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Trade Profile: Mexico Focuses on the United States

6 MINS READJun 19, 2017 | 09:15 GMT
International trade is a tenet of Mexico's economic policy today. For much of its modern history, however, the country took a defensive stance toward free trade.
International trade is a tenet of Mexico's economic policy today. For much of its modern history, however, the country took a defensive stance toward free trade.
(Marcelo Rodriguez/Shutterstock)
Summary
Editor's Note: Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled out over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.
 
In the third installment, we focus on Mexico.

Economic Background

The United States defines Mexico's trade strategy. Its proximity to and free trade agreement with the world's largest market — and the generator of 25 percent of global gross domestic product — is Mexico's main advantage over its peers in the developing world. And its abundant, comparatively cheap labor pool gives the country a distinct advantage over developed nations such as Canada, too. Mexico has spent the past two decades building a substantial manufacturing base intended to supply the U.S. market. Today, its main strategic interest lies in preserving its trade access across its northern border, and its trade policy focuses largely on defending its share of the U.S. export market against foreign competitors.

Though international trade has now become a tenet of Mexico's economic policy, the country hasn't always been so open to the concept. For much of its modern history, in fact, Mexico took a defensive stance toward free trade. Its export activity long revolved around low-value goods — mostly minerals and crude oil. Opening up its economy to a wide range of imports could have thrown off its balance of payments. To try to keep its trade on an even keel, Mexico formally enacted a policy of import substitution industrialization after World War II, creating a vast system of import licenses to restrict foreign products from entering the country. The system paid off for the government: Throughout the late 1940s and 1950s, import licenses generated up to 30 percent of federal revenues. 

Even with a stable of import licenses across an array of economic sectors, however, Mexico couldn't curb its trade deficit. Its limited pools of domestic capital, underdeveloped economy, low-value exports and rising volume of higher-value imports conspired to create a trade imbalance. By the mid-1970s, the Mexican economy was in dire straits. Mexico exported only $195 billion worth of goods in 1976, while it imported $273 billion worth. The discovery of the Cantarell oil field that year temporarily boosted the country's export revenues, but global oil markets delivered the Mexican economy a crushing blow in 1982, when crude oil prices collapsed. (At the time, Mexico relied on crude oil for about 80 percent of its export revenues.) The government subsequently defaulted on its foreign debt, and the country descended into recession. Import substitution industrialization had failed. Realizing the need for change, the Mexican government decided to try liberalizing the economy in an effort to increase foreign direct investment and stimulate economic growth through its exports.

Beginning in 1982, under President Miguel de la Madrid's administration, Mexico started lowering its tariffs and reducing the import licenses that by then applied to all foreign goods entering the country. Mexico joined the General Agreement on Trade and Tariffs in 1985, cementing its commitment to freer trade, and three years later, it was in negotiations over the North American Free Trade Agreement with the United States and Canada. The deal imposed a common tariff schedule on its signatories, created international arbitration mechanisms to resolve disputes between investors and governments, and proposed common labor and environmental standards. By the time of its signing in 1992, Mexico maintained licenses for just 16.5 percent of imported goods. And since it took effect Jan. 1, 1994, the country has pursued preferential trade access to other markets — all smaller than those included in NAFTA — through further trade agreements with partners such as Colombia, Venezuela, the European Union and Chile.  

Implications for Trade

Trade Strategy

Because access to the U.S. market is of utmost importance to Mexico's overall economic health, the country consistently strives to protect it. In the past, Mexico did so by joining all the multilateral free trade deals the United States signed on to, such as the ill-fated Free Trade Area of the Americas and Trans-Pacific Partnership agreements. But U.S. President Donald Trump's administration has cast doubt not only on that approach, but also on its underlying goal. Trump has made no secret of his antipathy toward multilateral trade agreements, and his threats to heavily amend NAFTA, or pull out of it altogether, became a centerpiece of his campaign for office. To mitigate the risk of economic upset, Mexico has agreed to renegotiate NAFTA. Its reliance on the United States may even compel it to accept less favorable terms in the interest of maintaining trade ties with its northern neighbor. Should renegotiations precipitate the bloc's demise, Mexico will look for other ways to leverage its geographic proximity and trade links to the United States, probably by pursuing a new, bilateral free trade agreement with Washington as quickly as possible. And in the meantime, Mexico City is weighing its trade options elsewhere.

Offensive Interests

Mexico broke down the most important trade barriers standing in its way — those between its economy and that of the United States — when it signed NAFTA. In the years since, it has adopted an offensive trade strategy built around reducing international trade barriers across all the export sectors of its economy and entering as many bilateral regional free trade agreements as possible. Its main priority lies in its manufacturing industry, and particularly the automotive sector, which accounts for nearly one-quarter of its total exports. Considering how important manufacturing exports are to Mexico's economy, its aggressive trade liberalization will continue well into the future. Given the volume of its exports to the United States, moreover, the threat of NAFTA's disintegration will further encourage this trend, prompting Mexico to redouble its search for new markets for its products. Mexico will likely try to diversify its trade relationships beyond NAFTA in the coming years no matter what becomes of the deal. Even so, its trade relationship with the United States will take precedence.

Defensive Interests

Despite its openness to foreign trade, Mexico is unyielding over a few sectors of its economy. The country, for example, has historically worked to defend its politically sensitive agricultural industry. Mexico has retained high tariffs on agricultural products even since NAFTA took effect to prevent the United States' formidable farming sector from overwhelming the Mexican sector.

The country also guards its low wages to maintain its edge on foreign competitors. Although Mexico's workforce is now moderately skilled, having evolved over the past several decades from a largely unskilled labor pool, pay rates are still low by regional and global standards. Mexican autoworkers, for example, earn about one-tenth of what their counterparts in the United States make. Compared with the 34 other countries in the Organization for Economic Cooperation and Development, in fact, Mexico's average wages are the lowest, at around $15,000 per worker. Its increasingly skilled and reliably inexpensive labor force, combined with its location and existing manufacturing hubs, make Mexico an attractive location for foreign investors. The United States recently highlighted the country's low wages and lax labor standards as unfair advantages and may try to persuade the Mexican government to amend these policies. But leaders in Mexico's public and private sectors alike are sure to resist the changes, recognizing that they would undermine its competitiveness abroad.

 

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