Negocios / Business Tips
Mexico: A Champion of Free Trade

Free trade is defined through the increase in a country’s productivity and competitiveness. As one of its most ardent advocates, Mexico has earned good standing in international negotiations and attracted productive investments.

Mexico has one of the most extensive free trade networks in the world, boasting treaties with 44 countries. This privileged position can partly be credited to geography –the fact that Mexico borders with the US, one of the largest markets in the world, is indubitably a plus for foreign investors– yet an attractive domestic market and readily available material, human and infrastructure resources are also relevant factors.

In terms of regional trade negotiations, the signing of the North American Free Trade Agreement (NAFTA) was a turning point for Mexico and the rest of the world. A result of the Uruguay Round negotiations that began in 1986, by 1989 the 123 states that were signatories of the General Agreement on Tariffs and Trade (GATT) at the time had reached an impasse and were on the lookout for alternatives. Qualms of a breakdown in talks led to growing interest in regionalism. So in 1990, when Mexico proposed the signing of a free trade agreement with the US, Washington was all for it. Canada, which already had a trade agreement in place with the US, soon joined them.

Thus, NAFTA was to be the first free trade agreement between a world power, a medium-growth nation and a developing country. This went beyond the dismantling of customs duties, central to the trade agreements of the past that included chapters on goods and services, investment, technical obstacles to trade, government purchases and telecommunications. It even included a mechanism for the settling of trade disputes. In 1993, its members agreed to adhere to parallel agreements on labor and the environment, making NAFTA the most complete and complex trade agreement of its day, one that was to set the bar for future negotiations among the world’s nations. By the same token, the ratification and coming into effect of NAFTA helped get Uruguay Round negotiations off the ground again and guide them to a satisfactory conclusion.

Free trade agreements are designed to offer preferential access to the goods and services of member countries via the phasing out of customs duties, streamline export and import procedures, create jobs and foster the transferal of cutting edge technology. Notwithstanding, the main reason Mexico has entered into this network of treaties has been to promote foreign direct investment, with a view to achieve a healthy balance vis-à-vis foreign portfolio investment, which, by its very nature, can create economic volatility.

The advantages of free trade agreements are many and varied but can be summed up as follows:

• Customs duties. One of the main purposes of trade agreements is to eradicate customs barriers to the trading of goods and services. In certain cases where it is impossible do away with duties completely, a preferential tariff lower than the rate to which non-member countries are subject is applied.

• Rules of origin. Ascertaining the country of origin is necessary to be able to apply basic trade policy measures in free trade agreements and other phases of economic integration processes, given that products originating in member countries can be imported and/or exported under the benefits of the treaty. Consequently, most trade agreements establish clear rules and common, simplified procedures to determine and certify the origin of imports and exports.

• Settlement of disputes. Ground rules are established and, in some cases, procedures, for the fair and timely settlement of disputes, with the parties generally resorting to arbitration.

• National treatment. This principle states that imported and locally produced goods should be treated equally, once the foreign goods have entered the market of the other member country, and may not be subject to taxes or special duties by virtue of the fact that they are of foreign origin.

• Most favored nation. This clause prevents countries from discriminating between their trading partners, i.e. any concession or benefit a member country grants to another must be extended to all the other members of the agreement.

• Greater negotiating power. To the extent that free trade zones are set up in adjacent geographic areas, the member countries of these free trade agreements and the region as a whole enjoy greater negotiating clout vis-à-vis other regions or countries.

These are just a few of the benefits Mexico stands to gain from a strategic utilization of the trade agreements it has entered into but these agreements contain many other mechanisms that facilitate exports and/or imports of goods and services, in addition to the export programs introduced by the Mexican government to ensure the country’s successful incursion into international markets.

The signing of NAFTA triggered a series of talks with other countries with a view to enter into new generation agreements, i.e. agreements with similar content and features to those of NAFTA, putting Mexico at the forefront of international trade negotiations. So experienced are the Mexican officials that had a hand in negotiating these treaties that several of them have set up consulting firms to advise other countries involved in similar processes.

All these agreements have gone a lot further than simply abolishing tariffs. The most sophisticated to date is the Free Trade Agreement between Mexico and the European Union (MEFTA), whose democracy clause seeks to guarantee individual freedoms, democracy and human rights as a prerequisite to the enjoyment of the trade and investment benefits established by member countries.

In the wake of the international economic crisis and in light of the deadlock of Doha Round negotiations, World Trade Organization (WTO) member countries are still interested in exploring alternative doors to international markets. This opens up the possibility for Mexico to engage in a new round of trade talks with countries like Brazil, Panama, Belize, Colombia, Argentina and South Korea, among others.

Another advantage of free trade agreements is that they can help reactivate the economies of member countries in times of crisis or during recession. For example, NAFTA was instrumental in helping Mexico weather the 1994-1995 financial crisis, which had a devastating impact on GDP.

Furthermore, in the absence of such agreements, countries –especially developing nations– find it harder to increase production volumes and create jobs.

As we have seen in the case of Mexico, free trade agreements contribute to greater productivity and competitiveness, thereby helping create attractive investment conditions in all spheres of member countries’ economies.

Trade agreements are being signed all over the world as we speak, many as part of regionalization processes. According to the WTO, there are over 300 economic regionalization processes currently taking place, which means that even the most remote corner of the planet probably has some form of preferential trade agreement, free trade zone or customs union. Clearly, free trade is here to stay.

Camino a Santa Teresa No. 1679, Col. Jardines del Pedregal, Del. Álvaro Obregón, C.P. 01900 México D.F., Tel. +52 (55) 5447 7070