TBY talks to Bruno Ferrari García de Alba, Secretary of Economy, on trade liberalization and the strengthening of Mexico’s economy.
TBY How has Mexico’s experience been during the process of trade liberalization in recent years?
BRUNO FERRARI GARCÍA DE ALBA Mexico is totally convinced about the benefits of free trade. Although trade liberalization had its criticisms at first, nowadays most countries agree that having an open economy is an opportunity to expand markets for their enterprises and, of course, to create better jobs for nationals. Nowadays, Mexico has 12 free trade agreements (FTAs) involving 44 countries. Such agreements have allowed Mexico not only to increase its exports to all those countries, hence creating new business opportunities for companies established in Mexico, but also to obtain quality inputs for its productive activities at much more competitive prices. Why? Because through trade openness, national economies can focus their production on those goods and services in which they have competitive advantages, so world production becomes more efficient. Since advantages go both ways, free trade is a win-win game for all. In other words, free trade is definitely one of the most effective engines to promote both efficiency and economic development.
So, you are saying that “globalization” and open markets are in fact good for those countries committed to efficiency?
Absolutely. The fact of the matter is that globalization has integrated societies, countries, and economies through different channels, such as trade, FDI, technology transfer, and knowledge flows, hence bringing about important benefits at a global level such as the expansion of production capacity, employment, human capital enhancement, innovation, and technology diffusion, all of which support growth in overall incomes. Now, one important result of this process of globalization is that it has increased the international fragmentation of production and the rise of trade in intermediate products. For example, in the manufacturing of an automobile, there are at least 50 different countries involved in the supply chain of the various parts, components, and services required for its production. Therefore, thanks to globalization, each day more countries have better opportunities to participate in at least one part of the global production process. But the important point is that, over the last few decades, there is evidence that countries with open markets are precisely those that have been able to focus their production efforts on those activities in which they are relatively more efficient. The reduction in transport costs and the rapid evolution of information technology have indeed made it easier to segment production across a range of countries. In that way, countries with open economies have taken advantage of their specializations in order to develop more competitive production processes, to increase productivity, and to pay better salaries, all of which strengthen their internal markets. At the same time, those countries have benefited from higher efficiency in the economies with which they trade, thereby lowering their input and production costs. We are convinced that free trade is one of the most important tools to take advantage of the globalization process. It is important to mention that the global value of foreign trade transactions made by all those countries with which we have a trade agreement represents today around three-fifths of the world’s GDP. Indeed, thanks to the opening up of our economy in the mid-1980s, Mexico began to experience substantial gains in the competitiveness of its exports. Why? Because our producers began to have access to a better range of production inputs, and those were available at a significantly lower price. Our national products became more competitive and our production processes are more efficient every day. We will keep doing the task correctly to continue getting benefits for everyone. For instance, during 2011, according to the competitiveness index of the World Economic Forum (WEF), Mexico scaled up as much as eight positions, more than any other country on the continent. Moreover, according to the World Bank’s Doing Business Report, the Mexican economy has consistently done better than any of the BRIC economies. Thanks to the competitive gains Mexico has made since its opening-up of trade policy, foreign trade now represents around 60% of Mexico’s GDP, a huge increase from the 25% GDP share observed at the beginning of the 1990s. Also, FDI now amounts to $18.5 billion, six times more than the observed amount two decades ago. In this context, let me give you an example of how the Secretariat of Economy is working to promote efficiency and foreign investment in Mexico. One of the main roles of the Secretariat of Economy is to ease and simplify foreign trade operations in order to increase the efficiency in the international exchange process and to promote the competitiveness of export and import companies. One important complementary tool to achieve these goals is the Manufacturing, and Export Services Industries Program (IMMEX).
Thanks to Mexico’s FTAs, today nearly 6,800 enterprises are registered with IMMEX, hence creating business opportunities, increasing investment flows, and generating better-paid jobs. In a few words, with the proper tools, globalization and free trade encourage productivity, innovation, and competitiveness, thereby boosting entrepreneurship.
So far, you have talked about many benefits for producers and entrepreneurs in Mexico, but what about Mexican workers and consumers?
Critics of it usually counter-argue that foreign trade causes business closures and layoffs, but that is definitely not true. On the one hand, the huge increase in Mexico’s foreign trade has generated more jobs and better salaries for workers. Indeed, one out of every five jobs in Mexico is provided either by exporting enterprises or by firms that receive FDI. On the other hand, Mexican residents and foreign visitors now have access to a much more extensive range of goods and services, and they can buy those goods at a much better price. And the main reason for such a result is that those goods are now produced more efficiently worldwide, so consumers have a wider choice. Mexico will keep supporting all measures that ease foreign trade and help our country and Latin America be a more competitive region. In conclusion, free trade generates winners everywhere, and it is one of the keys to promoting world economic growth and to strengthen the integration of regional markets.
What more has Mexico to do in order to improve its trade agreements?
Today, 93% of Mexico’s total exports relate to countries part of our FTAs. These countries, however, have been signing new agreements with other countries so our preferences have eroded. In 1994, the US had two signed agreements, but now it has 14; Canada had one in 1994, and now it has 11; the EU and Japan had no FTAs at that time, now they have six and 11, respectively. In response to these challenges, the trade policy objective of this administration has been to strengthen and invigorate export platforms, with the ultimate aim of achieving a greater diversification of exports. For instance, the services trade to North America is a segment that has been scarcely used. Accordingly, Mexico must define specific actions to enhance the export of services. It is also important to mention that Mexico is working hard to be part of the Trans-Pacific Partnership Agreement and President Calderón’s government has been very active in promoting Mexico’s inclusion in this important agreement.
However, FTAs by themselves are not enough. For that reason, the administration of President Calderón has pursued Congress’ approval of several structural reforms that scale up the benefits of those FTAs. So far, the federal government has already implemented a broad regulatory reform that has reduced the time and transaction costs that firms spend every day in their operations in Mexico. Thanks to that, more than 16,000 internal norms in all the federal public administration were eliminated, and so were more than 2,000 internal procedures. This simplification created a more competitive and straightforward business environment. One important outcome of these measures is the reduction of up to 65% in the administrative costs of starting a business. Another one is the reduction in the time that a business should spend in administrative procedures before starting operations, from 34 days to just a few hours. Nonetheless, we still have a long way to go in order to get the best out of our FTAs. Mexico still needs further economic reforms that enable it to obtain higher GDP growth rates than those it is achieving now.
© The Business Year