Different Models for Liberalisation: The Case of Mexico Lorenza Martínez Trigueros February, 2012 1
Contents 1. Introduction 2. Trade liberalisation in Mexico 3. Benefits from trade 4. Final remarks 2
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). International Trade Use of Dissemination Efficient use of More comparative of knowledge resources investment advantages and technology 3
And it also has been for Mexico’s development Mexico's economy is number 12 on the size of global GDP 1 Mexico is a leading exporter, ranking 14 worldwide Mexico has preferential access to 44 countries through 12 Free Trade Agreements Mexico is now an exporter of manufactured goods that require a significant amount of value added; has new trading partners and the trade volume grows steadily. 1 Measured by the PPP. 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
Mexico has well defined stages in the trade liberalisation process Trade liberalisation in goods and services (Total foreign trade as GDP%) 70 Closed economy Trade liberalisation • Trade liberalisation policies can be divided 60 into 3 main stages. • The first two policies 50 contributed to achieve economic development 40 and to get benefit from the comparative 2006: Unilateral tariff reduction advantages (e.g. 1995: Free trade agreements 30 geographical position). 1986: Mexico entered the • In order to develop 20 these advantages GATT (including the FTAs) it was necessary to reduce 10 the barriers to foreign and domestic trade . 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: The World Bank and Banxico 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
The trade liberalization that began in the late eighties did trigger the growth and diversity of exports. Structure of Mexican Exports, 1980-2010 (Percentage) Non oil Oil Non oil average 8 Source: INEGI
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
With the signature of FTAs, the international trade increased and the industries more prone to import became also those with more exports. Relation of exports and imports Evolution of exports by type of good (US million dollars) (1993=100) Total exports Commodities Manufactures 10 Source: Banxico
There were several benefits from FTAs. However, there were specific sectors that didn’t enjoy comparative advantages and suffered stagnation or decline. Gross Domestic Product for specific industries (Index 100=1994; seasonally adjusted) As other industries have been growing… 11 Source: INEGI Note: The black line refers to the trend (polynomial of degree 6) for the average of the industries specified for each graph.
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. Import shares in the U.S.: 1999 vs. 2010 Share in non-oil imports in the U.S.: Major Trading (First 5 partners) Partners Sum of each bar: 16.7 percentage points Source: UN COMTRADE
Moreover, Mexico has maintained a good performance in the global market of manufactures Import share of U.S. manufacturing Manufacturing exports in Latin America (Percentage) (Percentage) 13 Source: Based on data from U.S. Census Bureau Source: Based on data from UN COMTRADE
Specifically, some sectors that have achieved an important position in the U.S. are diversifying into other markets. Exports of New Light Motor Vehicles Share of U.S. imports (Percentage) (Percentage) Mexico Canada Germany Japan México Canadá Alemania Japón 40% Europe Northamerica Latin America Other 35% 30% 26% 24% 25% 20% 15% 10% 5% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 14 Sources: data from AMIA * Data to August Source: US Census Bureau
Mexico has significant competitive advantages in the automotive industry Position in automotive parts assembly by city Advantage in automotive assembly costs (Position of 102 considered cities) (Index 100 = USA) 140 101 120 90 83 100 63 80 60 18 19 8 7 6 4 3 40 2 1 Monterrey, Mexico Shreveport, USA Greenville-Spartanburg, USA Montgomery, USA Adelaide, Australia Melbourne, Australia Detroit, USA Manchester, UK Reynosa, Mexico Aguascalientes, Mexico Puebla, Mexico Paris, France Hamamatsu, Japan 20 0 United Kingdom Netherlands Australia France Italy Germany Mexico USA Canada Japan 15 Source: KPMG. Guide to international business location, 2008.
Note: Considers 61 Plants in North America, Europe y South America in 36 cities. The Harbor Report, June 2008. Source: Oliver Wyman Automotive Consulting Services. best plants worldwide Mexico has developed high performance plants that can be compared with the 0 1 2 3 4 Chrysler Dundee GEMA (USA) 1.84 GM Spring Hill (USA) 2.53 (Hours per produced engine) Top 10: Engine production Toyota Georgetown (USA) 2.6 Toyota West Virginia (USA) 2.66 GM Flint South (USA) 3.07 GM Flit North (USA) 3.09 GM Tonawanda (USA) 3.19 Chrysler Mack Av. II (USA) 3.32 Chrysler Saltillo (Mexico) 3.45 GM Romulus (USA) 3.46 10 20 30 40 50 0 Toyota Georgetown (USA) 48 Toyota Cambridge (Canada) 40 Top 10: Stamping process Chrysler Belvidere (USA) 32 (Parts per hour) Ford Dearborn (USA) 31 GM Silao (Mexico) 30 Chrysler Toluca (Mexico) 25 Nummi (USA) 24 Toyoya Princeton West (USA) 23.5 GM Parma, Ohio (USA) 20 Hyundai Mongtgomery (USA) 16 16
Unfortunately, with the FTAs, 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: 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. PROSECs 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. • Therefore, before 2008, the tariff scheme was characterised by: 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). 17
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 18
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 19
Tariff simplification Simple Average of Industrial Tariffs Tariffs with rate zero - industrial sector- (Industry; %) 9.6 8.3 5.2 4.7 4.4 4.3 3.3 USA 2008 2009 2010 2011 2012 2013 EUA 2010
Elimination of waiver programs: PROSECs Changes in the number of tariff in PROSEC, 2008-2013 REMOVAL OF PROSEC 4,885 The fractions included in the PROSEC's will be reduced from 4,885 in 2008 to zero in 2013. 3,414 SIMPLIFICATION OF RULE 8 The tariff lines included in the 1,370 Rule 8 will be reduced 1,175 969 according to the elimination of the PROSECs. 0 2008 2009 2010 2011 2012 2013 Source: Ministry of Economy. 21
Customs Facilitation: Single window system Advantages of Implementing: 1. Reduces transaction costs • One single delivery information window • Every procedure is electronic • The information will be delivered only once 2. Increases transparency • The information and requirements of each procedure will be defined clearly and explicitly. 3. Increases security • Has the Electronic Advanced Signature • Low risk of permits falsification 4. Facilitates information flow through countries • A single record for each data 5. Reduces Risk Corruption • The personal contact will be eliminated.
The trade simplification will have a direct effect on competitiveness. Trading across borders rank Mexico's position in market access • 74 2008 = improvement • 43 2009 • 22 2010 Source: World Economic Forum. Market access sub index in the Enabling Source: Doing business Trade Index.
Contents 1. Introduction 2. Trade liberalisation in Mexico 3. Benefits from trade 4. Final remarks 24
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