Mexico, Its Partners and Trade in Uncertain Times
Mexico’s economic relations with the rest of the world have evolved in recent decades, not solely due to the will of its very capable political and economic actors, but because it has skillfully exploited opportunities that have come in the wake of global transformations, namely political liberalism and the liberalization of trade. Today, the world order has unexpectedly taken an about-turn compared to the openness that defined it from the 1990s onwards. This brings with it major challenges for Mexico, which will have to adapt to new terms in its relations with its partners, old, new and prospective.
The story goes that the last global transformation of the 20th century —the end of the Cold War— was interpreted by Mexico as a chance to forge closer economic and political ties with Europe, which was where many of the more significant changes were taking place. Historically, the United States has been Mexico’s main trading partner —by a long shot. In 1993, the year before the North American Free Trade Agreement (NAFTA) came into force, the United States received 82.7% of Mexico’s total exports and accounted for 69.3% of its imports. Judging from the reaction of certain European leaders to the Mexican government’s advances, Europe was more bent on pursuing its integration process with its Eastern neighbors. Mexico would first have to join a regional North American effort if it were to become an attractive partner to Europe in the future. In short, as was the case with transatlantic flights, to get from Mexico to Europe required entering North American airspace.
Free trade negotiations between Mexico and what was by then the European Union (EU) kicked off in the late 1990s. In 1997, an agreement was signed that was exceptional for both parties in that it provided for free trade with an overseas partner, but it was also a document that reflected the essence of European integration, i.e. it was a political project. The Global Economic Partnership and Political Cooperation Agreement came into effect in mid-2000, one of its goals being to diversify Mexico’s trading partners and another to position the country further up global value chains. In 2001, during its first full year in force (and assuming the EU had the 28 members it has today and not the 15 it had at the time, because the figures for the 12 that joined later are insignificant), the European Union accounted for just 3.4% of Mexico’s total exports and 9.9% of its imports. That same year, seven years after the coming into force of NAFTA, Mexico’s exports to the United States had increased (88.5%), while its imports had declined only slightly (67.6%).
The tenth anniversary of the coming into force of the Global Agreement was an excellent occasion to celebrate growth in trade and investment flows and highlight Mexico’s political importance as a global partner of the EU (it was unilaterally recognized as a Strategic Partner by the European Council in 2008 and the Joint Plan of Action within the framework of the economic partnership in 2010). To the extent that the economic realities of globalization set in, attention was drawn to emerging trade and investment issues and the need to modernize regulatory frameworks, which, as tends to be the case, rarely keep step with practices. That same year, Mexican exporters found themselves forced to reflect on the need to reduce their dependence on the United States, for reasons that had more to do with economic security than trade logic.
In 2013, Mexico and the European Union publicly announced their intent to undertake a long overdue modernization and improvement of their trade agreement. For several years, both parties had been signing free trade agreements with third countries and their bilateral relationship needed to take into account the terms agreed to in these other arrangements. Negotiations began in 2016. At the same time, in the United States (the main trading partner of both Mexico and Europe and a pillar of global economic, political and security systems) a candidate who sympathized with neither the form nor substance of liberal values was running for president. In November 2016, following the results of the US elections, Mexico and the European Union reaffirmed their commitment to continue revising their bilateral agreement and in doing so sent the entire world a message: the multilateral trade system and its liberal principles serve a political purpose in a world order that is best preserved. Mexico greeted Europe’s gesture as one of partnership and the news came as a relief in light of mounting tensions with its main trading partner and neighbor. In 2017, on the 20th anniversary of the signing of the Global Agreement between Mexico and the European Union, Mexico’s fears proved founded when the US government demanded a renegotiation of NAFTA, leaving the country with the titanic task of agreeing on the future rules of economic relations with its main trading partner, which also happens to have the most complicated political leadership in the world.
Paradoxically, it has turned out to be easier to cross the Atlantic than the Rio Grande. In April 2018, after ten rounds of negotiations between Brussels and Mexico City, the European Union and Mexico announced an agreement in principle on their renegotiated transatlantic bond. It was a feat of economic diplomacy that reaffirmed respect for the principles of cooperation within multilateral frameworks amidst the uncertainty created by calls for unilateral “solutions” —even from within the European Union itself, which would soon have to deal with its first desertion following the exit of the United Kingdom. It will be a while yet before Version 2.0 of the agreement is ratified and comes into force. The experts say we could be looking at 2020 or 2021.
Progress on the negotiating front comes at a time when trade with Europe has grown in both real and relative terms —in 2017, the European Union represented 5.6% of Mexico’s total exports and 11.6% of its imports—, while Mexico has managed to diversify its imports (46%) from the United States and, to a lesser extent, its exports (79.8%). It should, however, be acknowledged that there is an additional success story of diversification behind these figures: due to its participation in global value chains, Mexico has significantly upped the quality of its exports by increasing exports of manufactured goods to the detriment of commodities, namely agricultural goods, as trade statistics with the European Union reveal. That said, Mexico needs to continue diversifying its economic and political partners.
Agents of economic diplomacy and economic interest groups in Mexico are now focusing their efforts on strategies to grow business in a not-very-optimistic short-term scenario for global trade and investment. In 1990, we looked to the United States to help us groom a profile more attractive to European eyes. In 2017, after almost three decades of partnership with the EU, we began turning our gaze beyond the Atlantic and toward the Pacific Basin, the shores of Latin America and East Asia in search of alternative partners and allies.
Created in 2011, the Pacific Alliance, formed by Chile, Colombia, Peru and Mexico, is a fledgling initiative compared to the two cases we have already discussed. In terms of trade, it is barely relevant (accounting for 1.58% of exports and 0.89% of imports in 2017), yet its growth rates point to economic potential, as do the areas of cooperation its members have advanced in. For example, Mexico and Chile are already full members of the Organization for Economic Co-operation and Development (OECD), Colombia is in the process of joining and Peru is not a member, but complies with some of the organization’s mechanisms.
The other integration process Mexico has joined is even more recent. Signed in February 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is still in the process of being ratified and has yet to come into force. The agreement boasts 11 members—Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam— and is descended from another free trade initiative, one that would have been the most ambitious in history in terms of global trade coverage if it had materialized: the Trans-Pacific Partnership (TPP), which the US government decided to back out of in early 2017. This year, Mexican exports to CPTPP members represented 5.4% of its total exports, with imports coming in at 10.6%. Once again, it is evident diversification is concentrated on the import side.
Last year, 93% of Mexico’s exports were made within the framework of free trade agreements compared to 67% of imports. This disparity points to a concentration of exports to one single partner. The other difference is called China. Mexico does not have a trade agreement in place with China, which makes up 17.6% of its imports and 1.66% of its exports. Instead, it applies the rules of multilateralism laid down by the World Trade Organization (WTO).
But this is not an appeal to the mercantilism-inspired protectionist logic the US government currently champions. On the contrary, one of the few economic policy stances the political forces that contended for the presidency of Mexico on July 1 all agreed on was the need to continue defending multilateralism and trading freely on global goods, services and financial markets.
Mexico needs to diversify its trade. It is a subject that has been amply studied and the solution is still in the pipeline, but it’s going to take more than adding more free trade agreements to the mix, which, albeit necessary are not sufficient. One way Mexico can improve its profile as a trade partner is by participating in integration processes that hinge on other values. The EU and the Pacific Alliance are clear examples of economic relationships we need to continue cultivating, because they too are on the hunt for new associates, having realized that their primary and longstanding partner has more unknowns than certainties to offer. The international economic order is changing and no one is sure in which direction it is headed. A compass appears to be guiding us across the Atlantic and along the Pacific coast.
Zirahuén Villamar - Economist specialized in global governance, member of the Mexican Council on Foreign Relations (Comexi) and the German Council on Foreign Relations (DGAP). He is a Political Sciences PhD candidate. @zirahuenvn
Source: Negocios ProMéxico 11: III-IV, pp. 62-65.