By Ricardo Aceves
This article was first published in Heavy Lift magazine.
Mexico, Latin America’s second largest economy accounting for over a fifth of the region’s gross domestic product (GDP), has reached an interesting point in history both domestically and on a global scale. Domestically, President Enrique Peña Nieto has pushed through most of his structural reform agenda and his administration will now focus on the implementation of the reforms as well as on boosting growth. Externally, even though the North American Free Trade Agreement (NAFTA) has not delivered the results that were expected when it was signed, Mexico now faces the possibility to improve its external sector by diversifying its trade and attracting foreign direct investment.
Following a year of unprecedented changes in 2013, Mexico is now facing a post-reform landscape. President Enrique Peña Nieto’s reform agenda is nearly complete and the government is now focused on ensuring that the secondary legislation (for all by-laws) is passed successfully in order to fully implement the reforms. Last year the economy expanded a meager 1.1%, which marked the worst result since 2009. In an effort to stimulate the economy, President Peña Nieto pledged to ramp up government spending and public investment in infrastructure while in office. In July 2013, he presented the National Plan of Investment and Communications, which projects USD 320 billion in spending on infrastructure projects from 2013 to 2018.
This year marks the 20th anniversary of NAFTA, which was signed by Canada, Mexico and the United States in 1992. NAFTA was a groundbreaking agreement in several ways: It was the first comprehensive free-trade arrangement (FTA) between developed economies and a developing country. It also created the world’s largest free-trade area in terms of total GDP and the second largest in terms of total trade volume. Moreover, it provided Mexico with the chance to enter the coveted U.S. market and join in on the global trend toward regional integration.
When NAFTA came into force in January 1994, it brought with it the promise of greater economic prosperity for Mexico. Foreign direct investment (FDI) and merchandise exports, particularly of electronics and other manufactured goods, have increased tremendously in the two decades since then. NAFTA’s impact on the Mexican economy was felt almost immediately. Merchandise exports increased sharply from USD 40 billion in 1990 to nearly USD 170 billion in 2000 (an increase of over 300%). According to estimates from the World Trade Organization (WTO), global total exports grew 388% between 1993 and 2012. Mexican exports increased 631% in the same period.
More recent data on merchandise exports showed that Mexico’s overseas sales reached USD 380 billion in 2013, which represented a 2.6% annual increase. Imports recorded USD 381 billion and the trade balance incurred a mild deficit of just USD 1.0 billion. In 2014, LatinFocus Consensus Forecast* panelists expect the trade deficit to widen to USD 6.5 billion. Panelists see exports increasing 6.6% to USD 405 billion this year and they expect imports to rise a stronger 8.1%, which will push imports to USD 412 billion.
It is clear that the manufacturing sector has been NAFTA’s biggest winner in Mexico thus far, primarily because it runs on a cost-effective production platform with low wages. Conversely, the agricultural sector has deteriorated as a result of unprotected exposure to the U.S. and Canadian agricultural markets, which both receive large subsidies. In addition, growth in overall productivity and income per worker in Mexico have remained broadly unchanged. Taking these results into account leads to a mixed assessment of NAFTA’s first 20 years and its impact on Mexico’s long-term competitiveness.
Although trade liberalization did improve the efficiency of many of Mexico’s industrial sectors, other sectors of the economy did not benefit proportionally. On top of that, the gradual decrease in Mexico’s relative importance as a U.S. trading partner has exacerbated the country’s inability to achieve the economic growth rates NAFTA’s signatories had anticipated. Between 1994 and 2013, the Mexican economy experienced a disappointing overall average annual growth rate of just 2.6%. During those years the country also experienced two major economic downturns (in 1995 and 2009).
Looking ahead, Mexico has the potential to improve its external sector. The country enjoys a strategic geographic position and has trade agreements with over 40 countries across the globe. Trade with the United States and Canada will continue to be one of the strongest pillars on which the country can prosper, as the North American region is expected to become one of the world’s powerhouses in terms of energy, along with technology, manufacturing and logistics. In addition, this vision will be complemented by greater trade diversification with a particular focus on South America and Asia. Efforts to diversify economic linkages will be made through the Trans-Pacific Partnership (TPP) and the Pacific Alliance pact (Alianza del Pacífico).
The comprehensive reform agenda that was approved last year should address many of the country’s economic weaknesses, including lack of competition, inefficiencies, and poor performance in the sectors targeted by the reforms. Economic policymaking now focuses on passing the necessary by-laws that will complement the structural reforms. Successful passing of these by-laws, combined with a gradual recovery in the U.S. economy, should support stronger economic growth in Mexico in 2014 and beyond.
LatinFocus Consensus Forecast panelists expect Mexico’s economy to accelerate the pace of expansion and grow 3.1% this year, which would mark a considerable improvement over the 1.1% rise recorded in 2013. Going forward, the economy should shift into higher gear. Panelists expect growth to accelerate to 3.9% in 2015 and they expect the economy to maintain roughly the same pace until 2017.
* Note: The LatinFocus Consensus Forecast is a monthly forecast based on 29 individual projections from investment banks, consultancies and think tanks. For more information, please contact us via www.focus-economics.com.