The Impact of EU FTAs on the trade and economic performance of Mexico

09/06/2011

Prof Claudio Dordi - Professor of International Law at Bocconi University (Milan), and MUTRAP III Team Leader
Mr Federico Lupo Pasini - Lawyer and consultant specialized in international economic law and policy. Based in Hanoi.
The literature on the assessment of the economic and trade performances of the FTAs concluded by the EU is quite comprehensive: however, most of the researches are conducted before the agreement is negotiated and is entered into force, as they are intended to support the negotiators to understand the magnitude of the effects of each agreement. Few analytical studies have been published to analyze the impact on trade and on the economies of the FTAs members after the agreement entered into force. In this research we select, among the countries which participated to a FTA agreement with the EU, only those agreements which might represent a reasonable example for Viet Nam. For this reason we excluded all the agreements with EU members’ candidates or with countries that are geographically close to the EU as well as the agreements with countries which are not comparable to that of Vietnam and we selected some agreements which already entered into force for a minimum number of years, allowing the possibility of an effective assessment of their impact on the members’ economies.

The Main Features of Mexico

 

Mexico

Surface

1964400 sq km

Population

107,6 millions

GDP

627,3 bn. Euro

GDP per capita

5832,2 Euro

Export/GDP

25,6%

Import/GDP

28,5%

Trade/GDP

54,1%

The EU- Mexico Free Trade Agreement

 

Mexico

Signed

8.12.1997

Entered into force

1.10.2000

Trade performances

Since the entry into force of the FTA, the 1 July 2000, trade flows between EU and Mexico has been particularly dynamic. Bilateral trade grew from 18.4 bn. USD in 1999 to 56.5 bn. in 2008 (+207%). Exports climbed from 5.2 bn. in 1999 to 17.2 bn. in 2008 (+228%), while imports increate by 196% in the same period, reaching a value of 39.3 bn. USD in 2008.

Table 1: Bilateral Trade Mexico-EU

 

1999

2008

Growth

Export

5.2

17.2

228%

Import

13.2

39.3

196%

Total trade

18.4

46.5

207%

Trade balance

-8

-22.1

176%

Graphic 1: Export, Import and Trade Balance

The important impact of the agreement on bilateral trade is testified by the trade growth rate Mexico-EU and Mexico world in the period 1999-2007 (graphic 2).

Graphic 2: Growth rate of trade with EU (blue) and world (red)

The trade relationships between Mexico and EU, in the period 1999-2007, have been more dynamic than that to the US (Import from EU, 12,7%, from US 4,1%; export to EU 14.1%, US 8.6%). Regarding the export, only China (+37.3%) growth rate has been higher than that with the EU (on import China and Japan performed better, respectively +41.4% and +17%). As a consequence, the EU substantially increased the presence on the Mexican import, amounting to the 12% of total Mexican import, while EU import from Mexico the 1.1% of total imports.

Table 2: rank in the bilateral trade EU-Mexico

 

 

1999

 

2007

Rank

Market rate

rank

Market rate

Import to Mexico from EU

2

9.1%

2

12.0%

Import to eu from Mexico*

30

0.7%

25

1.1%

As already highlighted, the bilateral trade deficit with the EU substantially increased; indeed, a number of EU enterprises relocated their production in Mexico to export into the US, benefiting indirectly from the NAFTA agreement.
The most important imports from the EU are machinery (29.45% of the total), Oil (22%), electronics (14.87%) and Vehicles (13.48%).

Table 3: Most imported products from EU


Products Exported

2008

%

All products

39250965

 

Machinery

8042020

29.45

Mineral fuels, oils, etc

6015834

22.03

Electrical, electronic equipment

4060701

14.87

Vehicles

3680223

13.48

Pharmaceutical products

2033693

7.45

Iron and steel

1835109

6.72

Optical, photo, technical, medical, etc

1490541

5.46

Organic chemicals

1404695

5.14

Plastics

1134468

4.15

Articles of iron or steel

872567

3.20

As a confirmation of the fact that Mexico is considered a platform for exporting into the US, most of the imports from EU are inputs and not consumers goods. This allowed the Mexican enterprises to benefit even from the necessary transfer of technology which has been useful to compete in the world trade.
Table 4 illustrates the most dynamic imported products:
Table 4: growth rate of the 10 most imported products

Products

2001

2008

2001-2008

All products

16716164

39250965

13.0

Machinery

4458923

8042020

8.8

Vehicles

2249146

3680223

7.3

Electronics

2606475

4060701

6.5

Mineral fuels, oils

117065

6015834

75.6

Pharmaceutical products

562343

2033693

20.2

Optical, photo, technical, medical etc.

536750

1490541

15.7

Organic chemicals

981316

1404695

5.3

Iron and steel

427596

1835109

23.1

Plastics and articles thereof

487858

1134468

12.8

Articles of iron or steel

314217

872567

15.7

The increase of import in Mexico is mainly due to the huge tariff reductions applied by the Central American country since the entry into force of the agreement. Table 5 illustrates clearly the magnitude of the tariffs decrease.

Table 5: Tariffs applied by Mexico to EU imports


Year

Simple Average

Weighted Average

1999

17.42

13.78

2008

11.78

10.38

As regard to exports, they increased, from 1999 to 2007, with an average of over 14%; all the sectors benefited from the entry into force of the agreement. Differently from the import side, the export side is relatively concentrated in few products. Oils, Vehicles, electronics and machinery account for more than 70% of the export to the EU.

Table 6: the most exported products from Mexico to EU

Product label

2008

%

All products

17162498

 

Mineral fuels, oils, etc

4306933

25.1

Vehicles

3838472

22.4

Electrical, electronic equipment

2659597

15.5

Machinery, nuclear reactors, boilers, etc

1334172

7.8

Optical, photo, technical, medical, etc

603653

3.5

Pearls, precious stones, etc

582015

3.4

Iron and steel

558304

3.3

Organic chemicals

393270

2.3

Ores, slag and ash

256866

1.5

Plastics and articles thereof

246888

1.4

Beverages, spirits and vinegar

194234

1.1

Table 7 illustrates the most dynamic products exported from Mexico to the EU. It should be taken into consideration that, besides oils, Mexico exports include even inputs for the EU productions. The annual growth rate of export of some products (electronics, vehicles, chemicals) is stunning.

Table 7: the dynamism of Mexico export to the EU


Product label

2001

2008

Annual  growth

All products

5641923

17162498

17.2

Electrical, electronic equipment

469801

2659597

28.1

Mineral fuels, oils, etc

1221603

4306933

19.7

Vehicles other than railway, tramway

864589

3838472

23.7

Machinery

1293061

1334172

0.4

Optical, photo, technical, medical, etc

148455

603653

22.2

Organic chemicals

360949

393270

1.2

Pearls, precious stones, etc

98043

582015

29.0

Plastics and articles thereof

88709

246888

15.7

Beverages, spirits and vinegar

115638

194234

7.7

Tanning, dyeing extracts, etc

70713

111666

6.7

Zinc and articles thereof

119

130557

171.8

Iron and steel

72310

558304

33.9

Cereals

10

96840

271.1

Ores, slag and ash

17139

256866

47.2

Rubber and articles thereof

32514

128248

21.7

Coffee, tea, mate and spices

37144

85740

12.7

Articles of iron or steel

20601

156690

33.6

The reduction of tariffs applied by the EU to Mexico following to the entering into force of the agreement is not as relevant as the inverse case. Indeed, in 1999 Mexico benefited from the GSP and the tariffs applied by the EU were already quite low. However, it is interesting to note the lower standard deviation and the lower maximum rate applied in 2008 compared to 1999: this is the evidence that EU tariffs vs. Mexico are more stable, with less tariff peaks. This, of course, had an important influence on Mexican exports.

Table 8: EU tariffs applied to Mexico


Tariff Year

Simple Average

Weighted Average

Standard Deviation

Minimum Rate

Maximum Rate

1999

5.1

3.85

11.92

0

284.67

2008

4.24

3.03

4.85

0

74.9

Investment
The EU is the second source of FDIs in Mexico, after US. The stock of FDIs from 1999 to 2008 amounted to 67.7 bn. USD, the 34% of total FDIs in Mexico (US FDIs represent the 55.8%). Since the entry into force of the agreement, the EU increased from 26% to 34% its share of FDIs in Mexico. The FDIs are concentrated in the industrial and manufacturing sector as well as in the financial sector (they represent more than 80% of the total FDIs in Mexico). EU enterprises have been particularly active in the manufacturing sector: in most of the case they use Mexico as a platform to export the final products into the US.
Conclusions
All the statistics proof that the EU-Mexico FTAs promoted a huge development of bilateral trade relations. Exports and imports increased substantially. The compositon of Mexican imports from the EU, based mainly on inputs, later transformed in Mexico to be exported or distributed in the local market, promoted employment and transfer of technology. On the other side, trade balance with the EU degraded, showing a structural problem of the Mexican economy, i.e. a very low value of the products is added in the Mexican territory.

Committee on International Trade Policies - VCCI