MEXICO: FREE TRADE AGREEMENTS ANYONE?
by Miguel Diaz
Mexico is the most prolific signer of Free Trade Agreements (FTAs) in the world, having negotiated a total of 10 agreements in the last seven years. These agreements encompass 32 countries with a combined 850 million people and more than 60% of the world's GDP. It is important for investors or potential investors in Mexico to understand the scope of these agreements due to their potential to enhance exports. This paper provides this understanding as well as the direction and role for Mexico in future trade agreements.
Within the hemisphere, Mexico has reached FTAs on a bilateral as well as on a multilateral basis. It has signed bilateral agreements with Chile, Bolivia, Costa Rica, and Nicaragua, while concluding multilateral accords with Canada and the United States under NAFTA; with Venezuela and Colombia; and with Guatemala, Honduras, and El Salvador that came into effect on January 1, 2001.
 Having already negotiated FTAs with most of the countries in its own hemisphere, Mexico has begun to venture out of the hemisphere for its most recent FTAs. In July 2000, Mexico implemented FTAs with Israel and the European Union, becoming the first Latin American country to have preferred access to these two markets. More recently -- in November 2000 -- Mexico completed an FTA with the EFTA countries of Iceland, Liechtenstein, Norway, and Switzerland. Consequently Mexico and Israel are now the only two countries in the world to have preferential trade access to the two most coveted export markets in the world, North America (U.S. and Canada) and Western Europe. The Mexican government is now looking to Asia for potential FTA partners, as talks are under way with Singapore. In addition, Korea and Japan have expressed an interest in an FTA with Mexico. With regards to Japan, at least, some positive momentum in the direction of an FTA has been generated recently by the signing of a preferential agreement between the two countries.
 Not all of Mexico's overtures, however, have resulted in agreements. Mexico has thus far been rebuffed by Mercosur, ostensibly because Brazil sees an FTA with Mexico as setting a precedent for future trade negotiations with the U.S. Many analysts believe that Brazil also is concerned that its private sector is just not ready to compete with the Mexican private sector. Despite the lack of an FTA, Mexico has managed to use bilateral sectoral negotiations to achieve positive trade results in Brazil and Argentina, including a substantive reciprocal opening of their auto markets. In addition, talks are also continuing to take place between Mercosur and Mexico on establishing an FTA.
The Agreements
All of the FTAs that Mexico has entered into have been modeled on NAFTA. In fact, Mexico renegotiated the only FTA that it had reached prior to NAFTA -- the FTA with Chile -- to make it more compatible with NAFTA. These FTAs mirror NAFTA both in form and substance. For example, they all follow the NAFTA template of having separate, comprehensive chapters on each subject area (i.e., there is a chapter on competition policy, intellectual property rights, dispute resolution procedures, and so on). All the FTAs are consistent with WTO trade disciplines and obligations.
What sets NAFTA and Mexico's subsequent FTAs apart from previous trade agreements is their breadth and comprehensive nature. For example, the Asociacion Latino-Americana de Integracion (ALADI) trade framework agreement that has ruled regional trade relations since its inception in Montevideo in 1980 only dealt with tariff preferences for goods. In contrast, NAFTA includes services as well as goods. Mercosur relies mostly on the good will of its signatories to resolve whatever conflicts arise. On the other hand, NAFTA is a ruled-based agreement that contains a clear dispute settlement mechanism. In addition, relative to Mercosur, NAFTA has also proven itself to be more of a living agreement that changes in tandem with the practical requirements of trade.
Despite their similarities, the FTAs differ in their treatment of sensitive trade areas. For the most part, the FTAs tend to provide many restrictions in sensitive sectors and, when the sectors are really sensitive, the FTAs tend to exempt them completely from the agreement. In the Mexico-EU FTA, for example, agricultural goods are almost completely exempted from the agreement due to the strong farm lobby in Europe. Agriculture was such a sensitive issue in NAFTA that the countries signed separate bilateral agricultural trade agreements.
A trade area that Mexico has successfully protected in most of its FTAs is the energy sector. Historically, the financial and telecommunications sector have also been sensitive areas for Mexico, but the U.S. and Canada did manage to pry open these two markets as part of NAFTA. There are also differences between the FTAs in the emphasis given to certain chapters. For example, Mexico's FTAs with Latin countries puts less emphasis on intellectual property rights issues than NAFTA does.
The FTAs also differ in how aggressively they attempt to dismantle tariff and non-tariff barriers. The tariff reduction schedules contained in Mexico's agreements with the European countries are accelerated in comparison to the others, with the Mexico-EFTA FTA having the most accelerated tariff reduction schedule of all. It is also important to note that Mexico's FTAs are asymmetric, with the more developed countries generally providing longer phase-in schedules to the less-developed countries. For example, Mexico was provided such treatment by the U.S., Canada, and Europe. Mexico, in turn, granted similar consideration to Bolivia and the Central American countries.
Each agreement also provides markedly different treatment to labor and environmental issues. Labor and environmental considerations are omitted from all of Mexico's FTA agreements with Latin America. NAFTA, on the other hand, addresses these issues in side agreements. In the Mexico- EU and the Mexico- EFTA agreements, there are references in the text to environmental and labor issues, but these subjects are not as comprehensively and thoroughly addressed as they are in the NAFTA side agreements.
Last but not least, the agreements differ in their scope of coverage. In Mexico's FTA with the EU, for example, there is a democratic clause that does not exist in previous agreements. This clause commits the signatories to work together to deepen their democracies and to protect human rights. What this means in practical terms, however, is not altogether clear.
Drivers for the Agreements
Many factors compelled Mexico to pursue its FTAs. On the economic front, there was the imperative to continue with the process of transforming Mexico into an export-based economy. In this regard, FTAs provide Mexican exporters with additional market access and help attract foreign direct investment into Mexico, especially in the industrial export sector. Mexico is also counting on its FTA network to help reduce its reliance on the U.S., which now takes in close to 85% of Mexico's exports. With exports as a percentage of GDP having risen to 30% of GDP from the high teens just a decade ago, it has become more of a priority for the Mexican government to diversify its export markets. Mexico is also counting on its FTAs to help diversify its exports. The government's ultimate economic objective, of course, is to put in place a development framework capable of providing for faster economic growth, and consequently a better standard of living for the Mexican people.
The Mexican government also sees the FTAs as an insurance policy. They provide insurance against countries raising trade barriers against Mexican exports as countries (including the U.S.) have done in the past when confronting difficult economic times. Moreover, they provide insurance in case sub-regional (NAFTA), regional (FTAA) and global (WTO) attempts to dismantle trade barriers are not able to complete the elimination of tariff and non-tariff barriers. Consequently, it is not surprising that it was after the U.S.'s failure to act on Chile's bid to join NAFTA that Mexico began to pursue aggressively its own FTAs. In this regard, it is also important to underscore that even if the Free Trade Area of the Americas (FTAA) materializes and succeeds in incorporating all other hemispheric FTAs within it, the FTAs that Mexico has signed with countries outside of the hemisphere will still give Mexico a competitive advantage vis-à-vis those countries that don't have FTAs with these countries.
In addition, Mexico also has a political agenda in pursuing FTAs, both domestically and internationally. Domestically, for example, the Mexican government sees FTAs as providing leverage in rallying political support for additional free-market reforms. Internationally, Mexico is counting on the FTAs to create some political separation from NAFTA. Creating this separation is important for Mexico because it harbors hopes of one day playing the role of broker between North and South America, as its geographic place between the two landmasses would seem to suggest that it should.
In addition to the economic and political motivations for the FTAs, it appears that the FTAs have generated their own momentum. This occurs because as Mexico signs more FTAs, it becomes a more attractive FTA partner for other countries. FTAs also became easier to finish as Mexican negotiators gain more expertise after negotiating each one. For example, the recently signed FTA with the EFTA countries just took four months to complete. FTAs have also gained in popularity in Mexico. This stands in stark contrast to the situation in the U.S. where FTAs continue to be politically controversial. Mexico does have an advantage over the U.S. in the negotiation of FTAs in that Mexico's executive does not require any special provision from the legislature (i.e. fast track authority) to be able to negotiate FTAs unencumbered. However, this may change under President Vicente Fox who has vowed to try to build more political consensus for all of the country's policies, including international trade policies.
Mexico has not been alone in entering into FTAs. However, what has separated Mexico from other countries in the hemisphere is the zeal with which it has pursued these agreements. Having found NAFTA to be good for Mexico, the government of Ernesto Zedillo simply concluded "the more FTAs, the better." In essence, the negotiation of FTAs was the mechanism that Mexico chose at the start of the era of globalization to assert that it would not turn back on its decision to open itself to the world.
The Results
Mexico has achieved many of its aims for the FTAs. Many of the results are obvious, some are not so obvious, and others have yet to materialize. There should be no mistaking, however, the fact that Mexicans have judged their FTAs to be an unmitigated success. For starters, the FTAs have met their principal objective of furthering Mexico's transformation to an export powerhouse. At the end of 1999, Mexico was the eighth largest export economy in the world, with U.S.$280 billion in exports. Just a decade ago, Mexico was ranked 26th in the world. By the end of 2000, Mexico ranked fifth in the world (check) with over U.S.$300 billion (check) in exports. It should be noted that global trade growth was healthy during this period, but even by world standards, Mexico's trade accomplishments have been remarkable.
The FTAs made this export growth possible by giving Mexico preferential access to markets that had not been fully exploited. It is no wonder, therefore, that the fastest increase in export growth has been with those countries with whom Mexico has signed FTAs. Between 1993 and 1999, for example, Mexico's exports to the U.S. rose an astonishing 160%. Export growth to Chile and Costa Rica have been even more dramatic at approximately 600% and 200% respectively, although in the case of these last two countries, Mexico started with a low base of exports. Government data show that nearly 90% of Mexico's exports get FTA privileged trade access.
The FTAs have also proven their worth in attracting investment, a major engine of export growth and of economic activity, generally, in recent years. Since 1994, Mexico has drawn an average of U.S.$11.8 billion a year in foreign direct investment, making Mexico the third largest emerging market recipient of private investment. Mexico's government trade agency, the Secretary of the Economy (formerly known as Secofi) enthusiastically points out that it is not just large quantities of investment that is coming in, but also that it is of increasingly good quality. Foreign auto companies, for example, are now designing cars in Mexico, whereas in the past they limited themselves to assembly work.
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Due to the assured export access that they provide, FTAs encourage investment by strengthening the government's claim that Mexico makes a logical production hub for multinational companies. FTAs also confirm to investors the government's commitment to free market policies. Notwithstanding these benefits, there is increasing frustration among both foreign and Mexican investors about the confusion created by the web of separate agreements. To some, a Tower of Babel of agreements has been built that baffles businesses looking for clear, consistent, and simple rules for trade. The hope is that the FTAA will bring all these agreements under one umbrella, but until that day arrives, the numerous agreements will probably continue to consternate, but hopefully not dissuade, investors.
 Open borders have also contributed to bringing down inflation, a long time weakness of the Mexican economy. Since the mid-1990's, annual inflation has come down steadily from double-digit rates to about 8.5% currently. The economics of how the FTAs have made this possible are simple -- lower import barriers enable Mexico to import goods more cheaply and forces Mexican producers to compete with these lower-priced imports. This trade impact permitted the slower growth of money to impact prices much more efficiently without slowing the economy. This, and other macroeconomic accomplishments, including increases in the level of foreign exchange reserves and a narrowing of the current account deficit, made possible Moody's decision in 2000 to upgrade Mexico to investment grade. Other rating agencies have signaled that they may follow suit.
If there is one disappointment, it is that the FTAs have not made much of a dent in the country's heavy export dependence on the U.S. If anything, the data shows that the share of Mexico's exports going to the U.S. has increased over the last decade from about 75% of total exports to about 85% currently. This is explained by the fact that the increase in exports to non-NAFTA countries has been more than compensated for by an increase in exports to NAFTA countries. According to Mexican government officials, more time is needed for diversification to take place. Mexico is counting on its recent FTA with the E.U. -- a market almost as big as the U.S. -- to begin having an impact. In its attempts to diversify its export market, reaching an FTA with Japan has also become a priority for Mexico, as Japan is the world's third largest economy. As a member of APEC (the Asia Pacific Economic Cooperation), Mexico is also working aggressively to develop closer trade ties with the group's membership.
However, the FTAs have helped Mexico diversify the kind of goods that it exports. Over the last decade, the share of primary goods in total exports has decreased from 80% to 15%. This shift makes Mexico stand apart from the rest of the region, where reliance on primary good exports continues even as primary good prices have declined. The FTAs contributed to this turnaround in Mexico by enabling Mexico to export greater amounts of industrial goods to these countries, many times at the expense of Brazil, which is the region's other major exporter of industrial goods.
Mexico's FTAs and the FTAA
Although in the long term it will undoubtedly be a challenge to weave Mexico's numerous FTAs -- and those of other countries in the region -- into the FTAA legal framework, analysts generally agree that, on balance, Mexico's FTAs -- and bilateral trade agreements generally -- have been indirectly supportive of the FTAA regional integration initiative. Bilateral trade agreements may not be the preferred objective -- global and regional integration are the two preferred options -- but as long as they lower anti-competition barriers, they make the eventual completion of the FTAA easier. As a result, FTAs should be considered building blocks, not stumbling blocks, towards regional trade integration.
Moreover, to the extent that the FTAs are a win-win for all involved -- and that appears to be the case with respect to the FTAs Mexico has reached -- it also creates constituencies in support of further trade liberalization. In the case of Mexico, the benefits from liberalization have been so clear in terms of job creation and economic growth that only a few in Mexico believe that the government should turn back the clock and return to the failed insular policies of the past. Certainly, no major candidate in the recent elections supported such a position. Similarly, Chilean wine exporters, Bolivian wool exporters, and all those who have profited from increased trade with Mexico as a result of the FTAs, are supportive -- or can be counted on to support -- further trade liberalization in these countries.
Not to be overlooked, Mexico's FTAs have also encouraged the institutional development needed in the region to make any FTAA possible. In order for Mexico to have put itself in a position to enter into an FTA with the U.S., it was compelled to reform its laws so as to make them capable of meeting the demands of NAFTA. Recently, less developed countries in the region have been forced to do the same with their laws to enter into an agreement with Mexico. The multilaterals, and the Inter-American Development Bank in particular, have provided financial assistance to make this possible, but it is doubtful that these reforms would have been carried out without the allure of an FTA with Mexico. In negotiating FTAs, Mexican trade negotiators -- now seasoned after having negotiated a handful of FTAs, including a comprehensive one with the United States and Canada -- have also helped develop the trade negotiating expertise of their counterparts. This is expertise that will come in handy as tough negotiations on FTAA begin.
Most importantly, the FTAA process has been advanced by the example Mexico has offered in terms of how to deal with the U.S. Latin Americans are eager to tap into the U.S. market, but they have historically harbored a distrust of their giant neighbor to the north that has made any kind of cooperation difficult. Understandably there is also fear in Latin America that they may not be able to compete with the North Americans. Although Mexico suffered some costs in opening itself up to North America, mostly in terms of companies that were forced to close because they were uncompetitive, the great lesson that Mexico has provided to Latin countries is that they can compete with the U.S. and that there is more to be gained than lost in embracing the U.S. Many Mexicans believe that if it weren't for NAFTA, for example, the U.S. would not have supported Mexico as much as it did during the 1995 peso crisis.
Not only are Mexico's FTAs encouraging free trade generally throughout the region, but they are also promoting the NAFTA rules-based approach to trade integration. Although few government officials care to admit it, there is a tug-of-war going on to see which integration model, either that of Mercosur or NAFTA, is best suited for the FTAA. At stake are more than just geopolitical bragging rights. Of course, the most potent advertisement for the NAFTA approach has been the success of NAFTA itself. Whereas NAFTA, by most accounts, has been an unmitigated success, Mercosur has fallen on hard times, especially since Brazil unilaterally decided to float its currency in 1999. To this day, trade flows between the Mercosur countries have yet to recover to pre-devaluation levels. Politically, Mercosur also suffered a blow recently when Chile -- an associate member -- opted to try to negotiate a FTA with the U.S.
Conclusion
The support that Mexico's FTAs have provided to the FTAA process -- although significant -- is not likely to be sufficient to overcome the political impasse that has bogged down the FTAA negotiations for years. For the FTAA to muster the political momentum necessary to move past the stage of preliminary technical negotiations, three things must at least happen. First, the U.S. Congress has to extend to the Bush Administration fast track negotiating authority. Without fast track, countries will not negotiate in good faith out of concern that the U.S. Congress may second guess anything that the U.S. trade negotiators have agreed to.
Second, Brazil (the second largest country in the hemisphere) has to stop stalling for time. If the reason for Brazil's cautious approach to the FTAA thus far is to gain time to build hemispheric solidarity to strengthen its hand in dealing with the U.S., the recent decision by Chile shows that this strategy is not working and may even have become counterproductive. Third and finally, the two big hemispheric powers, the U.S. and Brazil, need to seriously address the legitimate concerns of smaller countries that they are being overwhelmed, both in terms of personnel and resources, by the demands of the FTAA and other regional and global trade initiatives. Given that the FTAA requires the consensus support of all 32 participating states, the objections of just one country can prevent further progress.
With the exception of pushing for the exclusion of labor and environmental issues in the FTAA, Mexico has generally played a low-key role in FTAA negotiations. A recent indication of this has been its decision not to respond to Chile's suggestion to expedite the timeframe for completion of the agreement, even as others were quick to stake out positions. The U.S., for example, came out in support of the proposal, while Brazil came out against it. Some argue that Mexico is being reserved in the FTAA dialogue in order to preserve the privileged position that it currently enjoys with the U.S. and other countries with which it has FTAs. While this may be true, it would be uncharacteristic of Mexico's recent mode of behavior and shortsighted in light of the vast opportunities that regional trade liberalization renders.
Instead, it is more in keeping with Mexico's character to look proactively for the best position in which to place itself during FTAA talks. Recent developments provide good reason to believe that Mexico has concluded that the most advantageous role it can play in the FTAA process is that of a broker, a role Mexico is well suited for given its close ties to both Brazil and the U.S. President Vicente Fox's strong comments in support of regional free trade and his decision to travel to Brazil and the U.S. immediately after his election confirm to many analysts that this is the objective Mexico is pursuing. It also happens that the last two years of FTAA negotiations -- to be co-chaired by the U.S. and Brazil -- will take place in Mexico.
There are many advantages to Mexico in playing such a role. First, by putting itself in a position to serve as interlocutor for Latin American interests before Canada and the U.S., Mexico gains prestige in the region and accumulates favors that it could later cash in. Second, playing the role of broker should also allow Mexico, at times, to manage the focus of the debate to serve its own interest. Third and finally, Mexico would probably not mind having the permanent FTAA secretariat based in Mexico City.
If being a power broker is indeed the role Mexico wants to play in the FTAA negotiations, it would be in the interest of the U.S. not to inhibit Mexico from playing this role. Mexico is the best ambassador for free trade the U.S. has in the hemisphere. Furthermore, you would expect that Mexico, having adopted the NAFTA model itself, would favor the more rigorous and comprehensive NAFTA-approach to free trade that the U.S. favors.
The U.S. must be prepared, however, for Mexico to pursue its own interests at times. Thus, it should not be a surprise to the U.S. government if in the next round of FTAA negotiations, Mexico sides with Brazil on narrower issues, like agricultural access, countervailing duties, and sanctions. Although this may cause some consternation in some circles in Washington, this difference of opinion should nonetheless be respected, as Mexico has become a trade power in its own right.
When incorporating Mexico into NAFTA in 1994, the U.S. was already looking south to the vast trade opportunities that are available in Latin America. After wavering in the enterprise of opening the region to trade in the last few years, the time has come for the U.S. to stop wavering and to take the tough decisions that are needed to move forward on making the ambitious objective or regional free trade a reality, starting with the passage of fast track authority. But to get to the ultimate objective of regional free trade, fast track approval is not all that is needed. To make FTAA possible, in the sense that it was conceived, the U.S. needs Mexico as a partner, a distinction Mexico has earned through much sacrifice, courage, and assertiveness. It is also how Mexico has wanted to be treated all along. In its relentless pursuit of FTAs, one can even go a step further and argue that Mexico has set and example worth being imitated. Whether the U.S. can live up to Mexico's example, is yet to be seen, but it is expected, that it at least make more of an effort to do so. The spotlight in now on Washington.
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