CIAO DATE: 04/03

Mexico Alert: Mexico-EU Trade Accord Prompts Speculation about FTAA and New WTO Round

Overview

• With the signing of a trade accord between Mexico and the European Union, speculation deepens about the possibility of a new trade round for the World Trade Organization.
• With 10 trade accords signed in recent years, some trade specialists say Mexico is not enthusiastic about an FTAA, because of the potential for diverting trade and investment.
• An emerging player in the global economy, Mexico now accounts for 40 percent of Latin American trade.
• Regionalism has had profound effects on North America, with about 85 percent of Mexican exports destined for the United States under NAFTA.

The Mexico-European Union free trade agreement signed in March 2000 may not substantially alter the level of trade between the two regions in the short term but it might intensify the push for a new multilateral round of World Trade Organization negotiations.

Economists who gathered July 24 at a seminar co-sponsored by the Mexico Project and the European Studies Program of the Center for Strategic and International Studies (CSIS) offered differing views on the impact of the Mexican-European Union (EU) free trade agreement in the Western Hemisphere. The European Union is Mexico's second largest trading partner, but in terms of trade volume, the EU is a distant second to the United States, which absorbs about 85 percent of Mexico's exports. In 1999, the European Union received about a 6.5 percent share of Mexico's exports, down from about 11 percent in 1990.

Although the Mexico-EU trade agreement was the highest profile trade negotiation for Mexico over the past year and the first such bilateral agreement signed by the European Union outside its own region, it is only one of 10 accords that Mexico has negotiated in recent years. Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, signed a free trade agreement with Chile in 1992, joined the Asia-Pacific Economic Cooperation (APEC) in 1993, and joined the Organization for Economic Cooperation and Development (OECD) and NAFTA in 1994. Mexico signed bilateral free trade agreements with Colombia, Venezuela, Bolivia, and Costa Rica in 1995, Nicaragua in 1998, Uruguay and the European Union in 2000, and is concluding free trade negotiations with Israel.

The European Union takes on more significance for Mexico given the recent slowdown in trade flows within Latin America. Mexico now accounts for 40 percent of Latin America's trade and has preferential access to nine Latin American markets. However, a series of external economic events throughout Latin America since 1997 have compounded existing domestic problems. As a result, growth in those markets slowed in 1999. In fact, the Inter-American Development Bank reported that in 1999 the Latin American region experienced absolute declines in trade flows for the first time since the 1980s.

In diversifying and expanding its markets beyond Latin America, Mexico has been guided by a philosophy that "there is little time to waste in an effort to improve the welfare of its people, and that the other methods of gaining greater market access are moving at a glacial pace," said Jon Huenemann, former assistant U.S. trade representative. Huenemann was referring to the ongoing debate about whether to launch a new round of negotiations through the World Trade Organization (WTO), as well as the extended deadline for negotiations for a Free Trade Area of the Americas (FTAA), and the current stall in negotiations through the Asia-Pacific Economic Cooperation. At the heart of this debate is an unanswered question: is trade diversion from regionalism having a greater effect than the amount of trade such agreements create?

FTAA by Default?

Several speakers at the July 24 event speculated that by entering into so many bilateral agreements with other Latin American countries, Mexico has, by default, established the basis for an FTAA, but Mr. Huenemann warned that neither Mexico nor the EU is enthusiastic about an FTAA, because of the potential for diverting trade and investment. In fact, he noted that Mexico has made more progress pursuing its own Latin American free trade agenda than has the United States.

Aside from Brazil and Argentina, Huenemann said, "Mexico has FTAs with virtually everyone else in the hemisphere. É. Therefore, I will not be surprised if Mexico continues as a less than enthusiastic supporter of the FTAA. The ball will have to be carried by the U.S. or it will not roll up hill."

Mexico is concerned about the impact of an FTAA on its own investment potential, Huenemann said. Since 1994, Mexico has received more than $70 billion in foreign direct investment (FDI), and the United States accounts for about 60 percent of those inflows. The European Union is Mexico's second largest investor.

The Quest for FDI

Mexico relies on FDI to provide capital for modernizing its industry. For many years, the vast majority of the world's developing nations has aggressively sought foreign direct investment. Many nations believe that during times of domestic financial crisis, FDI flows into their nations are more stable than other forms of international financial flows. For Mexico, the result has been spectacular in trade terms: the government calculates that its trade has grown by 260 percent over the last decade. In terms of its U.S. trade, Mexico has expanded exports in the electronics, textiles and apparel, auto, and agroindustry sectors. Worldwide, Mexico now ranks as the seventh largest importing economy, as Table 1 indicates.

Table 1
Annual trade growth
for selected countries, regions, and world
(averages given as percentages for 1990-1998)

Source: World Trade Organization, 1999

The escalating value of Mexico's trade to the United States has been particularly evident over the past year, as Table 2 indicates. Table 2 also shows the dropping market share that the European Union has in Mexico.

Table 2
Mexico's Total Trade
(billions of U.S. dollars)

Mexico's growing trade volume has two advantages: it helps Mexico to increase both jobs and wages as exports rise. Eduardo Pérez Motta of the Mexican trade mission to the European Union emphasized at the July 24 seminar that wages for export-related jobs in Mexico are about 39 percent higher than wages in firms that export less than 60 percent of their production.

Mexico doesn't want its trade gains to begin slipping. Several trade economists at the seminar noted that the Mexico government is concerned that the Caribbean Basin Initiative and other trade initiatives giving preferences to other countries of the Western Hemisphere might undercut Mexico's trade preferences with the United States. Some of these preferences are for textile exports to the United States—a sector in which Mexico has done well under NAFTA. Mexico is now the largest exporter of these products to the United States. Fear of losing trade preferences has compelled Mexico to build a more competitive environment in which to diversify its export base.

U.S. Impact

Mexico's efforts to diversify its export base by signing bilateral accords such as the one with the European Union are not likely to have much impact on its trade relationship with the United States, said Jeffrey Schott, senior fellow at the Institute for International Economics. "It is a discriminatory bilateral trade agreement, but most of the discrimination doesn't hit the U.S. market," he said.

Sidney Weintraub, who holds the William E. Simon chair in political economy at CSIS, concurred with Schott's assessment. "It's not immediately important (to the U.S. markets), but auto trade may be affected. It is the most important export for all three of the NAFTA countries."

Mexico is the world's seventh largest vehicle producer, and between 1995-1999 its vehicle sales increased at an annual average growth rate of 17 percent. In 1999, the domestic market in Mexico absorbed about 700,000 vehicles, whereas exports accounted for more than 1 million vehicle sales. Mexico is now the third largest U.S. vehicle supplier, but at 7.3 percent of the U.S. market, Mexico lags behind Canada, with 12.3 percent, and Japan, with 11.6 percent.

By 2003, Mexico's automotive goods also will have duty-free access to the EU market, and European companies have already begun to invest in Mexico. Renault is resuming automobile production in Mexico after a 15-year absence, and beginning in 2001, a Renault-Nissan alliance will sell cars assembled in Mexico through a new dealer network. Volkswagen and Daimler Chrysler also are active in Mexico, and both have production sites for some of their best-selling cars.

Mexico's need to diversify its export base stems from its growing trade dependence on the United States, Dr. Weintraub said. He said that 35 percent of Mexico's GDP is generated by exports and about 85 percent of Mexico's exports go to the United States. That translates into about 30 percent of Mexican GDP being dependent on exports to the United States. "The one thing Mexico fears most is a slowdown in the U.S. economy," Dr. Weintraub said. "That would immediately affect Mexican exports."

Fears of Regionalism

Fears of growing regionalism point to the need for a new multilateral trade round in the WTO, several economists suggested. Some speculated that growing regionalism could prompt negotiations for a special trade arrangement between NAFTA and the European Union. But Anthony Gooch, spokesman for Pascal Lamy, commissioner for trade of the European Commission, said that the European Union strongly prefers a new multilateral round instead of more regional negotiations.

Dr. Schott said it might be difficult for Latin American countries to engage in a multilateral round at the same time that they are negotiating an FTAA. Both types of negotiations could be ongoing to 2005, and many developing countries are hard-pressed just to meet current WTO obligations. But Dr. Weintraub noted that even though FTAA negotiations are slated to end by 2005, they could actually end much sooner, if the new U.S. Congress next year decides to give the president fast-track negotiating authority. He said that the FTAA negotiations would yield a bracketed text detailing areas of trade disagreement among Western Hemisphere countries by the end of 2000. However, reaching final agreement on specific trade concessions depends on the granting of fast-track authority for U.S. negotiators.

The effect of tariff reductions between Mexico and the EU outside of the automotive industry remains unclear. The Mexican-EU trade agreement eliminates all tariffs on industrial exports between the two countries in four stages, ending with zero tariffs in 2007. In 1999, the average tariff on industrial exports from the EU to Mexico was 8.6 percent, with some tariffs as high as 35 percent. The agreement also liberalizes a small amount of agricultural trade and some trade in services, sets disciplines for investment flows, and guarantees access to government procurement markets. Mexican officials conceded they did not get all they wanted in agricultural tariff reductions. Specifically, they had hoped for more preferences in meat, orange juice, and other products. The barrier that Mexico, like other nations, faces is the European Union's Common Agricultural Policy, which Dr. Weintraub termed "an obscenity" because it imposes one of the most formidable world barriers to future trade liberalization.

Jan Gilbreath is an economist and adjunct fellow in the Americas Program of CSIS. She is working with the Mexico Project and the Global Environment Trade Study of the Yale Center for Environmental Law and Policy to complete two studies on the potential environmental effects of establishing a Free Trade Area of the Americas. Gilbreath has done extensive research on NAFTA's environmental impacts, differences in environmental policy implementation between the United States and Mexico, and other trade and investment trends under NAFTA. Her recent publications include "Economic Effects of NAFTA's Environmental Agreements," conference presentation with Sidney Weintraub, National Wildlife Federation and Yale Center for Environmental Law and Policy, April 27, 2000; "La relación Mexico-Texas: Redefinición del Regionalismo," in Nueva Agenda Bilateral en la Relación Mexico-Estados Unidos, Verea Campos, et al., eds. Mexico City: 1998; "Environment: Unwelcome Guest at the Free Trade Party," with J. Benjamin Tonra in The NAFTA Debate: Grappling with Unconventional Trade Issues, M. Delal Baer and Sidney Weintraub, Lynne Rienner Publishers, 1994. Gilbreath worked for over 12 years as a professional journalist with The Economist and the Houston Chronicle covering issues such as medicine, transportation, natural resource policy, and cross-border economic and political issues. She is a doctoral candidate at the Lyndon B. Johnson School of Public Affairs, University of Texas, and holds an M.A. from the UT's Institute of Latin American Studies.  Back.