NAFTA’s southernmost member needs to use pact to grow fragile economy
From The Economist
MONTERRY, Mexico — AT THE MOMENT, it is just a thousand hectares of mud on the outskirts of Monterrey, a bustling industrial city in northern Mexico. Soon it should be the “Interpuerto,” a customs-clearing zone to speed goods on their way to the United States via two rail lines and the motorways to which it will be connected.
The aim of the $2-billion project, backed by the state government of Nuevo Leon and private investors, is to allow cargoes to skip the long lines at customs posts on the border, 240 kilometres to the north.
Projects like the Interpuerto matter for Mexico, the economy of which depends on exporting labour-intensive manufactured goods to its giant neighbour. Despite the ratification of the North American Free-Trade Agreement (NAFTA) in 1993, within a decade Mexico’s exports to the United States were overtaken by those of China.
The financial crisis and the recession north of the border were even bigger blows: a slump in exports (down by a quarter in the first half of 2009, compared with the same period the previous year) helped to push Mexico’s economy into deep recession.
Recovery is now under way. But Mexicans remain gloomy about their economic prospects, according to opinion polls. And Mexican businesses worry about the world currency “war”: The peso is appreciating against the dollar and, recently, against the yuan, thanks to capital inflows.
Yet Mexico’s trade picture is brighter than it looks. Last year was less bad for Mexico than for most of the rest of the world. Although its exports shrank, they have recovered quickly. Mexico’s share of the American market has grown to 12.2 per cent — its highest level since NAFTA came into force. The rapacious expansion of China’s exports has come at the expense of others, including Canada, the third NAFTA member.
This resilience reflects various built-in advantages. Geographical proximity has become more valuable as the price of oil (and thus transport) has risen. NAFTA exempts Mexico from the American import tariffs that clobber Chinese exporters. Chinese tiles and paving stones, for instance, are cheaper than Mexican ones, averaging $6.22 per square yard against $6.32, but after paying an 8.5 per cent tariff they end up being more expensive.
The same is true of cloth, glassware, chemicals and much else. The NAFTA effect is also concentrating the manufacture of smaller cars in Mexico. The country’s car exports are booming as never before, up 10.5 per cent on their level in 2008. Carmakers have announced investment of $4.4 billion over the next four years, according to the government.
China’s edge in labour costs is less clear-cut than it used to be. The wages of its factory workers have been rising at double-digit rates in recent years. Mexican workers are highly skilled in some industries. But the wage gap with the United States has failed to narrow as much as people hoped, complains Rogelio Ramrez de la O, a Mexican economist.
Sadly, personal security has become a worry in northern Mexico because of the wave of drug-related violence. But high-tech businesses reckon that their intellectual property is safer there than in China, says Othon Ruiz, Nuevo Leon’s development minister. Partly as a result, consumer-electronics manufacturers have stepped up investment in Mexico in recent years.
Even if Mexico continues to gain market share north of the border, the benefit will be limited by the prospect of years of lackluster growth in the American economy. So it is all the costlier that Mexico is not making the most of its advantages. Take the Interpuerto. It does not yet have American permission to stage customs clearance. The easiest way would be to let American officials do checks on Mexican soil, but this raises nationalist hackles among Mexican politicians. (Similarly, the U.S. Congress, in violation of NAFTA, thwarted a pilot scheme under which Mexican long-haul truckers operated north of the border.)
The bigger problem is that a lack of dynamism in the domestic economy caps the gains from trade. Many of Monterrey’s export factories import their parts from the United States for assembly and re-export. Jaime Serra, an economist who as trade minister negotiated NAFTA in the early 1990s, points out that the multiplier effect of exports in Mexico is unusually low. Each export dollar generates only $1.80 at home, compared with $2.30 in Brazil and $3.30 in the United States, he calculates. The opportunity lost is magnified because exports make up some 28 percent of Mexico’s economy, compared with 11 percent of Brazil’s.
The problem is that many home-grown industries are uncompetitive oligopolies. The answer, argues Serra, is for the government to step up efforts to get foreign suppliers to set up in Mexico, and for state banks to increase lending to domestic suppliers if private banks won’t. More aggressive enforcement of competition rules would help, too.
Bringing more of the export supply chain inside Mexico would have another payoff. At the moment, four-fifths of exports go to the United States. Despite Mexico’s skein of trade agreements, branching out into new markets is hard because of the accords’ rules of origin. For example, goods exported to, say, the European Union must originate predominantly in Mexico (or the EU). Many export-oriented factories are so reliant on parts imported from the United States that they do not qualify for tariff-free access to third markets. That would change if those exporters could buy their parts from competitive Mexican suppliers rather than importing them.
More than 15 years after NAFTA, the task for Mexico is to take full advantage of the trade agreement — and to go beyond it.