Mexico is an export oriented economy. It is an important trade power as measured by the value of merchandise traded, and the country with the greatest number of free trade agreements.

In 2005, Mexico was the world’s fifteenth largest merchandise exporter and twelfth largest merchandise importer with a 12% annual percentage increase in overall trade. In fact, from 1991 to 2005 Mexican trade increased fivefold.

Mexico is the biggest exporter and importer in Latin America; in 2005, Mexico alone exported US $213.7 billion, roughly equivalent to the sum of the exports of Brazil, Argentina, Venezuela, Uruguay, and Paraguay.

By 2009 Mexico ranked once again number 15 on World’s leading exporters with US $230 billion (And amongst the top ten excluding Intra-EU countries). However, Mexican trade is fully integrated with that of its North American partners: close to 90% of Mexican exports and 50% of its imports are traded with the United States and Canada. Nonetheless, NAFTA has not produced trade diversion.

While trade with the United States increased 183% from 1993–2002, and that with Canada 165%, other trade agreements have shown even more impressive results: trade with Chile increased 285%, with Costa Rica 528% and Honduras 420%. Trade with the European Union increased 105% over the same time period.

Free Trade Agreements

Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, and today is an active and constructive participant of the World Trade Organization. Fox’s administration promoted the establishment of a Free Trade Area of the Americas; Puebla served as temporary headquarters for the negotiations, and several other cities are now candidates for its permanent headquarters if the agreement is reached and implemented.

Mexico has signed 12 free trade agreements with 44 countries:

• the North American Free Trade Agreement (NAFTA) (1994) with the United States and Canada
• Grupo de los tres, Group of the three [countries], or G-3 (1995) with Colombia and Venezuela; the latter decided to terminate the agreement in 2006; Mexico announced its intention to invite Ecuador, Peru or Panama as a replacement
• Free Trade Agreement with Costa Rica (1995)
• Free Trade Agreement with Bolivia (1995)
• Free Trade Agreement with Nicaragua (1998)
• Free Trade Agreement with Chile (1999)
• Free Trade Agreement with the European Union (2000)
• Free Trade Agreement with Israel (2000)
• TN Free Trade Agreement (2001), with Guatemala, El Salvador and Honduras
• Free Trade Agreement with the European Free Trade Association (EFTA), integrated by Iceland, Norway, Liechtenstein and Switzerland (2001)
• Free Trade Agreement with Uruguay (2004)
• Free Trade Agreement with Japan (2005)

Mexico has shown interest in becoming an associate member of Mercosur. The Mexican government has also started negotiations with South Korea, Singapore and Peru, and also wishes to start negotiations with Australia for a trade agreement between the two countries.

NAFTA

The North American Trade Agreement (NAFTA) is by far the most important Trade Agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope.

Unlike the rest of the Free Trade Agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

The NAAEC agreement was a response to environmentalists’ concerns that companies would relocate to Mexico or the United States would lower its standards if the three countries did not achieve a unanimous regulation on the environment.

The NAAEC, in an aim to be more than a set of environmental regulations, established the North American Commission for Environmental Cooperation (NACEC) as a mechanism for addressing trade and environmental issues, the North American Development Bank (NADBank) for assisting and financing investments in pollution reduction and the Border Environmental Cooperation Commission (BECC).

The NADBank and the BECC have provided economic benefits to Mexico by financing 36 projects, mostly in the water sector. By complementing NAFTA with the NAAEC, it has been labeled the “greenest” trade agreement.

The NAALC supplement to NAFTA aimed to create a foundation for cooperation among the three members for the resolution of labor problems, as well as to promote greater cooperation among trade unions and social organizations in all three countries, in order to fight for the improvement of labor conditions.

Though most economists agree that it is difficult to assess the direct impact of the NAALC, it is agreed that there has been a convergence of labor standards in North America. Given its limitations, however, NAALC has not produced (and in fact was not intended to achieve) convergence in employment, productivity and salary trend in North America.

The agreement fell short in liberalizing movement of people across the three countries. In a limited way, however, immigration of skilled Mexican and Canadian workers to the United States was permitted under the TN status.

NAFTA allows for a wide list of professions, most of which require at least a Bachelor’s degree, for which a Mexican or a Canadian citizen can request TN status and temporarily immigrate to the United States. Unlike the visas available to other countries, TN status requires no sponsorship, but simply a job offer letter.

The overall benefits of NAFTA have been quantified by several economists, whose findings have been reported in several publications like the World Bank’s Lessons from NAFTA for LA and the Caribbean, NAFTA’s Impact on North America, and NAFTA revisited by the Institute for International Economics.

They assess that NAFTA has been positive for Mexico, whose poverty rates have fallen, and real income salaries have risen even after accounting for the 1994–1995 Economic Crisis. Nonetheless, they also state that it has not been enough, or fast enough, to produce an economic convergence nor to reduce the poverty rates substantially or to promote higher rates of growth.

The value of Mexican cotton and apparel exports to the U.S. grew from $ 3 billion in 1995 to $ 8.4 billion in 2002, a record high of $ 9.4 billion in 2000. At the same time, the share of Mexico’s cotton textile market the U.S. has increased from 8 percent in 1995 to 13 percent in 2002. Some have suggested that in order to fully benefit from the agreement, Mexico should invest in education and promote innovation in infrastructure and agriculture.

Contrary to popular belief, the maquiladora program was in place far before NAFTA, in some sense dating all the way back to 1965. A maquiladora manufacturer operates by importing raw materials into Mexico either tariff free (NAFTA) or at a reduced rate on a temporary basis (18 months) and then using Mexico’s relatively less expensive labor costs to produce finished goods for export.

Prior to NAFTA maquiladora companies importing raw materials from anywhere in the world were given preferencial tariff rates by the Mexican government so long as the finished good was for export.

The US, prior to NAFTA, allowed Maquiladora manufactured goods to be imported into the US with the tariff rate only being applied to the value of non US raw materials used to produce the good, thus reducing the tariff relative to other countries. NAFTA has eliminated all tariffs on goods between the two countries, but for the maquiladora industry significantly increased the tariff rates for goods sourced outside of NAFTA.

Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, involving relatively small dollar amounts. These disputes are generally settled in WTO or NAFTA panels or through negotiations between the two countries. The most significant areas of friction involve trucking, sugar, high fructose corn syrup, and a number of other agricultural products.

Mexican Trade Facilitation and Competitiveness

A research brief published by the World Bank[108] as part of its Trade Costs and Facilitation Project suggests that Mexico has the potential to substantially increase trade flows and economic growth through trade facilitation reform. The study examines the potential impacts of trade facilitation reforms in four areas: port efficiency, customs administration, information technology, and regulatory environment (including standards).

The study projects overall increments from domestic reforms to be on the order of $31.8 billion, equivalent to 22.4 percent of total Mexican manufacturing exports for 2000-03. On the imports side, the corresponding figures are $17.1 billion and 11.2 percent, respectively. Increases in exports, including textiles, would result primarily from improvements in port efficiency and the regulatory environment.

Exports of transport equipment would be expected to increase by the greatest increment from improvements in port efficiency, whereas exports of food and machinery would largely be the result of improvements in the regulatory environment.

On the imports side, Mexican improvements in port efficiency would appear to be the most important factor, although for imports of transport equipment, improvements in service sector infrastructure would also be of relative importance.