1 Contents 1. Introduction 2. Trade liberalisation in Mexico 3. - - PowerPoint PPT Presentation

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Different Models for Liberalisation: The Case of Mexico

Lorenza Martínez Trigueros

February, 2012

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Contents

• 1. Introduction
• 2. Trade liberalisation in Mexico
• 3. Benefits from trade
• 4. Final remarks

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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

• f knowledge

and technology More investment

International Trade

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1 Measured by the PPP.

And it also has been for Mexico’s development

Mexico's economy is number 12 on the size of global GDP1 Mexico is a leading exporter, ranking 14 worldwide Mexico has preferential access to 44 countries through 12 Free Trade Agreements

Mexico is now an exporter of manufactured goods that require a significant amount of value added; has new trading partners and the trade volume grows steadily.

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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

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Trade liberalisation in goods and services (Total foreign trade as GDP%)

Source: The World Bank and Banxico

10 20 30 40 50 60 70 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1986: Mexico entered the GATT 2006: Unilateral tariff reduction Closed economy 1995: Free trade agreements

Mexico has well defined stages in the trade liberalisation process

• Trade

liberalisation policies can be divided into 3 main stages.

• The first two policies

contributed to achieve economic development and to get benefit from the comparative advantages (e.g. geographical position).

• In order to develop

these advantages (including the FTAs) it was necessary to reduce the barriers to foreign and domestic trade .

Trade liberalisation

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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

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Source: INEGI

The trade liberalization that began in the late eighties did trigger the growth and diversity of exports.

Structure of Mexican Exports, 1980-2010 (Percentage)

Non oil Oil Non oil average

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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

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With the signature of FTAs, the international trade increased and the industries more prone to import became also those with more exports.

Source: Banxico

Total exports Commodities Manufactures

Evolution of exports by type of good (1993=100) Relation of exports and imports (US million dollars)

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There were several benefits from FTAs. However, there were specific sectors that didn’t enjoy comparative advantages and suffered stagnation or decline.

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

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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 14

Share of U.S. imports (Percentage)

Source: US Census Bureau

24% 26%

0% 5% 10% 15% 20% 25% 30% 35% 40% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 México Canadá Alemania Japón

Mexico Canada Germany Japan

20 40 60 80 100 120 140 Mexico Australia USA Canada France United Kingdom Netherlands Italy Germany Japan

1 2 3 4 6 7 8 18 19 63 83 90 101 Reynosa, Mexico Aguascalientes, Mexico Puebla, Mexico Monterrey, Mexico Shreveport, USA Greenville-Spartanburg, USA Montgomery, USA Adelaide, Australia Melbourne, Australia Paris, France Detroit, USA Manchester, UK Hamamatsu, Japan

Mexico has significant competitive advantages in the automotive industry

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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 10 20 30 40 50 Toyota Georgetown (USA) Toyota Cambridge (Canada) Chrysler Belvidere (USA) Ford Dearborn (USA) GM Silao (Mexico) Chrysler Toluca (Mexico) Nummi (USA) Toyoya Princeton West (USA) GM Parma, Ohio (USA) Hyundai Mongtgomery (USA) 1.84 2.53 2.6 2.66 3.07 3.09 3.19 3.32 3.45 3.46 1 2 3 4 Chrysler Dundee GEMA (USA) GM Spring Hill (USA) Toyota Georgetown (USA) Toyota West Virginia (USA) GM Flint South (USA) GM Flit North (USA) GM Tonawanda (USA) Chrysler Mack Av. II (USA) Chrysler Saltillo (Mexico) GM Romulus (USA)

Mexico has developed high performance plants that can be compared with the best plants worldwide

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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)

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Unfortunately, with the FTAs, 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).

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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

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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 EUA 2010

Simple Average of Industrial Tariffs

• industrial sector-

USA

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Elimination of waiver programs: PROSECs

4,885 3,414 1,370 1,175 969 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

• f 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
• A single record for each data
• 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.

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Contents

• 1. Introduction
• 2. Trade liberalisation in Mexico
• 3. Benefits from trade
• 4. Final remarks

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An important effect of trade is the productivity factors increase, also related to innovation.

Transfer of technology Increased competition Economies of Scale

3 transmission lanes:

Source: Onodera, O. (2008) OCDE.

• Trade

in capital goods and intermediate goods.

• The importing companies are 7.6%

more likely to adopt new technologies.

• With foreign trade, there is an

increase in market size for companies, making R & D activities more profitable. In the case of exporting companies:

• A «learning by exporting» process
• ccurs.
• There is a previous process of "self

selection“ done by the most productive companies

Related to:

Source: López-Córdova ,2002

TFP growth in Mexico by type and industry characteristics (1993-99, % annual growth of the TFP)

The total factor productivity growth rates in those industries with foreign trade are higher. Competition is a key factor.

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Source: Miroudot, S. et al. (2009) Trade in intermediate goods and services. OECD Trade Policy Working Paper No. 93

There is evidence that higher trade flows of intermediates lead to productivity gains.

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There is a productivity multiplier through intermediate inputs, that is, higher productivity in upstream sectors increase the productivity in downstream industries. (Jones, 2008)

Imported intermediates embody foreign

• techonlogies. Indirect acces

to better technologies. The trade of Intermediate goods can help improve the

• wn technologies and have

an impact on the efficiency

• n the use of production

factors. The impact of trade of intermediate goods on productivity is twofold:

Halpern, Koren and Szeidl (2009) find that 40% of the total productivity gain are due to better quality or technology of foreign inputs. Trade in intermediates account negatively for the distance to the frontier, implying that it has a positive effect on the reduction of inefficiency.

Moreover, a positive relation is observed between trade and the development of industries with high added value.

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Exports vs added value (Average annual growth 99 – 09)

Source: INEGI Economic Census and UN COMTRADE Note: in red those industries classified as "high technology" according to The World Bank

Imports vs added value (Average annual growth 99 – 09)

Therefore, the development of the global value chains is changing the

• peration of the World economy.

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Source: OECD

Intermediate imported goods / intermediate domestic goods

1995 average: 20.7% 2005 average: 25.2%

For instance, in the case of Mexico, 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

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Imports from China by type of good in manufacturing (Percentage)

Source: Based on data from UN COMTRADE

Capital goods Intermediate goods Consumer goods

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Contents

• 1. Introduction
• 2. Trade liberalisation in Mexico
• 3. Benefits from trade
• 4. Final remarks

Final remarks

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• 1. International trade is a key determinant for economic growth.
• 2. There is evidence that higher trade flows of intermediates lead to

productivity gains.

• 3. Mexico has been implementing instruments to gain position in the global
• market. The main strategy has been foreign trade liberalization .
• 4. Thus, Mexico is now an exporter of manufactured goods that require a

significant amount of value added; it has new trading partners and the trade volume grows steadily.

• 5. Mexico, as many other countries, needs to benefit from the technology

transfer developed by its trade partners.

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Different models for liberalisation: the case of Mexico.

Lorenza Martínez Trigueros

February, 2011

In order to achieve that position, Mexico has worked towards trade liberalisation.

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Free Trade Agreements (Number of countries) Number of documents to export

Source: SRE

Number of documents to import

Source: Doing Business of World Bank , 2011

Beside, there has been a diversification of products. The composition of the Mexican exports has become primarily of manufactured goods.

Source: Based on data from WTO Note: The original figures were adjusted trade reported to the rates of international commodity prices accordingly. These prices were taken from the IMF.

Composition of exports adjusted for growth in commodity prices (Percentage)

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1992 2009

Manufactured exports rose 7 percentual points using the price adjustment.

Adjusted Manufacturing Mining and Fuel Others Unadjusted Agricultural Products Adjusted Unadjusted

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Fuente: Banxico

In this regard, Mexico has already shown some improvements in the diversification of export markets.

Evolution of export destinations

1.7% 3.3% 1.2% 2.1% 0.2% 88.7% 80.3%

Diference 2000 – 2010: 8.5%

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Benefits

• Establishes most tariffs between 0% and 5% for

imported inputs and machinery, based on final goods producing firms;

• Gives certainty about tariff levels for the export

sector;

• Promotes the attraction of local and regional

suppliers by defining a list of equipment and supplies that may be imported into this scheme;

• Maintains

the competitiveness

• f

firms established in Mexico compared to companies located in the U.S. and Canada.

Mexico has specific programs to facilitate foreign trade: PROSEC

PROSEC is a program for production companies that allow them to import, under preferential tariff, various inputs for the manufacturing of their products.

Who can apply and other considerations

• Legal entities established in the country that

manufacture goods and which has the registration PROSEC;

• Apply for temporary or permanent imports;
• It is not conditioned to export
• Must comply with non-tariff restrictions and

regulations

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Given the advantages of Mexico in the World trade it is crucial to simply the processes for trade

• Mexico already has tariff benefits with its major trading partners, it was

necessary to look for options to reduce costs and increase the benefits of producing in our country.

• The increased volume of trade in an economy generates traffic congestion

and reduces efficiency. E.g. China increased 2 days on average waiting time in port goods in 2003.

• An additional delay of a day in the importation or exportation of goods,

reduces trade by more than one point porcentual.3

• For Mexico, this would be equivalent to 6 billion dollars a year or so.

2, 3 Djankov, Freund and Pham 2010

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Impact of Reform: Savings Identified

Source: General Administration of Customs, Business Case.

 Optimization of Human Resources 21%, representing about 1.25 million dollars for various units of the APF and $ 43,000 annually for the AGA.  Staff costs for the Management Procedures (Units): $ 5.1 million annually  Staff Costs Paperwork Management (AGA: $ 348 000 annually)  In case of not implementing the project, the AGA would have to spend

• n renovating the systems in the country's customs 1,636.5 million

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Impact of Reform on the Doing Business Simulator

• Problematic. Doing Business Survey 2012

According to the survey, the greatest delays in import and export processes are in the category

• f "document preparation".

The Single Window will have a direct impact on reducing delays and costs of preparation of government documents, which could mean a breakthrough for Mexico Subscript 26 positions in the Trade Facilitation World Bank, indicator moving from place 59 to 38.

Export Import Day Cost* Day Cost* Preparation of documents 6 200 5 230 Customs procedures and technical control 2 150 2 300 Port and terminal handling 2 200 3 300 Domestic shipping and handling 2 900 2 950 Total 12 1,450 12 1,780

* Cost in dollars per container. ** Source: Trade Facilitation Sub-index index component "Doing Business 2012" World Bank. DGCE estimate. Considering a simulator is used to comply with the following assumptions: 1 .- Improvements in the fields of import and export time and costs, 2 .- 183 countries considered, and 3 .- There are no improvements elsewhere.

Also, in some cases, the value added incorporated by China in the products they assemble remains low (i.e. 1.1% of iPhone).

Value decomposition for iPhone 4 (Sales price= 600 USD)

iPhone: “Designed by Apple in

• California. Assembled in China”

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