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Text for NAFTA

 

MEXICO & ISRAEL SIGN A FREE TRADE AGREEMENT .
Summary: On July 1, a Free Trade Agreement (FTA) between Mexico and Israel came into effect that immediately eliminated tariffs on most products currently traded between Mexico and Israel and stipulates full tariff elimination on all products included in the agreement by 2005. Although overshadowed by the EU-Mexico FTA that came into effect the same day, the Mexico-Israel FTA is nevertheless expected to also have a significant positive economic impact on both countries. Mexico is expected to benefit by having greater export access to Israel, increased investment from Israel, and greater availability to Israeli technology. The diversionary impact of the FTA on US-Mexico trade should be negligible, as there are few products in which Mexico and the US currently compete directly with Israel.

This report:
1. Describes the current trade relationship between Mexico and Israel
2. Explains Mexico's motivation for entering into this FTA
3. Describes the Mexico-Israel FTA
4. And assesses how the FTA will impact Mexico-Israeli trade relations, and how the latter, in turn, will impact US-Mexico trade


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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