Mexico’s Top Free Trade Agreements and Their Impact
April 28, 2017
Mexico's Free Trade Agreements have pushed the country to become the 13th largest export economy in the world with USD$393 Billion in exports in total, in 2016. The impact of access to a free trade economy, a global network, and a highly skilled labor force all point to Mexico’s ability to host efficient production operations. The FTAs provide mutual benefits to partnering countries and companies alike as manufacturing in Mexico holds a competitive advantage over many countries.
What is a Free Trade Agreement?
Free Trade Agreements are terms between partnering countries that loosen or eliminate tariffs on goods and services being transported across regional lines. They can also implement environmental and social stipulations based on the goods and services being produced. The agreements can be unilateral, bilateral, or multilateral, and most counties hold more than one. FTAs provide countries access to different markets and encourage global competition. More importantly, FTAs can boost a country’s GDP, and promote business opportunities for companies. Uniform Tariffs are applied to countries that aren’t a member of a Free Trade Agreement but still trade – trade between China and the U.S. is a good example. These tariffs are set by a third party source, usually the World Trade Organization (WTO), and are suggested to be applied on a case by case basis.
It’s not a surprise that Mexico's top ten trading partners receive exports under stipulations from at least one of the country's Free Trade Agreements (FTAs) – excluding China which holds an export value of USD$6.83 Billion.
The Top 5 Free Trade Agreements with Mexico
Mexico’s top free trade agreements are bilateral (two country partnership), and multilateral (three or more country partnership), they include NAFTA, EU, Japan, Pacific Alliance (G3), and Central America. The U.S. isn’t the first country to suggest to renegotiate or withdraw from a Free Trade Agreement, many of Mexico's top FTAs have had revisions, renegotiation, and withdraws, creating a stronger and more beneficial agreement for all partnering countries.
Mexico’s proximity to the U.S. and Canada have created a large North American logistics hub that provides easy access and entry of goods for all three countries interchangeably. The North American Free Trade Agreement (NAFTA) boosts trade between the three countries by eliminating tariffs on goods with a 60% rule of origin in North America. The top products being exported from Mexico to the U.S. and Canada are automobiles, auto parts, and electronics, this is due to a two and three way trade where more than half of the materials used in the products originated from a NAFTA country. This form of trading has boosted the GDP rates of all three countries over the past 23 years.
Because of NAFTA, around 80% of Mexico’s exports go to the U.S. and are valued around USD$291 Billion a year. About 5.4% of Mexican exports go to Canada with a value of around USD$22.6 Billion. Canada is Mexico’s second largest export market. Both Canada and the U.S. make up most of Mexico’s import/export facilities because of the agreement, but also due to the proximity of the countries and other FDI in Mexico that takes advantage of access to North America.
NAFTA 2.0 - USMCA
The new North American Free Trade Agreement is called USMCA and if passed by the governments of all three countries - U.S., Mexico, and Canada - it will be put into effect in 2020. There will be something like a trial period until 2023 to enable manufacturers with enough time to be compliant with the agreement's terms. USMCA will maintain most of NAFTA's stipulations with updated terms and a few new ones as well. These changes affect automotive parts rules of origin count, labor, trade dispute settlements, duty-free trade, the sunset clause, and sourcing from non-market countries.
2. The Mexico - EU Free Trade Agreement
The Mexico - EU Free Trade Agreement is one of the most comprehensive trade agreements negotiated by the EU. Investors in either region are granted preferential access to goods and services, and investment security. Signed in 2000 and implemented in 2001, the first transatlantic FTA for the EU seemed successful as trade grew by 28.9% in its first two years. Mexico exported USD$23 Billion of products and services in 2015. Tariffs on Mexican exports to the EU began with a 82% tariff elimination and were set to phase out by 2013.
Modernization of the EU-Mexico Free Trade Agreement began with renegotiation in 2015, and will continue to push for a cut in tariffs on industrial goods. Previous alterations to the agreement advanced climate issues as well as trade liberation. Talks are set to begin during summer 2017, and all parties have made public comments with regards to their interest to renegotiate the agreement.
Germany and Mexico
As part of the EU - Mexico FTA, Germany is Mexico’s 4th largest export destination, making the EU - Mexico FTA the 2nd largest Free Trade Agreement region, with USD$6.83 Billion in total for 2015. Germany and Mexico are also part of the G-20 major economies that push for trade and diplomatic relations. Mexico’s main exports to Germany are cars, vehicle parts, electronics, and medical devices.
3. Japan - Mexico Free Trade Agreement
The Japan - Mexico Free Trade Agreement was Japan’s first comprehensive agreement with any country. Signed in 2004, and enforced in 2005, Japan has become Mexico’s 5th largest export destination with a USD$4.4 Billion in exports 10 years later. Commonly known as the Economic Partnership Agreement (EPA) relieved tariffs on goods and services, and was revised in 2011 to apply lower import tariffs on some agricultural products from Japan, as well as Mexican imports on auto parts, and paper for ink-jet printers. The partnership allowed more Japanese investment in Mexico because of its access to larger markets – the U.S. and Canada.
4. G3 and the Pacific Alliance
Colombia, Venezuela, and Mexico claim about 70% of the Greater Caribbean region. The three countries entered a Free Trade Agreement in 1995 that protects intellectual property rights, public sector investments, and eases off trade restrictions by annually lowering tariffs by 10% for 10 years. Venezuela left the agreement in 2006, but Colombia and Mexico still continue working under these stipulations. Colombia is Mexico’s 7th biggest export country with about USD$3 Billion dollars exported in 2015. Venezuela is lower on the export list with around USD$1.2 Billion.
After Venezuela's leaving, Colombia and Mexico entered into the Pacific Alliance FTA with Chile and Peru, which was signed in 2014. The four countries bordering the Pacific Ocean entered into a free trade partnership to boost Asian investment and integrate country economy. This FTA held a total value of about USD$28 Billion in Mexican exports in 2015.
5. Central America - Mexico FTA
In 2011, Mexico and the Central American countries, Guatemala, Costa Rica, Honduras, El Salvador, and Nicaragua signed an agreement, and was slowly enforced in all countries a couple years following. Mexico's agreement began with an alliance along the Northern Triangle, El Salvador, Guatemala, and Honduras, but included the other countries shortly after. The agreement maintained similar stipulations to NAFTA, which included little to no tariffs on goods and services, and garnered around USD$5 Billion in Mexican exports in 2015.
FTAs in the Works
The Trans Pacific Partnership (TPP) was originally written to undermine China’s influence along the pacific ocean. The partnership caused an uproar in the U.S. political election, making the country withdraw early 2017. Although the U.S. was an integral part of the trade agreement, countries participating in the trade agreement are evaluating the pros and cons of continuing the deal. Most of the countries involved in the deal have put off ratifying it and alternatives for the trade deal are still being reviewed. The remaining TPP countries include: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
Following Argentina’s pledge to open the nation’s economy, Mexico and Argentina have been in negotiations for a trade agreement that would involve agriculture and automobiles. Since the U.S. election, Mexico has made efforts to speed up negotiations and diversify their trade partners. Specifically, Mexico is considering options in importing Argentinian corn and soy, and exporting automobiles in return.
Since 1994, Mexico has seen an annual GDP growth rate of 2.59%. In 2016, Mexico had the highest GDP growth rate at 2.1% in North America with USD$2.3 Trillion compared to the other two countries. The high production capacity signifies a better propensity for investors to manufacture in environment accustomed to high skilled production. As a vessel of access to large markets, Mexico’s manufacturing power has boomed with their Free Trade Agreements, all while many changes have been made throughout the years.