Lesson in Mexico's trade dilemma

New bilateral United States free trade agreements, including with Australia or New Zealand, are a worry for Mexico, says the head of a Mexican think tank.

Mexico is part of the tripartite Nafta free trade area with Canada and the United States. A delegation has been in New Zealand this week, headed by the Under-Secretary of Foreign Affairs, Ambassador Miguel Marin Bosch.

If the US enters bilateral free trade agreements with other countries, that is likely to affect its Nafta partners, says Carlos Elizondo Mayer-Serra, director-general of the Centre for Economic Research and Education, who was in the delegation.

"Officials are a little bit concerned that the privileges we now have will in some ways be eroded," he said.

However, he added, there was no official position in Mexico on what should be done if the US did enter other free trade agreements.

Mexico's conundrum mirrors New Zealand's if Australia wins a free trade agreement with the US and New Zealand doesn't.

Essentially Mexico would lose competitiveness at home and in the US if other countries gained tariff-free access to the US - and lose its attractiveness to foreign investors.

At the root of Mexico's difficulty is the Mexican Congress' failure to pass economic reforms to drive efficiencies through the economy.

President Vicente Fox, due to visit next year, commands only 38 per cent of the Congress and cannot get his reform programme through.

"So the sorts of reforms needed to be more competitive are not taking place," Elizondo said.

Elizondo cites particularly energy and labour reforms among the raft of stalled microeconomic reforms.

There is also an urgent need to help the heavily subsidised farmers, who mostly have very small, inefficient holdings and "find it very difficult to compete, even in corn", which is Mexico's staple. Yet under Nafta, agriculture markets in all three countries must be completely open by 2004.

The bigger problem is manufacturing. Mexico has benefited under Nafta from US investment in manufacturing.

It also has a free trade agreement with Europe, which has encouraged investment from Europe, including, for example, Volkswagen.

Elizondo doesn't think this investment will leave. But even without any new free trade agreements and without the completion of a new World Trade Organisation multilateral liberalisation, China is already attracting much US investment that Mexico might have won because China-based manufacturing can out-compete Mexican low-cost producers.

So with free trade agreements "a lot of the incentive to invest in Mexico will disappear".

"The gain from the initial impact [of Nafta] in driving better use of resources has already been incorporated. We need further reforms to make our economy more competitive and there we face this political stagnation".

There is a message in that for this country, which likewise might find it harder to attract foreign investment compared with Australia, if Australia had privileged access to the US market.

There is another parallel, with which New Zealanders are already familiar.

The likely result in Mexico of stalled reforms and international liberalisation is more emigration of Mexicans to the US.

But should either country worry? Perhaps not. The end of the boom in the US may make trade liberalisation less likely because protectionist forces will have more say, Elizondo thinks. Though that brings problems of its own for exporters to the US.

* ColinJames@synapsis.co.nz