Bringing NAFTA back home

AT THE moment it is just a thousand hectares of mud on the outskirts of Monterrey, a

bustling industrial city in northern Mexico. Soon it should be the “Interpuerto”, a
customs-clearing zone to speed goods on their way to the United States via two rail lines
and the motorways to which it will be connected. The aim of the $2 billion project,
backed by the state government of Nuevo León and private investors, is to allow cargoes
to skip the long queues at customs posts on the border, 240km (150 miles) to the north.

Projects like the Interpuerto matter for Mexico, the economy of which depends on
exporting labour-intensive manufactured goods to its giant neighbour. Despite the
ratifying of the North American Free-Trade Agreement (NAFTA) in 1993, within a
decade Mexico’s exports to the United States were overhauled by those of China.

The financial crisis and recession north of the border was an even bigger blow: a slump in
exports (down by a quarter in the first half of 2009, compared with the same period the
previous year) helped to push Mexico’s economy into deep recession. Recovery is now
under way. But Mexicans remain gloomy about their economic prospects, according to
opinion polls. And Mexican businesses worry about the world currency “war”: the peso is
appreciating against the dollar and, recently, against the yuan, thanks to capital inflows.

Yet Mexico’s trade picture is brighter than it looks. Last year was less bad for Mexico
than for most of the rest of the world. Although its exports shrank, they have recovered
quickly. Mexico’s share of the American market has grown to 12.2%—its highest level
since NAFTA came into force. The rapacious expansion of China’s exports has come at
the expense of others, including Canada, the third NAFTA member (see chart). This
resilience reflects various built-in advantages. Geographical proximity has become more
valuable as the price of oil (and thus transport) has risen. NAFTA exempts Mexico from
the American import tariffs that clobber Chinese exporters. Chinese tiles and paving
stones, for instance, are cheaper than Mexican ones, averaging $5.20 per square metre
against $5.29, but after paying an 8.5% tariff they end up more expensive. The same is
true of cloth, glassware, chemicals and much else. The NAFTA effect is also
concentrating the manufacture of smaller cars in Mexico. The country’s car exports are
booming as never before, up 10.5% on their level of 2008. Carmakers have announced
investment of $4.4 billion over the next four years, according to the government.

China’s edge in labour costs is less clear-cut than it used to be. The wages of its factory
workers have been rising at double-digit rates in recent years. Mexican workers are
highly skilled in some industries. But the wage gap with the United States has failed to
narrow as much as people hoped, complains Rogelio Ramírez de la O, a Mexican
economist.

Sadly, personal security has become a worry in northern Mexico because of the wave of
drug-related violence. But high-tech businesses reckon that their intellectual property is
safer there than in China, says Othón Ruiz, Nuevo León’s development minister. Partly
as a result, consumer-electronics manufacturers have stepped up investment in Mexico in
recent years.

Even if Mexico continues to gain market share north of the border, the benefit will be
limited by the prospect of years of lacklustre growth in the American economy. So it is
all the costlier that Mexico is not making the most of its advantages. Take the Interpuerto.
It does not yet have American permission to stage customs clearance. The easiest way
would be to let American officials do checks on Mexican soil, but this raises nationalist
hackles among Mexican politicians. (Similarly, the United States Congress, in violation
of NAFTA, thwarted a pilot scheme under which Mexican long-haul truckers operated
north of the border.)

The bigger problem is that a lack of dynamism in the domestic economy caps the gains
from trade. Many of Monterrey’s export factories import their parts from the United
States for assembly and re-export. Jaime Serra, an economist who as trade minister
negotiated NAFTA in the early 1990s, points out that the multiplier effect of exports in
Mexico is unusually low. Each export dollar generates only $1.80 at home, compared
with $2.30 in Brazil and $3.30 in the United States, he calculates. The opportunity lost is
magnified because exports make up some 28% of Mexico’s economy, compared with
11% of Brazil’s.

The problem is that many home-grown industries are uncompetitive oligopolies. The
answer, argues Mr Serra, is for the government to step up efforts to get foreign suppliers
to set up in Mexico, and for state banks to increase lending to domestic suppliers if
private banks won’t. More aggressive enforcement of competition rules would help, too.

Bringing more of the export supply-chain inside Mexico would have another pay-off. At
the moment four-fifths of exports go to the United States. Despite Mexico’s skein of
trade agreements, branching out into new markets is hard because of the accords’ rules of
origin. For example, goods exported to, say, the European Union must originate
predominantly in Mexico (or the EU). Many export-oriented factories are so reliant on
parts imported from the United States that they do not qualify for tariff-free access to
third markets. That would change if those exporters could buy their parts from
competitive Mexican suppliers rather than importing them.

More than 15 years after NAFTA, the task for Mexico is to take full advantage of the
trade agreement—and to go beyond it. A sickly American economy may at last provide a
powerful incentive to do so.