Mexico - International trade

Mexico has dramatically changed its approach to international trade. Over the past 25 years Mexican exports have moved successfully from a reliance on oil (oil was 76 percent of export revenue in 1982) to a reliance on

manufacturing (manufacturing was 89 percent of export revenues in 1999). The success of this shift has come primarily from the maquiladora program, which started in the 1960s but which was greatly increased by the NAFTA agreement in 1994.

As Mexico has changed its approach to international trade, its balance of trade has also changed. Before 1981, Mexico suffered from a trade deficit. During this time, the Mexican government was committed to a policy of "defending" the peso by setting the value of the peso at a high level—unrealistically high in this case—as a matter of national pride. But because the price of pesos was too high, people were unwilling to buy pesos with other currencies at the official exchange rate . Therefore, the main way for the Mexican government to get foreign currency so that it could trade with other countries was to borrow it. By the early 1980s, the government had amassed a large foreign debt to other countries. What is worse is that oil revenues, the main source of revenue to the government, decreased with the drop in world oil prices in the late 1970s. Things got so bad that by 1982 the Mexican government announced that it could no longer even pay the interest on the debt that it owed. As a result of this more expensive peso, Mexicans were able to buy more goods from outside of Mexico because they could get more dollars for their peso. So imports into Mexico increased. By the same token, buyers outside of Mexico were less willing to buy Mexican goods because the peso was too expensive relative to their currencies. As a result, although exports out of Mexico increased before 1981, imports increased faster than exports, leading to a trade deficit.

Nationalism gave way to economic reality and in 1982 the government devalued the peso. But the Mexican government went even further, deciding in 1985 to pursue growth of the economy through exports. On the export side, in addition to its devaluation of the peso, the government gave Mexican manufacturers various incentives to export. On the import side, the government followed a policy of liberalizing trade by removing the restrictions (e.g., licenses) that it had placed on countries wanting to export to Mexico. This policy made it easier for Mexican manufacturers to get the inputs they needed for their manufacturing processes. The result was that exports exceeded imports from 1982 to 1989. However, in 1990 Mexico became a victim of its own success. The growth of the economy generated an internal demand for goods that resulted in an increase in imports into Mexico. In addition, the price of pesos was now high relative to other currencies, probably because the demand for pesos was high. The expensive peso resulted in a slower rate of increase of Mexican exports. So in 1990 Mexico experienced a trade deficit. This deficit persisted until the Mexican government once again devalued the peso in 1994. That devaluation made possible a trade surplus from 1995 to 1997. Since then, however, the economy has once again experienced a trade deficit.

A great deal of Mexico's trade situation depends on the United States, its largest trading partner. Exports to the United States reached a high of 88.4 percent of Mexico's total exports in 1999. In 1999, Canada received the next highest percentage of Mexico's exports (1.7 percent). In addition, Mexico imports most of its products from the United States, almost 75 percent in 1995. Some argue that the increase in Mexico's exports to and imports from the United States over the past 5 years have come as a result of the North American Free Trade Agreement (NAFTA), which was entered into by Mexico, the United States, and Canada in 1994. NAFTA gradually abolishes the trade barriers (for example, import tariffs) between the countries over a 15-year period, resulting in one single economic market with a population of over 400 million people and a gross domestic product of over US$6 trillion.

But Mexico is not willing to be wholly reliant on the United States. Mexico entered into a free trade agreement with the European Union (EU) in July of 2000 that commits the parties to eliminate their trade barriers over 10 years. With its agreement with the EU, Mexico becomes the only country other than Israel to have special access to the European and North American markets.

In addition to the flow of imports and exports in Mexico, a very positive role in the international accounts has been played by remittances of Mexicans who are living abroad (mostly in the United States). These transfers (US$6.3 billion in 1999) are treated in the international accounts in the same manner as Mexican exports are treated.