This report will provide a detailed economic analysis on Mexico. We will concentrate on certain aspects such as globalisation, economic development & trade pattern. Moreover, we will look into its GDP & concentrate on its economic growth. This report will basically highlight how Mexico has been beneficial from trade with the help of its regional trade agreements as well as its support of foreign investments in its country & its dependence on other nations for trade. We conclude by providing recommendations & highlighting prospective indicators of their developments till date.
From 1970 onwards, Mexico had experienced significant economic developments due to the expansionist economic policy embarked by the government. Even though being a major oil exporter, they began to evolve into other territories such as technological advancement to increase agricultural productivity, modernisation of railroads, expansion of fishing fleets & so on. The government had promised to provide 3 million jobs by 1981, but it was not fully executed due to the fall in the world oil prices followed by the financial crisis which had a major impact on Mexico's revenue. In 1986, Mexico had joined GATT as to which trade barriers were removed and tariffs were reduced. It even led to privatization of government subsidiaries. In 1994, The North American Free Trade Agreement (NAFTA) was implemented & Mexico had joined along with USA & Canada. It resulted in a great boom to the Mexican economy, until it was struck again by an economic downturn. This time, the International Monetary Fund (IMF) had provided aid to Mexico to overcome this crisis.
At the end of World War II, the United States was economically and politically the most powerful nation in the world. Over a period of time, countries felt rather than just depending on the United States, there were more opportunities amongst other nations. Therefore, there realised a growing amount of "economic interdependence". When two countries trade, both experience gains from trade. Firstly, there is voluntarily exchange of goods & services between countries. Secondly, investment flows between countries as well as increased production capabilities. Moreover, countries specialise in the production of those goods that they have an absolute advantage on. This was only possible through "globalisation". Robert J. Carbaugh (2009), defines globalisation as "a process of greater economic interdependence among countries and their citizens. It consists of increased integration of product and resource markets across nations via trade, immigration & foreign investment". It is necessary to understand how the drivers of globalisation affect countries. There are 4 main drivers namely "market drivers, cost drivers, government drivers & competitive drivers". The only change that has majorly influenced the process is the technological change. At the time of the industrial revolution, technological innovations resulted in greater productivity & fall in transportation costs. Until date, the world has experienced 3 major waves of globalisation. The 1st wave occurred from 1870-1914. It resulted in decrease in tariff barriers & technological innovations led to decline in transportation costs. However, it was bought to an end by World War 1. The 2nd wave took place from 1945-1980. It was the result of reaction against nationalism followed by World War 2. Transportation costs continued to fall fostering increased trade. This phase was mainly dominated by the developed countries & the developing countries were largely excluded. The Last wave began in about 1980. It experienced large no. of developing countries, such as China, entering into the global market. It had also experienced increase in foreign outsourcing. The countries would shift their manufacturing into low wage developing countries where the costs were lowest.
Globalisation in Mexico
Being a developing economy, trade liberalization had been beneficial to the country. According to the reports published in the New York Times, Nov. 1985, Mexico decided to join the General Agreement on Trade and Tariffs (GATT). The Mexican President Miguel de la Madrid had made this announcement because of the indebtedness it had faced due the weakening of its foreign economic position and trade deficits. As a result of the elimination of trade barriers and tariff quotas, many developing countries could enter in the world market. Between 1985 and 1990, Mexico experienced a rise in the export of industrial products to about 2.4% on a yearly average. On its path to globalisation, its aim was to increase productivity in the export related commodities as well as help in the growth of its domestic competing industries. Free trade has proved to be very beneficial in the growth & modernisation of our economy. In 2000, Mexican President Ernest Zidello, stated that his country has immensely benefited from trade liberalization. It is the second largest country after Canada to partner with USA & is expected to have a trade growth of 200%. Mexico exports a lot USA as well as imports the same. It imports more products from USA than the United Kingdom, France & Germany on a whole. Moreover, it has opened trade with the European Union granting them access to other nations. According to President Zidello, he believes free trade will help increase the value of labour condition in the domestic workforce.
(Globalization and the Opening of Mexico)
Mexico constitutes to be a major exporter of oil. In 2008, it was ranked as the 7th largest producer of oil in the world & 3rd largest exporter to USA. It produces on average of about 3.19 million barrels per day in 2008 which had fallen down from 3.50 million barrels per day in 2007.
Apart from being an exporter in oil, it also concentrates on other commodities as well. Looking at the products mentioned below, we can see the country looks to mainly specialise upon labour intensive commodities. These products are ranked on their importance to the country as of 2009.
- Manufactured Goods
- Oil & oil products
With a current population of 110 million, in 2008, Mexico's total exports have estimated to about $291.3billion worth of goods. Out of its major export partners, USA constitutes about 73.1%, Canada takes about 6.2% followed by Germany amounting to 1.9%. (Source: www.indexmundi.com). With this analysis, we see Mexico happens to follow an "export oriented policy". (Carbaugh2009) explains this policy as an outward looking strategy, where the domestic economy is linked directly to the world economy. Rather than protecting the domestic industries which have comparative disadvantage to promote growth, this strategy implies on promoting growth by exporting manufactured goods. Many developing nations feared they may not be able to compete with the developed nations. From 1970 onwards, many developing countries shifted from import-substitution strategies which mainly focused on imposing trade barriers to protect its domestic market from import competition. One of them is Mexico that had benefited from the export oriented policy & managed to accomplish trade agreements with other industries. This policy has benefited the developing nations in several ways. Firstly, it encourages developing nations that are most likely to enjoy comparative advantage on labour intensive goods. Secondly, by providing a bigger market to the domestic manufacturers where they can have a gain on the economies of scale. Lastly, it maintains low restrictions on import goods, which allows domestic competitors to constantly improve their production techniques, so as to stay in the market.
Here, we look at the total amount of merchandise exports in US Dollars along with its ranking.
During the 1950s and 1960s, many developing countries began to follow an inward looking strategy known as the "import substitution". This policy adopts extensive use of trade barriers to protect its domestic market from foreign competition. Many developing nations feared they would not be able to compete with the developed nations. As well as the use of tariffs & quotas would restrict imports. There may be products that may work out costly to produce but cheap to import or cheap to produce & costly to import. (Carbaugh2009) Economists believed that the comparative advantage should decide the export & import of goods. This policy supports developing nation in following ways:
- The risk is desirably low in establishing a home industry because the manufactured goods already exist in the market.
- It protects the domestic manufacturers from foreign competitors rather than trying to influence the industrial nations to minimise its trade barriers & tariffs.
This policy could not be carried for long as the domestic manufacturers realised there was no need for competing internationally. By lifting the trade barriers, Mexico being labour abundant country managed to term agreements with USA, Canada & the European Union to benefit from trade.
Mexico's major import partners are as follows:
- USA - 51%
- China - 10%
- Japan - 6%
- South Korea - 4.2%
Mexico to how much it exports, equally imports from USA as well. This is because both the countries are members of North American Free Trade Agreement (NAFTA). Given below, we look at the top 10 goods imported from America into Mexico for 2008. About 40% is calculated total U.S exports to Mexico:
Commodity Value in $(billions) %(Increase/Decrease) Vehicle parts and accessories 10.0 0.1 Electrical apparatus and parts 8.9 -7.1 Other Petroleum Products 6.9 48.2 Plastic Materials 5.7 10.3 Computer Accessories 5.4 26 Other Industrial Supplies 5.2 -8.1 Semiconductors 4.73 1 Finished Metal Shapes 4.69 1 Telecommunications 4.4 10.2 Organic Chemicals 4.1 6.7
Here, we look at the total amount of merchandise imports in US Dollars along with its ranking.
Balance of Trade
Trade balance is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. (Source: www.investopedia.com) Mexico had concentrated majority of its exports & imports with USA. In 2000, apart from trading with North America it began to pursue its free trade with other potential partners. Thus, signing an agreement with EU and the Latin American countries. The bilateral trade system is generally followed by USA-Mexico.
USA being the largest trading partner for Mexico constitutes to about 70% of total exports to USA. In the below table, we highlight the exports, imports & trade balance of Mexico. We will look into data from 2004-2009. The year 2009 has only been calculated till September.
Year Exports(million $) Imports(million $) Balance(million $) 2004 110,731.3 155,901.5 -45,170.2 2005 120,247.6 170,108.6 -49,861.0 2006 133,721.7 198,252.2 -64,531.4 2007 135,918.1 210,714.0 -74,795.8 2008 151,220.1 215,941.6 -64,721.6 2009 92,448.6 125,066.0 -32,617.4
According to the news edge report on January 23, 2009 - Mexico had accumulated a deficit of 16.8 billion dollars in 2008. The INEGI national statistics institute stated that the reason was due to a drastic fall in the oil revenues in the following year. In the year 2008, their exports amounted to be worth 291.8 billion dollars which had a 7.3% increase from its previous year & its imports were at 308.6 billion dollar having a 9.5% increase compared with 2007.(Trade Balance Deficit in 2008)
Balance of Payment (BOP)
BOP involves recording the flow of economic transactions between the residents of one country & the rest of the world. It takes into account the trade balance, capital movements (including FDI) & other items that flow in & out of the country. If the BOP is negative, it means there is outflow of money (deficit) & if it's positive, there is an inflow of money (surplus). (Source: www.investopedia.com). Given below, is a table where we take into account the current balance of Mexico from 2004 to 2008.
Foreign Direct Investment
(Carbaugh2009) Opening markets to foreign direct investment is as compelling as it is for trade. Open economies prefer high rates of private investment as it is a major contribution for the economic growth of the country, as well as job opportunities. With more and more foreign investment entering into the country, labour productivity on an average increases, eventually demanding for higher wages. While investing outside would support employment in the domestic market & remain competitive in the market.
Mexico being a part of NAFTA along with USA & Canada follows an open trade policy. In 2007, the FDI in Mexico had recorded a 21% increase which amounted to about $23.2 billion (U.S Dollars). It was ranked the second highest among the country's history. United States had invested almost half into Mexico followed by Holland investing 15% and Spain investing 10%. In Sept. 2007, the FDI inflow amounted to $18.4 billion having a 30.3% increase compared to its previous year. Majority of the investment was mainly for the manufacturing sector creating job opportunities for the Mexican citizens. According to the analysts, US economy was expected to suffer the current economic crisis. This would have a direct impact on Mexico since they are linked with the US economy through various trade relations. Mexico expected FDI was scaled down to $20billion for 2008 compared to its previous year estimate of $23billion.
According to the recent reports on Nov 20th 2009, Mexico's FDI investment had drastically fallen down to 37% in the first 9months. The only reason was because of the financial crisis that struck the economy affecting the flow of capital. In the following nine months it had an FDI investment of about $9.75billion where in 2008 its initial FDI for nine months was estimated $15.56 billion.(Foreign Domestic Investment in Mexico) (Mexico FDI Plunges)
Gross Domestic Product
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and publicconsumption, government outlays, investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
"NX" = Exports - Imports
Mexico is a free trade economy. Its economic sector is a combination of modern & outdated industry as well as agriculture which is mainly privatised. The economic sector of Mexico has gradually expanded over time & has seen a lot of development on transportation, rail road, shipping, telecommunication etc. The per capita income of Mexico is considered to be one-fourth of that of United States in 2008. In 2008, Mexico's GDP PPP (Purchasing Power Parity) was estimated to be $1.578 trillion & its official exchange rate estimated $1.143 trillion. The real growth rate of Mexico was about 2%. Given below, is Mexico's GDP Per Capita from 2000 to 2009.
Mexico's economy had a major impact on the economic downturn. The real GDP growth of Mexico was affected because US imports on Mexican products had declined. In 2007, the GDP growth rate was about 3.3% which had fallen down to closely 2% in 2008 and is further expected to fall down in 2009. This has led to an increase in job losses as the industries that are export oriented have cut down its production due to less demand. Moreover, the oil prices have gone down which has been a major source of revenue to Mexico & this could possibly affect the growth rate. The peso value is expected to fall down mainly because of the slash in oil prices & the financial crisis suffered by United States. As the saying goes "when the United States sneezes, the economies of other nation catch a cold." Villarreal M)
How has NAFTA benefited Mexico?
Being implemented in 1994, it's an agreement that constitutes a free trade policy between USA, Canada & Mexico. The main motive was to reduce trade barriers for inter-regional trade. This has been a turning point for Mexico as it played a vital role in strengthening the economic structure of the economy & moving towards being industrialised. NAFTA had transformed Mexico into following an export-led growth path. With the trade liberalization, it encouraged foreign investments entering into the country and stimulating Mexican exports of manufactured products to USA. About 80% of Mexican exports are towards USA. Moreover, it has even granted them access into trading with other potential partners. With the regional trade agreements it has been very much favoured by Latin America and EU. During the years, Mexico has seen a lot of development in its various sectors like transportation, telecommunication, airports etc.
(Mexico After NAFTA)
Looking at the above analysis, we can say Mexico has progressed over the past years. Being a member of NAFTA, it has purely had an impact on Mexico, strengthening different sectors of the economy & emerging into an industrialised nation. We can say it follows the path of 2nd Wave of Globalisation, where developing nations believed they were to be granted access into trading with developed nations. Following an export-trade policy, Mexico is able to produce & specialise in those commodities where there is a preferable comparative advantage. Mexico has been very much dependant on the United States as it exports majority of its products to them. With the financial crisis hitting the United States, it looks to trouble Mexico along the line. This has also affected the job conditions. Since there is less demand, the machinery as well as the people are not being utilised efficiently. Mexico should begin to widen its trade with other nations rather than just sticking onto United States. It must open its trade with the EU as well as the Latin-American nations if they need to subdue from this crisis. Trading with the Latin-American nations may be much convenient as they are located closely to Mexico and the distribution of goods and services will be smooth. The only country that they may find difficult to face is China, as they are well known for its low cost production and cheap labour. This might prove difficult for Mexico to have a stand in the global market. So we can conclude by saying Mexico may still need to prepare itself to compete in the global market competition. The only possibility to being competitive is to expand its export areas & enter into trade agreement with different countries.
- Carbaugh, R.J., (2009) International Economics, 12th Edition, Thomson South-Western
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