1

Different Models for Liberalisation:

The Case of Mexico

Lorenza Martínez Trigueros February, 2012

2

Contents

1. Introduction

2. Trade liberalisation in Mexico

3. Benefits from trade

4. Final remarks

3

International trade is a key determinant for economic growth

“Policies toward foreign trade are among the more important factors promoting economic growth and convergence in developing countries"

IMF (1997, 84).

Use of comparative advantages

Efficient use of resources

Dissemination of knowledge

and technology Attracts FDI

International Trade

4

Contents

1. Introduction

2. Trade liberalisation in Mexico

a) From a closed economy to the GATT signature

b) Free trade agreements

c) Trade simplification

3. Benefits from trade

4. Final remarks

5

Trade liberalisation in goods and services Total foreign trade (X+M) as GDP%

Source: The World Bank and Banxico

0

10

20

30

40

50

60

701

960

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

199

0

19

92

19

94

19

96

199

8

20

00

20

02

20

04

200

6

20

08

20

10

19

86

: M

exic

o e

nte

red

th

e G

AT

T

20

06

: U

nila

tera

l tar

iff

red

uct

ion

Closed economy

19

95

: Fre

e t

rad

e ag

ree

men

ts

Trade liberalisation process in Mexico has gone through four main stages

Trade liberalisation

6

Contents

1. Introduction

2. Trade liberalisation in Mexico

a) From a closed economy to the GATT signature

b) Free trade agreements

c) Trade simplification

3. Benefits from trade

4. Final remarks

7 Source: INEGI

Trade liberalization, among other factors, trigger the growth and diversity of exports

Structure of Mexican Exports, 1980-2010 (Percentage)

Non oil Oil Non oil average

8

Contents

1. Introduction

2. Trade liberalisation in Mexico

a) From a closed economy to the GATT signature

b) Free trade agreements

c) Trade simplification

3. Benefits from trade

4. Final remarks

9

Trade liberalisation in goods and services Total foreign trade (X+M) as GDP%

Source: The World Bank and Banxico

0

10

20

30

40

50

60

701

960

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

199

0

19

92

19

94

19

96

199

8

20

00

20

02

20

04

200

6

20

08

20

10

19

86

: M

exic

o e

nte

red

th

e G

AT

T

20

06

: U

nila

tera

l tar

iff

red

uct

ion

Closed economy

19

95

: Fre

e t

rad

e ag

ree

men

ts

FTAs brought a new impulse to the export sector

Trade liberalisation

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FTAs brought trade creation, but also trade diversion

Gross Domestic Product for specific industries (Index 100=1994; seasonally adjusted)

Source: INEGI Note: The black line refers to the trend (polynomial of degree 6) for the average of the industries specified for each graph.

As other industries have been growing…

Despite China's entry into the WTO in 2001, Mexico is the only country that has gained participation in the U.S. non oil imports.

Share in non-oil imports in the U.S.: Major Trading Partners

Import shares in the U.S.: 1999 vs. 2010 (First 5 partners)

Source: UN COMTRADE

Sum of each bar: 16.7 percentage points

12

Moreover, Mexico has maintained a good performance in the global market of manufactures

Manufacturing exports in Latin America (Percentage)

Source: Based on data from UN COMTRADE

Import share of U.S. manufacturing (Percentage)

Source: Based on data from U.S. Census Bureau

Other Europe Latin America Northamerica

Specifically, some sectors that have achieved an important position in the U.S. are diversifying into other markets.

Exports of New Light Motor Vehicles (Percentage)

Sources: data from AMIA * Data to August

13

Share of U.S. imports (Percentage)

Source: US Census Bureau

24%

26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

México Canadá Alemania JapónMexico Canada Germany Japan

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but……the tariff scheme became complex, leading to high costs and distortions

• To maintain the competitiveness of the industrial plant, special programs by sector (PROSECs) were established:

• Therefore, before 2008, the tariff scheme was characterised by:

PROSECs

They exempt tariff payments to certain sectors and companies in order to enable the use of more efficient supply sources worldwide at no additional cost.

They did generate distortions, inequities and inefficiencies. The artificial deterioration of the competitive position SMEs was particularly relevant as well as the high cost of managing those programs.

Full liberalisation with countries with whom we have treaties and high commercial protection with those countries that we didn´t. As a result of the different tariff combinations, there were over 150 000 tariff rates:

(i) there were over 12,000 tariffs on single products, (ii) specific rules were handled for each of the 12 FTAs we have (iii) Furthermore, 24 sectorial programs (PROSECs) were handled as well as particular tariff benefits with annual seasonality (Rule 8th and import quotas).

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Contents

1. Introduction

2. Trade liberalisation in Mexico

a) From a closed economy to the GATT signature

b) Free trade agreements

c) Trade simplification

3. Benefits from trade

4. Final remarks

16

The most recent reform involves trade facilitation and it has 3 strategies

Tariff simplification

The elimination of waiver programs

The simplification of foreign trade and customs operations

Tariff simplification

Tariffs with rate zero (Industry; %)

9.6

8.3

5.2 4.7

4.4 4.3

3.3

2008 2009 2010 2011 2012 2013 EUA2010

Simple Average of Industrial Tariffs - industrial sector-

USA

Average Tariff Paid 2008 2010 0.95 0.66

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Elimination of waiver programs: PROSECs

4,885

3,414

1,370 1,175

969

0

2008 2009 2010 2011 2012 2013

Changes in the number of tariff in PROSEC, 2008-2013

Source: Ministry of Economy.

REMOVAL OF PROSEC

SIMPLIFICATION OF RULE 8

The fractions included in the PROSEC's will be reduced from 4,885 in 2008 to zero in 2013.

The tariff lines included in the Rule 8 will be reduced according to the elimination of the PROSECs.

Customs Facilitation: Single window system

2. Increases transparency

3. Increases security

4. Facilitates information flow through countries

5. Reduces Risk Corruption

1. Reduces transaction costs

Advantages of Implementing:

• One single delivery information window • Every procedure is electronic • The information will be delivered only once

• The information and requirements of each procedure will be defined clearly and explicitly.

• Has the Electronic Advanced Signature • Low risk of permits falsification

• Easy implementation of single petition

• The personal contact will be eliminated.

The trade simplification will have a direct effect on competitiveness.

Source: Doing business

Trading across borders rank

= improvement 2008

• 74

2009 • 43

2010 • 22

Mexico's position in market access

Source: World Economic Forum. Market access sub index in the Enabling Trade Index.

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Contents

1. Introduction

2. Trade liberalisation in Mexico

3. Benefits from trade

4. Final remarks

0

20

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Mexico has become a top manufacturer in the automotive industry

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Advantage in automotive assembly costs (Index 100 = USA)

Position in automotive parts assembly by city (Position of 102 considered cities)

Source: KPMG. Guide to international business location, 2008.

48

40

32 31 30

25 24

23

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Mexico has developed high performance plants that can be compared with the best plants worldwide

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Top 10: Engine production (Hours per produced engine)

Source: Oliver Wyman Automotive Consulting Services. The Harbor Report, June 2008. Note: Considers 61 Plants in North America, Europe y South America in 36 cities.

Top 10: Stamping process (Parts per hour)

Moreover, a positive relation is observed between trade and the development of industries with high added value.

24

Exports vs added value (Average annual growth 99 – 09)

Source: INEGI Economic Census and UN COMTRADE (NAICS code) Note: in red those industries classified as "high technology" according to The World Bank

Imports vs added value (Average annual growth 99 – 09)

China has provided inputs or machinery for domestic production, which turns into products with added value.

Imports from China. Selected industries (Percentage of total imports)

Source: UN COMTRADE

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Imports from China by type of good in manufacturing (Percentage)

Source: Based on data from UN COMTRADE

Capital goods

Intermediate goods

Consumer goods

In some products emerging economies are still assemblers, getting a very low share of the whole value

Value decomposition for iPhone 4 (Sales price= 600 USD)

iPhone: “Designed by Apple in California. Assembled in China”

26

27

Contents

1. Introduction

2. Trade liberalisation in Mexico

3. Benefits from trade

4. Final remarks

Final remarks

28

Mexico, as other emerging economies, followed an export led development

strategy

1. Closed economy with free trade areas restricted to export firms

2. Liberalization became in stages: entrance to GATT, FTAs and unilateral tariff

reduction

Mexico has developed a strong exporter sector moving from low value added

sectors to high value added ones

Mexican exporter sector is part of global supply chains, importing a significant

amount of its inputs

The challenge is to keep on scaling in the value chain by adding the contribution

of design and development

29

Different models for liberalisation: the

case of Mexico.

Lorenza Martínez Trigueros February, 2011