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How to organize free trade across Atlantic - Reality and

Expectations

By Carlos Martínez Velázquez (@carlosmartinezv)

I. Free trade and the openness of Mexican economy

One of the goals of free trade agreements (FTA) is to eliminate or reduce

barriers to trade (such as taxes) to get the full advantages of the free

market. In 1986, Mexico decided to open its economy by joining the

General Agreement on Tariffs and Trade (GATT). From that moment

onwards, Mexico has followed a commercial policy of openness and free

trade; on 2012, merchandise trade as a percentage of Mexico’s GDP

was 63%1. In this regard, Mexico has 12 Free Trade Agreements2 with

44 countries and 28 agreements to promote reciprocal foreign

investment.

After the GATT, the most important step to liberalization was the signing

of NAFTA. In the early 90s, Mexico, the USA and Canada negotiated the

North American Free Trade Agreement (NAFTA), which Mexico signed

in November 1993 and it entered into effect on January 1, 1994. NAFTA

was an instrument that set a new paradigm in international trade; it was

an agreement between countries with different economies and different

levels of development.

1 Merchandise trade as defined by the WB: The sum of merchandise exports and imports divided by the value of GDP, all in current U.S. dollars. Other Latin-American countries: Brazil (21.1%); Argentina (31.5%); Peru (44.7%); Chile (58.9%); Venezuela (44.1%). 2 NAFTA, Costa Rica, Colombia, Nicaragua, Chile, Israel, European Union, Guatemala, Honduras, El Salvador, Islandia, Liechtenstein, Noruega y Suiza, Uruguay, Japón y Perú.

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Since the entry into force of NAFTA, trade and investment among

members have increased. The relationship that has deepened the most

is between Mexico and US. Among these countries trade in goods

increased 5 times, in services it doubled and finally on investment flows

the trade increased six fold compared to levels in 1993. In addition, 6

million jobs in the US depend on Mexican commerce.

However, as scholars such as Gerardo Esquivel and Robert Blecker

have contended, the treaty has not yielded the expected results,

especially, regarding job creation and wage convergence. It is also

important to mention that economic convergence between countries is

far from being a reality: as an example, the 2012 GDP per capita

(purchasing power parity) in Mexico was approximately three times

lower than in the United States and twice less than Canada.

Graphic 1Trade of Mexico with Different Partners

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II. The Agreement with Europe

The second relevant moment of openness was the economic

relationship with Europe. On July 1 of 2000 the Free Trade Agreement

between Mexico and the European Union came in to effect. That treaty

was part of the Economic Partnership, Political Coordination and

Cooperation Agreement signed between Mexico and the member States

of the European Union in 1997. Hence, this year we will celebrate 17

years of economic cooperation with Europe. Cooperation that has been

beneficial for all the members.

Official data3 from 2013 indicates that at the end of last year, the total

amount of commerce (which takes into account the sum of imports and

exports) between the two parts was 62 thousand million dollars. In

addition, the European Union represents 8.26% of Mexico’s

International trade. If we compare the aforementioned data with the data

before the agreement was signed, the results are striking. Compared

with 1999, exports to Europe more than tripled and the annual growth

rate of exports in the period 2000-2013 was 10.4%; accordingly, imports

from Europe have tripled and its annual growth rate is 9.6%.

Furthermore, in the period from 2000 to 2013 the Foreign Direct

Investment from Europe to Mexico was 132 thousand million dollars -

which is 37% of the total FDI received in Mexico in the same period -

from 15 thousand European businesses operating in Mexico (Graphic

2).

3 From Secretary of Economy

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Graphic 2 Total FDI received in Mexico

There is something to note here4. Foreign Direct Investment has

increased nearly 10 times since Mexico opened its market in the 90s.

However, economic growth within the country has been unequal. If we

consider that FDI and economic growth are related variables, we can

see that the Mexican states that have more growth are those that were

better endowed with physical and human capital before the opening.

Hence, we can assert that in this period the inequalities among Mexican

regions have exacerbated (Graphic 3). Therefore, to take full advantage

of trade liberalization, we need to consider establishing mechanisms for

cooperation between the parties in a FTA, when there are inequalities

between and within them. For example, drawing in Robert Pastor’s

ideas, my organization has proposed that, in the case of NAFTA, it would

be desirable to create a joint fund for productive infrastructure projects

4 For a full review. Look at the document: “TLCAN 20 años. Comercio, Inversión y Desarrollo”. Spanish. Available: http://www.centralcyc.mx/?p=154

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and education to help equalize the less advantaged regions in Mexico

(that go beyond the NADBANK).

Graphic 3 Average Growth Rate by State compared with its Per capita GDP on 1993

Back to the results of European Agreement. Among the European

countries Germany (27.4%), Spain (18.3%), Italy (10.92%), Netherlands

(9.21%), France (7.91%) and the United Kingdom (6.27%) concentrated

the 80% of all trade5 between Mexico and Europe in 2013 (likewise for

previous years). Also, it is important to note the commerce profile

between the two regions. The top export products from Mexico were

crude oils, tourism vehicles, telephone machines, data processing

machines, and vehicle parts or accessories. The top import products to

Mexico were gasoline motors, medicines, petroleum oils, and vehicle

parts or accessories.

5 Exports plus imports

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As we can see, under the agreement, economic integration among

regions has advanced in the right direction but there are still some

challenges for the future. The first is the possibility of greater integration

between the United States and the European Union. In this respect, my

assertion is that the agreement must be built upon the basis of regional

integration. In other words, Europe must view North America as an

integrated region. For that purpose, it is necessary that Mexico (and

Canada) participate with its vast experience of cooperation with Europe

in this new effort.

III. Conclusions

We must recognize that free trade, by promoting competition and open

markets for more products, benefits consumers. Certainly, the

challenges that exist today in the transatlantic trade are very clear if we

were to focus on the regulation. For example, the TPP negotiations imply

providing the same technical standards for the free movement of

products. While this is desirable, participating countries should take a

model of democratic regulation.

Regarding the relationship between Mexico and Europe, as we have

seen, it has been beneficial in terms of trade; however, there is still room

for improvement. For instance, we can develop cooperation programs in

global matters such as data protection and e-commerce. While there is

local legislation, consumers are global and need to be protected globally

too. We need to develop a long-run view and put in the center of the

debate the consumer rights and the adoption of best business practices

Finally, it is important to make progress in generating production chains

that substantially exploit the comparative advantages of different

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countries of the European Union and the various regions of Mexico and

North America as a whole. If this is achieved, the benefits of economic

integration will be more tangible for consumers and may cause deeper

social and cultural integration. And, of course, it will generate a different

discussion among businesses and consumers about the benefits of free

trade.