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Mexico Can Take NAFTA Further
 The Economist
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November 02, 2010
| | Despite Chinese competition, Mexicans have seen their exports grow. But they can do more with the trade pact. | |
At the moment it is just a thousand acres 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 highways 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 cargo to skip the long lines at customs posts on the border 150 miles to the north.
Projects like the Interpuerto matter for Mexico, the economy of which depends on exporting labor-intensive manufactured goods to its giant neighbor. Despite the ratifying 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 recession north of the border was an even bigger blow: 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 underway. 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 U.S. market has grown to 12.2 percent - 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 $5.20 per square yard against $5.29, but after paying an 8.5 percent tariff they end up 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 percent on their level of 2008. Carmakers have announced investment of $4.4 billion over the next four years, according to the government.
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 U.S. 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 U.S. 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.
More than 15 years after NAFTA, the task for Mexico is to take full advantage of the trade agreement - and to go beyond it. A sickly American economy may at last provide a powerful incentive to do so.
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