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1
Different Models for Liberalisation:
The Case of Mexico
Lorenza Martínez Trigueros February, 2012
2
Contents
1. Introduction
2. Trade liberalisation in Mexico
3. Benefits from trade
4. Final remarks
3
International trade is a key determinant for economic growth
“Policies toward foreign trade are among the more important factors promoting economic growth and convergence in developing countries"
IMF (1997, 84).
Use of comparative advantages
Efficient use of resources
Dissemination of knowledge
and technology Attracts FDI
International Trade
4
Contents
1. Introduction
2. Trade liberalisation in Mexico
a) From a closed economy to the GATT signature
b) Free trade agreements
c) Trade simplification
3. Benefits from trade
4. Final remarks
5
Trade liberalisation in goods and services Total foreign trade (X+M) as GDP%
Source: The World Bank and Banxico
0
10
20
30
40
50
60
701
960
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
199
0
19
92
19
94
19
96
199
8
20
00
20
02
20
04
200
6
20
08
20
10
19
86
: M
exic
o e
nte
red
th
e G
AT
T
20
06
: U
nila
tera
l tar
iff
red
uct
ion
Closed economy
19
95
: Fre
e t
rad
e ag
ree
men
ts
Trade liberalisation process in Mexico has gone through four main stages
Trade liberalisation
6
Contents
1. Introduction
2. Trade liberalisation in Mexico
a) From a closed economy to the GATT signature
b) Free trade agreements
c) Trade simplification
3. Benefits from trade
4. Final remarks
7 Source: INEGI
Trade liberalization, among other factors, trigger the growth and diversity of exports
Structure of Mexican Exports, 1980-2010 (Percentage)
Non oil Oil Non oil average
8
Contents
1. Introduction
2. Trade liberalisation in Mexico
a) From a closed economy to the GATT signature
b) Free trade agreements
c) Trade simplification
3. Benefits from trade
4. Final remarks
9
Trade liberalisation in goods and services Total foreign trade (X+M) as GDP%
Source: The World Bank and Banxico
0
10
20
30
40
50
60
701
960
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
199
0
19
92
19
94
19
96
199
8
20
00
20
02
20
04
200
6
20
08
20
10
19
86
: M
exic
o e
nte
red
th
e G
AT
T
20
06
: U
nila
tera
l tar
iff
red
uct
ion
Closed economy
19
95
: Fre
e t
rad
e ag
ree
men
ts
FTAs brought a new impulse to the export sector
Trade liberalisation
10
FTAs brought trade creation, but also trade diversion
Gross Domestic Product for specific industries (Index 100=1994; seasonally adjusted)
Source: INEGI Note: The black line refers to the trend (polynomial of degree 6) for the average of the industries specified for each graph.
As other industries have been growing…
Despite China's entry into the WTO in 2001, Mexico is the only country that has gained participation in the U.S. non oil imports.
Share in non-oil imports in the U.S.: Major Trading Partners
Import shares in the U.S.: 1999 vs. 2010 (First 5 partners)
Source: UN COMTRADE
Sum of each bar: 16.7 percentage points
12
Moreover, Mexico has maintained a good performance in the global market of manufactures
Manufacturing exports in Latin America (Percentage)
Source: Based on data from UN COMTRADE
Import share of U.S. manufacturing (Percentage)
Source: Based on data from U.S. Census Bureau
Other Europe Latin America Northamerica
Specifically, some sectors that have achieved an important position in the U.S. are diversifying into other markets.
Exports of New Light Motor Vehicles (Percentage)
Sources: data from AMIA * Data to August
13
Share of U.S. imports (Percentage)
Source: US Census Bureau
24%
26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
México Canadá Alemania JapónMexico Canada Germany Japan
14
but……the tariff scheme became complex, leading to high costs and distortions
• To maintain the competitiveness of the industrial plant, special programs by sector (PROSECs) were established:
• Therefore, before 2008, the tariff scheme was characterised by:
PROSECs
They exempt tariff payments to certain sectors and companies in order to enable the use of more efficient supply sources worldwide at no additional cost.
They did generate distortions, inequities and inefficiencies. The artificial deterioration of the competitive position SMEs was particularly relevant as well as the high cost of managing those programs.
Full liberalisation with countries with whom we have treaties and high commercial protection with those countries that we didn´t. As a result of the different tariff combinations, there were over 150 000 tariff rates:
(i) there were over 12,000 tariffs on single products, (ii) specific rules were handled for each of the 12 FTAs we have (iii) Furthermore, 24 sectorial programs (PROSECs) were handled as well as particular tariff benefits with annual seasonality (Rule 8th and import quotas).
15
Contents
1. Introduction
2. Trade liberalisation in Mexico
a) From a closed economy to the GATT signature
b) Free trade agreements
c) Trade simplification
3. Benefits from trade
4. Final remarks
16
The most recent reform involves trade facilitation and it has 3 strategies
Tariff simplification
The elimination of waiver programs
The simplification of foreign trade and customs operations
Tariff simplification
Tariffs with rate zero (Industry; %)
9.6
8.3
5.2 4.7
4.4 4.3
3.3
2008 2009 2010 2011 2012 2013 EUA2010
Simple Average of Industrial Tariffs - industrial sector-
USA
Average Tariff Paid 2008 2010 0.95 0.66
18
Elimination of waiver programs: PROSECs
4,885
3,414
1,370 1,175
969
0
2008 2009 2010 2011 2012 2013
Changes in the number of tariff in PROSEC, 2008-2013
Source: Ministry of Economy.
REMOVAL OF PROSEC
SIMPLIFICATION OF RULE 8
The fractions included in the PROSEC's will be reduced from 4,885 in 2008 to zero in 2013.
The tariff lines included in the Rule 8 will be reduced according to the elimination of the PROSECs.
Customs Facilitation: Single window system
2. Increases transparency
3. Increases security
4. Facilitates information flow through countries
5. Reduces Risk Corruption
1. Reduces transaction costs
Advantages of Implementing:
• One single delivery information window • Every procedure is electronic • The information will be delivered only once
• The information and requirements of each procedure will be defined clearly and explicitly.
• Has the Electronic Advanced Signature • Low risk of permits falsification
• Easy implementation of single petition
• The personal contact will be eliminated.
The trade simplification will have a direct effect on competitiveness.
Source: Doing business
Trading across borders rank
= improvement 2008
• 74
2009 • 43
2010 • 22
Mexico's position in market access
Source: World Economic Forum. Market access sub index in the Enabling Trade Index.
21
Contents
1. Introduction
2. Trade liberalisation in Mexico
3. Benefits from trade
4. Final remarks
0
20
40
60
80
100
120
140
Me
xico
Au
stra
lia
US
A
Ca
na
da
Fra
nce
Un
ite
d K
ing
do
m
Ne
the
rla
nd
s
Ita
ly
Ge
rma
ny
Jap
an
1 2 3 4 6 7 8
18 19
63
8390
101
Rey
no
sa, M
exi
co
Agu
asca
lien
tes,
Me
xico
Pu
ebla
, Mex
ico
Mo
nte
rre
y, M
exi
co
Shre
vep
ort
, USA
Gre
env
ille
-Sp
art
anb
urg
, US
A
Mo
ntg
om
ery,
USA
Ad
ela
ide
, Au
stra
lia
Mel
bo
urn
e, A
ust
ralia
Par
is, F
ran
ce
Det
roit
, USA
Ma
nch
est
er,
UK
Ham
amat
su, J
apan
Mexico has become a top manufacturer in the automotive industry
22
Advantage in automotive assembly costs (Index 100 = USA)
Position in automotive parts assembly by city (Position of 102 considered cities)
Source: KPMG. Guide to international business location, 2008.
48
40
32 31 30
25 24
23
.5
20
16
0
10
20
30
40
50
Toyo
ta G
eorg
eto
wn
(USA
)
Toy
ota
Ca
mb
rid
ge
(Ca
na
da
)
Ch
rysl
er
Be
lvid
ere
(US
A)
Ford
Dea
rbo
rn (U
SA)
GM
Sil
ao (M
exi
co)
Ch
rysl
er
Tolu
ca (M
exi
co)
Nu
mm
i (U
SA)
Toyo
ya P
rin
ceto
n W
est
(USA
)
GM
Par
ma,
Oh
io (U
SA)
Hyu
nd
ai M
on
gtgo
mer
y (U
SA)
1.84
2.53 2.6 2.6
6 3.07
3.09 3.1
9
3.32 3.4
5
3.46
0
1
2
3
4
Ch
rysl
er
Du
nd
ee
GE
MA
(US
A)
GM
Sp
rin
g H
ill (
US
A)
Toy
ota
Ge
org
eto
wn
(U
SA
)
Toy
ota
We
st V
irg
inia
(U
SA
)
GM
Flin
t S
ou
th (U
SA
)
GM
Flit
No
rth
(USA
)
GM
To
na
wa
nd
a (U
SA
)
Ch
rysl
er
Ma
ck A
v. II
(U
SA
)
Ch
rysl
er
Sa
ltill
o (M
exi
co)
GM
Ro
mu
lus
(USA
)
Mexico has developed high performance plants that can be compared with the best plants worldwide
23
Top 10: Engine production (Hours per produced engine)
Source: Oliver Wyman Automotive Consulting Services. The Harbor Report, June 2008. Note: Considers 61 Plants in North America, Europe y South America in 36 cities.
Top 10: Stamping process (Parts per hour)
Moreover, a positive relation is observed between trade and the development of industries with high added value.
24
Exports vs added value (Average annual growth 99 – 09)
Source: INEGI Economic Census and UN COMTRADE (NAICS code) Note: in red those industries classified as "high technology" according to The World Bank
Imports vs added value (Average annual growth 99 – 09)
China has provided inputs or machinery for domestic production, which turns into products with added value.
Imports from China. Selected industries (Percentage of total imports)
Source: UN COMTRADE
25
Imports from China by type of good in manufacturing (Percentage)
Source: Based on data from UN COMTRADE
Capital goods
Intermediate goods
Consumer goods
In some products emerging economies are still assemblers, getting a very low share of the whole value
Value decomposition for iPhone 4 (Sales price= 600 USD)
iPhone: “Designed by Apple in California. Assembled in China”
26
27
Contents
1. Introduction
2. Trade liberalisation in Mexico
3. Benefits from trade
4. Final remarks
Final remarks
28
Mexico, as other emerging economies, followed an export led development
strategy
1. Closed economy with free trade areas restricted to export firms
2. Liberalization became in stages: entrance to GATT, FTAs and unilateral tariff
reduction
Mexico has developed a strong exporter sector moving from low value added
sectors to high value added ones
Mexican exporter sector is part of global supply chains, importing a significant
amount of its inputs
The challenge is to keep on scaling in the value chain by adding the contribution
of design and development
29
Different models for liberalisation: the
case of Mexico.
Lorenza Martínez Trigueros February, 2011