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NAFTA’sImpactonMexico
LuisBernardoTorresRuiz,Ph.D. July20,2017ResearchEconomist DallasFederalReserve
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Contents1. NAFTAProvisions
2.NAFTATradeandEconomicEffects
3.NAFTARenegotiation
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Mexico’sPre-NAFTAUnilateralTradeLiberalization
q Firststepsinopeningclosedeconomyfocusedon
eliminatingimportsubstitutionpoliciesinmid-1980s
q In1986,MexicobecamememberofGeneralAgreement
onTariffsandTrade(GATT)
q Mexico’strade-weightedaveragetarifffellfrom25%in
1985toabout19%in1989.
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Afterthemid1980s,Mexicomovedfromclosedtoopeneconomy
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
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
2012
2014
2016
TradeOpenness:Exports+Imports/GDP(Percentage)
Note: Exports and imports of goods and services. Shaded area depicts Mexico’s entry into the GATT.Source: World Bank national accounts data, and OECD National Accounts data files.
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Mexico’sNAFTAOpportunity
q Lockinreformsofitsmarketopeningmeasuresfrom
mid-1980s
q Transformformerlystatisticeconomyafterdevastating
debtcrisisof1980s
q Increaseinvestmentconfidencetoattractforeign
investmentandspureconomicgrowth
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NAFTAKeyProvisions
1. Removal of trade barriers
2. Rules of origin
3. Services trade
4. Foreign investment
5. Intellectual property rights protection (IPR) (1st FTA)
6. Government procurement
7. Dispute resolution
8. Labor and environmental provisions (side agreement) (1st FTA)
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NAFTAKeyProvisions
1. Removal of trade barriers and 2. Rules of origin
Tariff changes based on rules of origin:
§ MostmarketopeningmeasuresfromNAFTAresultedin
removaloftariffsandquotasappliedonimportsfromUnited
StatesandCanada
§ AverageapplieddutyforallimportstotheU.S.2.07%in1993.
§ Over50%ofU.S.importsenteredduty-freeunderU.S.
GeneralizedSystemofPreferences(GSP)in1993.
§ AveragetariffonallimportsfromUnitedStateswas10%in
1993(Canada’swas0.37%).
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NAFTAKeyProvisions
1. Removal of trade barriers and 2. Rules of origin:
Tariff changes based on rules of origin:
§ Significantchangesintextiles,apparel,automotive,andagriculturalindustries
§ PhasedoutalldutiesontextileandapparelgoodswithinNorthAmericameetingspecificNAFTArulesoforiginover10yearperiod
§ PhasedoutMexico’srestrictiveautodecree
§ Rulesoforiginrequirementof62.5%NorthAmericancontentforautosand60%forvehicleparts
§ U.S.-Mexicoagriculturaltradebecameduty-freewhenagreementwentintoeffect
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NAFTAKeyProvisions
3. Servicestrade.Liberalizedcertainservicessector,particularlyfinancialserviceswhileothersexcludedlikeoilandgasdrilling
4. Foreigninvestment.“Non-discriminatorytreatment”forforeigninvestmentincertainsectors
5. IPR.Enforceablecommitmentsregardingprotectionofcopyrights,patents,trademarks,andtradesecrets
6. Governmentprocurement.Openedupasignificantportionineachcountrynondiscriminatorybasistosuppliersforgoodsandservices
7. Disputeresolution.Createdanarbitrationsystemforresolvingdisputes
8. Laborandenvironmentalprovisions.Firstagreementonlaborandenvironmentalcooperation
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Contents1. NAFTAProvisions
2.NAFTATradeandEconomicEffects
3.NAFTARenegotiation
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AfterNAFTAexportsgrewrapidly,makingUnitedStatesbyfarMexico’sleadingtradepartner
MexicoExports(BillionsUS$)
Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.
0
50
100
150
200
250
300
350
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. Canada ROW
U.S.$42.9
ROW$7.4andCanada$1.6
U.S.$302.6
ROW$60.9
Canada$10.4
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ManufacturingexportsafterNAFTAincreasedsubstantially
MexicoManufacturingExports(BillionsUS$)
Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.
0
20
40
60
80
100
120
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. ROW
U.S.$35.1
U.S.$281.4
ROW$6.0
ROW$54.6
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Automotiveexportsleadincrease
MexicoAutomotiveExports(BillionsUS$)
Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.
0
20
40
60
80
100
120
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. ROW
U.S.$8.2
U.S.$96.8
ROW$1.9
ROW$16.5
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Nonautomotiveexportsalsoregisteredimpressiveincrease
MexicoNon-AutomotiveExports(BillionsUS$)
Source:SAT,SE,BancodeMéxico,INEGI.BalanzaComercialdeMercancíasdeMéxico.SNIEG.
0
20
40
60
80
100
120
140
160
180
200
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. ROW
U.S.$26.9
U.S.$184.6
ROW$4.0
U.S.$38.1
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Exportgrowthattributedtodevelopmentofsupplychains,
especiallyintheautoindustry
q Trade occurs in the context of production sharing
q Manufacturers in each country work together to
produce goods
q Trade expansion has resulted in the creation of vertical
supply relationships, especially along the U.S.-Mexico
border
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Exportgrowthattributedtodevelopmentofsupplychains,
especiallyinautoindustry
q Intermediate inputs produced in U.S. and exported to
Mexico
q Finished product exported from Mexico to U.S.
q 40% of content of Mexican exports are of U.S. origin
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Mexico’sexportgrowthattributedtodevelopmentof
supplychains,especiallyintheautoindustry
q Supply chains have been increasingly crossing national
boundaries.
qManufacturing work is performed wherever is most
efficient.
q Autos manufactured in NAFTA region sold in U.S. have a
domestic content of between 47% to 85%.
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ForeignDirectInvestment(FDI)increasedrapidlyafterNAFTA
0
10
20
30
40
50
60
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
ForeignDirectInvestmentinMexico(BillionsUS$)
Source:SecretariadeEconomia.
$1.6$4.9
$27.5
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U.S.islargestsourceofFDI,integralpartoftheeconomicrelationship,whileMexicanFDIintheU.S.increasedfrom$1.2b1993to$16.6bin2015
U.S.andCanadaForeignDirectInvestmentinMexico(BillionsUS$)
Source:SecretariadeEconomia andBureauofEconomic Analysis.
0
5
10
15
20
25
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. Canada
FDI1993US$3.50Canada$0.07
FDI2016US$10.92Canada$1.72
FDI1980US$1.08Canada$0.02
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MexicaneconomicgrowthafterNAFTAisslowercomparedtotheprevious20years,butlessvolatile
GDPperCapita(y-o-y%)
Note:Inflationadjusted.Source:WorldBanknationalaccountsdata,andOECDNationalAccountsdatafiles.
-8
-6
-4
-2
0
2
4
6
8
10
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Mexico U.S. Canada1960-1993Mexico2.30%U.S.2.41%Canada2.18%
1994-2016Mexico1.07%U.S.1.51%Canada1.52%
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IncomedisparitybetweenMexicoandU.S.andCanadadidnotimproveafterNAFTAandcontinues
RatioofGDPperCapita(#)
Note:GDPperCapitabasedonpurchasing-power-parity(PPP).Source:InternationalMonetaryFundWorldEconomicOutlookDatabaseApril2017.
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Mexico/U.S. Mexico/Canada
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NAFTAincreasedsynchronicityofMexico-U.S.businesscycle,particularlyinmanufacturingandautomotiveindustries
ManufacturingIndustrialProduction(y-o-y%)
Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography);FederalReserveBoard..
-20
-15
-10
-5
0
5
10
15
20
1981
-Q1
1982
-Q1
1983
-Q1
1984
-Q1
1985
-Q1
1986
-Q1
1987
-Q1
1988
-Q1
1989
-Q1
1990
-Q1
1991
-Q1
1992
-Q1
1993
-Q1
1994
-Q1
1995
-Q1
1996
-Q1
1997
-Q1
1998
-Q1
1999
-Q1
2000
-Q1
2001
-Q1
2002
-Q1
2003
-Q1
2004
-Q1
2005
-Q1
2006
-Q1
2007
-Q1
2008
-Q1
2009
-Q1
2010
-Q1
2011
-Q1
2012
-Q1
2013
-Q1
2014
-Q1
2015
-Q1
2016
-Q1
2017
-Q1
Mexico U.S.
Correlation:0.11 Correlation:0.77
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IncomedisparitybetweenborderMexicanstatesandsouthernMexicanstatescontinued
RatioofGDPperCapita(#)
Note:GDPestimatesfrom1993to2005differentwithNationalAccounts2006whileGDPestimatesfrom2006to2015with2008baseyear.Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography)andConsejo NacionaldePoblacion.
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Border/National Southern/National
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Inthesouthernstates,theagriculturalsectorplaysanimportantrole.AfterNAFTA,theagriculturalsectorregisteredstrongdownturn
MexicoAgricultureValueAdded(asapercentage(%)ofGDP)
Source:WorldBanknationalaccountsdata,andOECDNationalAccountsdatafiles.
0
2
4
6
8
10
12
14
16
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
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AfterNAFTA,laborproductivityhasimprovedmostnotablyinmanufacturingplants
MexicoLaborProductivity(Index2005Q1=100)
Note:SeasonallyAdjusted.Personalthatisemployedintheestablishment.Source:Instituto NacionaldeEstadística yGeografía (NationalInstituteofStatisticsandGeography).
90
100
110
120
2005
-Q1
2005
-Q3
2006
-Q1
2006
-Q3
2007
-Q1
2007
-Q3
2008
-Q1
2008
-Q3
2009
-Q1
2009
-Q3
2010
-Q1
2010
-Q3
2011
-Q1
2011
-Q3
2012
-Q1
2012
-Q3
2013
-Q1
2013
-Q3
2014
-Q1
2014
-Q3
2015
-Q1
2015
-Q3
2016
-Q1
2016
-Q3
2017
-Q1
Global Manufacturing
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Contents1. NAFTAProvisions
2.NAFTATradeandEconomicEffects
3.NAFTARenegotiation
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InMay2017,theU.S.traderepresentativesent30-daynotificationtoCongressofadministrationsintenttobegintalkswithCanadaandMexicotorenegotiateNAFTA
q The parties may agree on any modification of or anaddition to the agreement
qWhen so agreed and approved in accordance with theapplicable legal procedures of each party, amodification or addition constitutes an integral part ofagreement (NAFTA Article 2202)
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IssuesfacingMexico
q Has stated it would consider modernizing NAFTA
q Government officials have alluded Mexico may seek tobroaden NAFTA negotiations to include bilateral ortrilateral cooperation on various issues, especiallysecurity and immigration
qMay consider withdrawing from NAFTA, if negotiationsare not favorable
q Priority for the government would be to improveagreement rather than to withdraw from it
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PotentialTopicsforProspectNAFTArenegotiations
1. Automotive sector
§ Newrulesoforigintoaddressmodern
developmentsinautoandautoparts
manufacturing
§ EncouragemoreproductioninNorthAmerican
automanufacturingindustrybyraisingrules-of-
originrequirements
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PotentialTopicsforProspectNAFTArenegotiations
2. Services
§ Removebarrierstoelectronicpaymentcardservices,electronicsignature,mobiletelecommunications,internationalroamingrates,andadditionalmarketaccessinareassuchasaudiovisualservices
3.E-Commerce,DataFlows,andDataLocalization
§ Cross-bordertransferofinformationbyelectronic
meansorforcelocalizationofdatacenters
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PotentialTopicsforProspectNAFTArenegotiations
4. IPR:
§ Copyright in digital environment, additional patentprotections for pharmaceuticals
§ Criminal penalties for trade secret theft
§ Provisions for customs agents to have ex officioauthority to seize counterfeit and pirated goods
§ Requirements for countries to provide criminalpenalties for copyright and trademark infringementin digital environment
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PotentialTopicsforProspectNAFTArenegotiations
5. SOE
§ Addressingpotentialcommercialdisadvantagesto
privatesectorfirmsfromstate-supported
competitorsreceivingpreferentialtreatment
6.Disputesettlement:
§ NAFTApanelsmaybeexaminedtofunction
properly
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PotentialTopicsforProspectNAFTArenegotiations
7.Labor:
§ Protectingcollectivebargainingandreformingitssystemforadministrationlaborjustice
§ UpdateMexicolaborreform
8.Environment
§ Adopt,enforceandnotdetractfromtheirenvironmentallawstoattracttradeandinvestment
§ Increasecooperationtoaddresstrans-nationalthreatsandpoliceenvironmentalcrimessuchendangeredspeciestradeandillegalfishing
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PotentialTopicsforProspectNAFTArenegotiations
9. Energy:
§ Enhancebilateralcooperationonenergy
productionandsecurity
§ Updateenergyreform
10.Customsandtradefacilitation:
§ Improvebyloweringtimesinthemovementof
goodsandservicesacrosscountries
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PotentialTopicsforProspectNAFTArenegotiations
11. Sanitary and Phytosanitary Standards (SPS)
§ Improve scientific basis of SPS regulation,
notifications to importers or exporters of shipments
detained by SPS issues, or consultative mechanisms
to seek quick resolution of such detentions
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NorthAmericanSupplyChains
qManyNorthAmericanautomotiveassemblylinesand
partmakersworktogetherasoneintegratedproduction
regionfromcitiessuchasTorontoinCanadathrough
DetroitandintonumerousregionsofMexico
q LaborintensivepartscanbemanufacturedinMexico,
whereproductioncostsarelower,whilemorecomplex
partsaremadeintheUnitedStates
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NorthAmericanSupplyChains
q Tariffsortradebarriershavepotentialofdisrupting
theseproductionchains
q Proponentswanttobringbackashareofglobal
productiontoUnitedStates
q Opponentsargueitcouldcausethousandsoflostjobs
inallthreecountriesandbenefitcountrieslike
Germany,JapanandChina
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ImportpenetrationofChinesemanufacturedproductshassurpassedMexico
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Mexico China
Note:ImportpenetrationistheratiobetweenthevalueofimportsdividedbyGrossDomesticOutputminusexportsplusimports.Source:BureauofEconomicAnalysis.
ImportPenetration(#)
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FreeTradeAgreement(FTA)Diversification
qMexicohasnumerousFTAswithothercountriesand
maycontinuetoseektodiversifytradethroughFTAs
qMexicowillingtonegotiateanewagreementwiththe
Asia-PacificregiontobesimilartoTPPandinclude
Chinaindiscussions
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NAFTAWithdrawal
q Acountrycanwithdrawfromtheagreementsixmonths
afterithasprovidedwrittennoticeofwithdrawaltothe
otherparties
q Italsoprovidestheagreementremainsinforcefor
otherparties
q Underthisprovision,existingNAFTArateswould
continueforoneyear
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NAFTAWithdrawal
q Duringthistime,governmentscanproclaimtariffrates
existingpriortoNAFTA
q Likelymost-favored-nation(MFN)rateforMexico
qMFNaccordedtoallmembersofWTO
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