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History of Mexico-Israel Trade Relations
Mexico's trade with Israel has risen in
the last few years, but total trade
between the two countries still doesn't
amount to much. In the case of Mexico,
it amounts to less than 1% of its total
trade. Last year, Mexico exported to
Israel just US$37.9 million worth of
goods, two-thirds of that being oil. The
rest included electrical equipment,
fruits and vegetables, and basic
chemicals. On the other hand, Mexico
imported from Israel US$172.7 million
worth of goods in 1999; primarily
electronic equipment, chemicals, and
pharmaceutical products.
Israel-Mexico
Trade
Drivers for Trade Agreement
Propelling Mexico to enter into an FTA
with Israel were the same drivers that
have propelled it to enter into other
FTAs, i.e. the impetus to increase
exports, diversify its export market,
and attract new investment. In Israel,
Mexico found a country that believes in
FTAs as much as it does. Certainly, no
country in the world has signed more
FTAs than Mexico or Israel. For instance,
the two countries have FTAs with the US,
Canada, and the EU countries-- the only
two countries in the world to have free
trade access to these three important
markets. Mexico also has worked out FTAs
with Bolivia, Chile, Colombia, Costa
Rica, Nicaragua, Uruguay and Venezuela
and is in the process of negotiating
others with Singapore, Japan, Central
America and the Southern Cone countries
of Latin America. For its part, Israel
has attained FTAs with the EFTA
countries of Iceland, Liechtenstein,
Norway, and Switzerland as well as with
Turkey, the Czech Republic, the Slovac
Republic, Hungary, and Poland. In
entering into these FTAs, Mexico
believes its competitive advantage is
its productive and relatively cheap
labor force. Israel believes its
competitive advantage is its highly
educated workers.
But it is not ideology alone that led
Mexico to sign a FTA with Israel. In
taking a hard look at its present
trading relationship with Israel, Mexico
concluded that given the size of
Israel's market, its exports should be
much greater than what they are and sees
a FTA as a means of fulfilling this
potential. Although Israel has a
population of only just 5.9 million
people, it imported a hefty US$27.4
billion worth of goods last year, thanks
to the country's high average per capita
income of US$16,404. Politically, it was
also relatively easy for Mexico to
pursue a FTA with Israel, as the two
countries' exports generally complement
each other, mitigating concerns about
the dislocation risks presented by the
FTA. Mexico, for example, is mostly an
exporter of labor-intensive goods, while
Israel is an exporter of technology-intensive
goods.
A FTA with Israel is also in keeping
with Mexico's quest to reduce its export
reliance on the US. Thanks to NAFTA,
Mexico's exports to the US have risen,
both in terms of volume and share of
total exports. From 1993 to 1999,
Mexico's exports to the US rose from
US$42.8 billion, or 83% of Mexico's
total exports, to US$120.4 billion, or
88% of total exports. Given that exports
now comprise 35% of Mexico's GDP, this
means that nearly 30% of Mexico's GDP
depends on exports to its northern
neighbor. Although Mexico's preferential
access to the US has served it well
during this boom period in the US, there
is concern -- justifiably we believe --
that should the US economy slow, Mexico
would be disproportionately hurt.
Mexico is also hoping a FTA with Israel
will help narrow its current account
deficit, at least a little. Due mostly
to a widening trade deficit, Mexico's
current account deficit last year
widened to 4.1% of GDP from 2.2% of GDP
in 1998. Mexico's trade deficit with
Israel contributed US$119 million of
that total. This year, thanks to higher
oil prices, the trade deficit gap, and
consequently the current account deficit
gap, has narrowed. The trend, of course,
could easily reverse, if oil prices fall,
as they undoubtedly will. With this FTA,
Mexico hopes to at least make a dent on
its trade deficit with Israel. Such an
accomplishment may be a drop in the
bucket in coping with the overall size
of the current account gap, but it is
seen as a start.
Last but not least, Mexico is also
hopeful that a FTA with Israel will
attract Israeli investment into the
country. Mexico is looking to take
advantage of its geographical location
and the many FTAs it has to market
itself as a strategic hub of production
for multinationals who want to cater to
the NAFTA members and countries south of
Mexico's borders, especially those
Mexico has FTAs with. Mexico is
particularly eager to get a hold of
Israel's greenhouse and irrigation
technology that has allowed its deserts
-- which happens to be similar to those
found in Mexico -- to be productive.
Currently, 51 Israeli companies have
US$8.3 million worth of investment in
Mexico. Not to be overlooked, the
agreement is also seen as a way of
strengthening political ties between the
two countries.
The Agreement
After two years of negotiations, the
agreement was signed on March 6, 2000
and came into effect on July 1. In
total, 10 rounds of negotiations were
required to conclude the agreement, with
the first taking place in April of 1998.
The agreement has 11 chapters, which
deal amongst other things with market
access, rules of origin, customs
clearing, emergency measures,
competition policy, government
procurement, resolution, and WTO rights
and obligations. It also provides for
the establishment of a commission to
monitor the compliance of the agreement
and for contingency plans to address any
problems that may arise.
The treaty eliminates tariffs in three
stages, which before the agreement came
into effect averaged on a weighted basis
5.44% on Mexican exports to Israel and
7.54% on Israeli exports to Mexico. The
FTA covers 96.6% of agricultural goods
currently traded and 100% of industrial
goods. Mexico reserved the right to
maintain import licenses on petroleum,
used machinery, clothes, and automobiles,
while Israel has maintained restrictive
measures on non-kosher meats. All in all,
about 99% of the trade between the two
countries is covered in the agreement.
However, the agreement does not cover
trade in services, an increasingly
important part of global trade.
On July 1, 2000 the FTA withdrew all
tariffs on about 50% of Mexico's exports
to Israel. Mexican exports that now have
duty-free entry into Israel are coffee,
sugar, concentrated orange juice, beer
and tequila. An additional 25% of
merchandise goods was accorded duty-free
entrance, as long they were below a
certain quota, and another 12% of
Mexican merchandize exports experienced
tariff reduction of anywhere between 25%
and 50%. Of what remains, most of that
will have tariffs eliminated in 2003 --
these include furniture, shoes, and
candles. The rest (about 2% of what is
exported today) will have whatever
tariffs are applied to them eliminated
in 2005.
For Israel, the treaty accorded it duty
free access on July 1 to about 72% of
its exports to Mexico. For example,
Israel's export of flowers, bulbs, and
spices are no longer subject to tariffs
when entering Mexico. In terms of
manufactured good, no tariffs are also
now levied on exports of irrigation
systems, green houses, medical equipment,
and security equipment, such as
bulletproof articles. Another 22.8% of
goods will have their tariffs withdrawn
in 2003 and another 4.4% of goods in
2005.
In addition to not including trade in
services, the agreement also does not
allow for accumulation rights and for
indirect transfer privileges. By
accumulation rights is meant that
production can not pass through a third
country in meeting rules of origin
criteria. Lack of indirect transfer
privileges, meanwhile, forces both
countries' exporters to export directly
to each other to take advantage of the
preferred tariff concessions. An Israel
company, for example, cannot export to
Mexico by way of the US to cut down on
transport costs and still be able to
take advantage of the tariff privileges
accorded by the agreement. The issue of
transfer privileges will be addressed in
about a year's time. However, there are
no plans, as yet, to consider the matter
of accumulation rights, although Israel
is lobbying for such consideration.
Impact of FTA
on Mexico/Israel Trade
There is good reason to believe that
this agreement will succeed in meeting
its objective of encouraging increased
trade flows between the two countries
and in attracting Israel investment. The
trackrecord established by previous FTAs
agreements is encouraging. Since signing
a FTA with Israel in 1985, US exports to
Israel have increased by 244% from US$1.8
billion to US$6 billion currently. Of
course, Mexico's own experience with
FTAs is heartening. After signing FTAs
with the US in 1994 and with Costa Rica
in 1995, Mexico's exports to those two
countries doubled and quadrupled,
respectively, within five years. Mexican
government officials are particularly
optimistic that Mexican exports to
Israel of coffee, sesame seeds, beer,
kitchen glassware, wooden furniture,
footwear, candles and engines will
flourish because of this agreement.
Nonetheless, export gain expectations
have to be tempered by the wide
geographic separation of the two
countries, and in the short term, by the
capacity constraints that the Mexican
economy faces. Furthermore, if forced to
choose between exporting to the EU or
Israel because of capacity constraints,
Mexican exporters will probably try
first to make inroads in the vastly
larger EU market.
Israeli investment in Mexico should also
increase as a result of this agreement,
but we don't expect any dramatic
increases here either. To the extent
that it materializes, it will probably
be in the form of joint ventures. There
are already reports, for example, of
Israeli investors looking for Mexican
partners to invest in the field of
telecommunications. Because of the lack
of land in Israel, we also expect
Israeli agroindustrial exporters to soon
link up with Mexican entrepreneurs to
set up shop in Mexico to produce for the
Mexican market and for export.
Israeli
Investments in Mexico
Impact of FTA
on US-Mexico Trade
Given the relatively little trade that
takes place between Israel and Mexico,
this FTA should have a negligible impact
on US-Mexico trade. To the extent that
the FTA has a diversionary impact, it
will probably be manifested in increased
agricultural and pharmaceutical exports
from Mexico to the US, given the
sophisticated technology in those areas
Mexico will now have access to. As for
US exports, the one sector where US and
Mexican exporters currently compete
directly that may be impacted by this
FTA to Mexico's advantage is the auto
sector. But since a large part of
Mexico's auto industry is US-owned, the
impact here is also muted. And of course,
to the extent that this agreement allows
Mexico to grow faster and more equitably,
the US benefits in having a more stable
and prosperous trading partner. In sum,
Mexico's new FTA with Israel should be
more trade creating than trade diverting.
--September
2000
The preceding paper is part of the
United State-Mexico Chamber of
Commerce's NAFTA Forum series, which
considers general trade issues and
sector-specific concerns between the two
nations. The information contained
herein is for informational and
educational purposes only.
CONTACT INFORMATION:
Albert C. Zapanta, President
John Harrington, Senior Economist and
author of NAFTA Forum series
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite 270
Washington, DC 20004-3021
Tel: 202-371-8680 Fax: 202-371-8686
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