Different Models for Liberalisation: The Case of Mexico. Lorenza Martínez Trigueros February, 2012

Transcription

1 Different Models for Liberalisation: The Case of Mexico Lorenza Martínez Trigueros February,

2 Contents 1. Introduction 2. Trade liberalisation in Mexico 3. Benefits from trade 4. Final remarks 2

3 International trade is a key determinant for economic growth Policies toward foreign trade are among the more important factors promoting economic growth and convergence in developing countries" IMF (1997, 84). International Trade Use of comparative advantages Efficient use of resources Dissemination of knowledge and technology More investment 3

4 And it also has been for Mexico s development Mexico's economy is number 12 on the size of global GDP 1 Mexico is a leading exporter, ranking 14 worldwide Mexico has preferential access to 44 countries through 12 Free Trade Agreements Mexico is now an exporter of manufactured goods that require a significant amount of value added; has new trading partners and the trade volume grows steadily. 1 Measured by the PPP. 4

5 Contents 1. Introduction 2. Trade liberalisation in Mexico a) From a closed economy to the GATT signature b) Free trade agreements c) Trade simplification 3. Benefits from trade 4. Final remarks 5

6 : Mexico entered the GATT 1995: Free trade agreements 2006: Unilateral tariff reduction Mexico has well defined stages in the trade liberalisation process Trade liberalisation in goods and services (Total foreign trade as GDP%) Closed economy Trade liberalisation Trade liberalisation policies can be divided into 3 main stages The first two policies contributed to achieve economic development and to get benefit from the comparative advantages (e.g. geographical position) In order to develop these advantages (including the FTAs) it was necessary to reduce the barriers to foreign and domestic trade. Source: The World Bank and Banxico 6

7 Contents 1. Introduction 2. Trade liberalisation in Mexico a) From a closed economy to the GATT signature b) Free trade agreements c) Trade simplification 3. Benefits from trade 4. Final remarks 7

8 The trade liberalization that began in the late eighties did trigger the growth and diversity of exports. Structure of Mexican Exports, (Percentage) Non oil Oil Non oil average Source: INEGI 8

9 Contents 1. Introduction 2. Trade liberalisation in Mexico a) From a closed economy to the GATT signature b) Free trade agreements c) Trade simplification 3. Benefits from trade 4. Final remarks 9

10 With the signature of FTAs, the international trade increased and the industries more prone to import became also those with more exports. Evolution of exports by type of good (1993=100) Relation of exports and imports (US million dollars) Total exports Commodities Manufactures Source: Banxico 10

11 There were several benefits from FTAs. However, there were specific sectors that didn t enjoy comparative advantages and suffered stagnation or decline. Gross Domestic Product for specific industries (Index 100=1994; seasonally adjusted) As other industries have been growing Source: INEGI Note: The black line refers to the trend (polynomial of degree 6) for the average of the industries specified for each graph. 11

12 Despite China's entry into the WTO in 2001, Mexico is the only country that has gained participation in the U.S. non oil imports. Share in non-oil imports in the U.S.: Major Trading Partners Import shares in the U.S.: 1999 vs (First 5 partners) Sum of each bar: 16.7 percentage points Source: UN COMTRADE

13 Moreover, Mexico has maintained a good performance in the global market of manufactures Import share of U.S. manufacturing (Percentage) Manufacturing exports in Latin America (Percentage) Source: Based on data from U.S. Census Bureau Source: Based on data from UN COMTRADE 13

14 Specifically, some sectors that have achieved an important position in the U.S. are diversifying into other markets Exports of New Light Motor Vehicles (Percentage) Share of U.S. imports (Percentage) Other Europe Latin America Northamerica 40% México Mexico Canadá Canada Alemania Germany Japón Japan 35% 30% 25% 24% 26% 20% 15% 10% 5% 0% Sources: data from AMIA * Data to August Source: US Census Bureau 14

15 Mexico Australia USA Canada France United Kingdom Netherlands Reynosa, Mexico Aguascalientes, Mexico Italy Germany Puebla, Mexico Monterrey, Mexico Shreveport, USA Greenville-Spartanburg, USA Montgomery, USA Adelaide, Australia Melbourne, Australia Japan Paris, France Detroit, USA Manchester, UK Hamamatsu, Japan Mexico has significant competitive advantages in the automotive industry Position in automotive parts assembly by city (Position of 102 considered cities) Advantage in automotive assembly costs (Index 100 = USA) Source: KPMG. Guide to international business location,

16 Mexico has developed high performance plants that can be compared with the best plants worldwide 1.84 Chrysler Dundee GEMA (USA) 2.53 GM Spring Hill (USA) 2.6 Toyota Georgetown (USA) 2.66 Toyota West Virginia (USA) 3.07 GM Flint South (USA) 3.09 GM Flit North (USA) 3.19 GM Tonawanda (USA) 3.32 Chrysler Mack Av. II (USA) 3.45 Chrysler Saltillo (Mexico) 3.46 GM Romulus (USA) 48 Toyota Georgetown (USA) 40 Toyota Cambridge (Canada) 32 Chrysler Belvidere (USA) 31 Ford Dearborn (USA) 30 GM Silao (Mexico) 25 Chrysler Toluca (Mexico) 24 Nummi (USA) 23.5 Toyoya Princeton West (USA) 20 GM Parma, Ohio (USA) 16 Hyundai Mongtgomery (USA) Top 10: Engine production (Hours per produced engine) Top 10: Stamping process (Parts per hour) Source: Oliver Wyman Automotive Consulting Services. The Harbor Report, June Note: Considers 61 Plants in North America, Europe y South America in 36 cities. 16

17 Unfortunately, with the FTAs, the tariff scheme became complex, leading to high costs and distortions To maintain the competitiveness of the industrial plant, special programs by sector (PROSECs) were established: PROSECs They exempt tariff payments to certain sectors and companies in order to enable the use of more efficient supply sources worldwide at no additional cost. They did generate distortions, inequities and inefficiencies. The artificial deterioration of the competitive position SMEs was particularly relevant as well as the high cost of managing those programs. Therefore, before 2008, the tariff scheme was characterised by: Full liberalisation with countries with whom we have treaties and high commercial protection with those countries that we didn t. As a result of the different tariff combinations, there were over tariff rates: (i) there were over 12,000 tariffs on single products, (ii) specific rules were handled for each of the 12 FTAs we have (iii) Furthermore, 24 sectorial programs (PROSECs) were handled as well as particular tariff benefits with annual seasonality (Rule 8th and import quotas). 17

18 Contents 1. Introduction 2. Trade liberalisation in Mexico a) From a closed economy to the GATT signature b) Free trade agreements c) Trade simplification 3. Benefits from trade 4. Final remarks 18

19 The most recent reform involves trade facilitation and it has 3 strategies Tariff simplification The elimination of waiver programs The simplification of foreign trade and customs operations 19

20 Tariff simplification Tariffs with rate zero (Industry; %) Simple Average of Industrial Tariffs - industrial sector USA EUA 2010

21 Elimination of waiver programs: PROSECs Changes in the number of tariff in PROSEC, ,885 3,414 REMOVAL OF PROSEC The fractions included in the PROSEC's will be reduced from 4,885 in 2008 to zero in SIMPLIFICATION OF RULE 8 1,370 1, The tariff lines included in the Rule 8 will be reduced according to the elimination of the PROSECs Source: Ministry of Economy. 21

22 Customs Facilitation: Single window system Advantages of Implementing: 1. Reduces transaction costs One single delivery information window Every procedure is electronic The information will be delivered only once 2. Increases transparency The information and requirements of each procedure will be defined clearly and explicitly. 3. Increases security Has the Electronic Advanced Signature Low risk of permits falsification 4. Facilitates information flow through countries A single record for each data 5. Reduces Risk Corruption The personal contact will be eliminated.

23 The trade simplification will have a direct effect on competitiveness. Trading across borders rank Mexico's position in market access = improvement Source: Doing business Source: World Economic Forum. Market access sub index in the Enabling Trade Index.

24 Contents 1. Introduction 2. Trade liberalisation in Mexico 3. Benefits from trade 4. Final remarks 24

25 An important effect of trade is the productivity factors increase, also related to innovation. 3 transmission lanes: Related to: Transfer of technology Increased competition Trade in capital goods and intermediate goods. The importing companies are 7.6% more likely to adopt new technologies. With foreign trade, there is an increase in market size for companies, making R & D activities more profitable. Economies of Scale In the case of exporting companies: A «learning by exporting» process occurs. There is a previous process of "self selection done by the most productive companies Source: Onodera, O. (2008) OCDE. 25

26 The total factor productivity growth rates in those industries with foreign trade are higher. Competition is a key factor. TFP growth in Mexico by type and industry characteristics ( , % annual growth of the TFP) Source: López-Córdova,

27 There is evidence that higher trade flows of intermediates lead to productivity gains. The impact of trade of intermediate goods on productivity is twofold: Imported intermediates embody foreign techonlogies. Indirect acces to better technologies. The trade of Intermediate goods can help improve the own technologies and have an impact on the efficiency on the use of production factors. Halpern, Koren and Szeidl (2009) find that 40% of the total productivity gain are due to better quality or technology of foreign inputs. Trade in intermediates account negatively for the distance to the frontier, implying that it has a positive effect on the reduction of inefficiency. There is a productivity multiplier through intermediate inputs, that is, higher productivity in upstream sectors increase the productivity in downstream industries. (Jones, 2008) Source: Miroudot, S. et al. (2009) Trade in intermediate goods and services. OECD Trade Policy Working Paper No

28 Moreover, a positive relation is observed between trade and the development of industries with high added value. Exports vs added value (Average annual growth 99 09) Imports vs added value (Average annual growth 99 09) Source: INEGI Economic Census and UN COMTRADE Note: in red those industries classified as "high technology" according to The World Bank 28

29 Therefore, the development of the global value chains is changing the operation of the World economy. Intermediate imported goods / intermediate domestic goods Source: OECD 1995 average: 20.7% 2005 average: 25.2% 29

30 For instance, in the case of Mexico, China has provided inputs or machinery for domestic production, which turns into products with added value. Imports from China by type of good in manufacturing (Percentage) Imports from China. Selected industries (Percentage of total imports) Capital goods Source: Based on data from UN COMTRADE Intermediate goods Consumer goods Source: UN COMTRADE 30

31 Contents 1. Introduction 2. Trade liberalisation in Mexico 3. Benefits from trade 4. Final remarks 31

32 Final remarks 1. International trade is a key determinant for economic growth. 2. There is evidence that higher trade flows of intermediates lead to productivity gains. 3. Mexico has been implementing instruments to gain position in the global market. The main strategy has been foreign trade liberalization. 4. Thus, Mexico is now an exporter of manufactured goods that require a significant amount of value added; it has new trading partners and the trade volume grows steadily. 5. Mexico, as many other countries, needs to benefit from the technology transfer developed by its trade partners. 32

33 Different models for liberalisation: the case of Mexico. Lorenza Martínez Trigueros February,

34 In order to achieve that position, Mexico has worked towards trade liberalisation. Free Trade Agreements (Number of countries) Number of documents to export Number of documents to import Source: SRE Source: Doing Business of World Bank,

35 Beside, there has been a diversification of products. The composition of the Mexican exports has become primarily of manufactured goods. Composition of exports adjusted for growth in commodity prices (Percentage) Others Adjusted Mining and Fuel Unadjusted Manufacturing Agricultural Products Adjusted Unadjusted Manufactured exports rose 7 percentual points using the price adjustment. Source: Based on data from WTO Note: The original figures were adjusted trade reported to the rates of international commodity prices accordingly. These prices were taken from the IMF. 35

36 In this regard, Mexico has already shown some improvements in the diversification of export markets. Evolution of export destinations 88.7% 1.7% 3.3% 1.2% 2.1% 0.2% 80.3% Diference : 8.5% Fuente: Banxico 36

37 Mexico has specific programs to facilitate foreign trade: PROSEC PROSEC is a program for production companies that allow them to import, under preferential tariff, various inputs for the manufacturing of their products. Benefits Establishes most tariffs between 0% and 5% for imported inputs and machinery, based on final goods producing firms; Gives certainty about tariff levels for the export sector; Promotes the attraction of local and regional suppliers by defining a list of equipment and supplies that may be imported into this scheme; Maintains the competitiveness of firms established in Mexico compared to companies located in the U.S. and Canada. Who can apply and other considerations Legal entities established in the country that manufacture goods and which has the registration PROSEC; Apply for temporary or permanent imports; It is not conditioned to export Must comply with non-tariff restrictions and regulations 37

38 Given the advantages of Mexico in the World trade it is crucial to simply the processes for trade Mexico already has tariff benefits with its major trading partners, it was necessary to look for options to reduce costs and increase the benefits of producing in our country. The increased volume of trade in an economy generates traffic congestion and reduces efficiency. E.g. China increased 2 days on average waiting time in port goods in An additional delay of a day in the importation or exportation of goods, reduces trade by more than one point porcentual.3 For Mexico, this would be equivalent to 6 billion dollars a year or so. 2, 3 Djankov, Freund and Pham

39 Impact of Reform: Savings Identified Optimization of Human Resources 21%, representing about 1.25 million dollars for various units of the APF and $ 43,000 annually for the AGA. Staff costs for the Management Procedures (Units): $ 5.1 million annually Staff Costs Paperwork Management (AGA: $ annually) In case of not implementing the project, the AGA would have to spend on renovating the systems in the country's customs 1,636.5 million Source: General Administration of Customs, Business Case. 39

40 Impact of Reform on the Doing Business Simulator Problematic. Doing Business Survey 2012 According to the survey, the greatest delays in import and export processes are in the category of "document preparation". Export Import Day Cost* Day Cost* Preparation of documents Customs procedures and technical control Port and terminal handling Domestic shipping and handling Total 12 1, ,780 The Single Window will have a direct impact on reducing delays and costs of preparation of government documents, which could mean a breakthrough for Mexico Subscript 26 positions in the Trade Facilitation World Bank, indicator moving from place 59 to 38. * Cost in dollars per container. ** Source: Trade Facilitation Sub-index index component "Doing Business 2012" World Bank. DGCE estimate. Considering a simulator is used to comply with the following assumptions: 1.- Improvements in the fields of import and export time and costs, countries considered, and 3.- There are no improvements elsewhere. 40

41 Also, in some cases, the value added incorporated by China in the products they assemble remains low (i.e. 1.1% of iphone). iphone: Designed by Apple in California. Assembled in China Value decomposition for iphone 4 (Sales price= 600 USD) 41