How the United States and Mexico can make NAFTA, already an overwhelming success, even better.
BY FRANKLIN L. LAVIN
Let me begin with a few observations on Mexico’s economy. There has been a lot of good news recently, and a few facts suggest Mexico’s prosperity is long-term and sustainable.
The economy rebounded from near zero growth to 4 percent last year; inflation has been cut in more than half this decade; and at the same time international reserves have more than doubled. The markets reflect this optimism, with the IFC stock index near an all-time high. GDP has doubled in a decade, and Mexicans are making long-term capital investments in Mexico.
One example of this is home ownership. More than 560,000 new homes were built in Mexico last year, almost double six years ago. Indeed, more people now own their homes in Mexico than ever before, and Mexico’s middle class is larger than ever.
Credit for this growth goes to the Mexican people and to sound government policies. Mexico has been on a reform path for a number of years, privatizing, deregulating, and pruning the role of government. President Calderon’s 2030 Plan, which focuses on strengthening the rule of law, facilitating cross-border trade, and enhancing intellectual property rights protection is a good example of the spirit of economic optimism that we increasingly see across Mexico.
Part of this reform process has been the increased internationalization of Mexico’s economy, which we see in our bilateral trade. Last year was a trade record, with more than $330 billion in goods and services crossing our border. This was double the trade of nine years ago, and more than triple the trade when NAFTA went into effect. Complementing all of this is more than $80 billion in cross-border investment, which has more than doubled in less than seven years.
This means Mexican workers and businesses have access to the largest market in the world, and it also means that Mexico consumers can command products from that same market. The United States sees similar benefits, with less expensive products on the import side and better access to markets on the export side.
Interestingly, despite the overwhelming success of NAFTA, it still receives some criticism in each country. But the fact that not everyone has yet fully benefited from a faster growing Mexican economy or that there have been adjustment issues in the U.S. does not mean that we should not pursue policies of economic growth. Indeed, it means we have to keep at it, so that citizens in both our countries can more broadly benefit.
For Mexico, trade with the U.S. is greater than its trade with the rest of the world combined. For the U.S., trade with Mexico is larger than our trade with all of Latin America, including Brazil, Argentina, all of Central America, and all of the Caribbean, with enough left over to also add all our trade with India as well.
To express this another way, America’s trade with Mexico today is greater than our trade with the entire world 30 years ago.
REFORM PROCESS CONTINUES
We keep the reform process going through the U.S.-Mexico-Canada Security and Prosperity Partnership (SPP), which tackles issues such as: protecting our societies against faulty consumer goods; managing infectious diseases; reducing wait times at borders; and combating fakes and counterfeits. Through the SPP, we recently implemented the Sea Cargo Initiative, which allows for electronic collection of data before ships enter port, which expedites customs clearance. Last year’s cement agreement and progress on the elimination of a 20-percent tax on beverages sweetened with high fructose corn syrup are other examples of successful cooperation.
Indeed, according to the World Bank, Mexico (43) has been a top economic reformer, leapfrogging more than 20 countries in this year’s annual survey of economic reform. In areas of starting a business, protecting investors and paying taxes, Mexico has made exceptional progress. In fact, it now ranks in the same class as Spain (39) and Taiwan (47).
With all of this good news, we should also be aware that there are challenges as well.
First, global competition means that we need to continue to improve our effectiveness and efficiency. Even when we make economic strides in an absolute sense, we may have actually lost ground in a relative sense because others in Asia, Europe and elsewhere are also improving their competitiveness. It has never been easier for U.S. or Mexican companies to enter other markets, and it has never been easier for foreign firms to enter our markets. The world is spinning faster.
On the U.S. side, we have work to do on border crossings. To my mind, those who view this as a trade-off between security and efficiency have set up a false dichotomy. High volume of activity can be maintained in conjunction with our security needs. Manufacturers know that high volume and high quality are not inconsistent, because they can standardize production, make use of process control and industrial engineering, so that as throughput is improved, quality also rises.
At the Department of Commerce we are working with other agencies to improve the efficiency of these crossings. We are finding that even simple measures such as harmonizing operating hours can have a significant impact on border efficiencies.
Trucking is another sensitive issue we are addressing. The United States supports the implementation of the NAFTA trucking provisions and is working to address recent Congressional concerns.
We also have a challenge on President’s comprehensive immigration reform, a sensitive topic in both our societies. Doing the hard work that is necessary to secure our borders, as well as finding a compassionate way to deal with those who have crossed our borders illegally is important. This Administration wants to achieve this in a bipartisan way that reforms a system that is not working and is consistent with our country’s spirit. We are a land of immigrants. They strengthen us. They renew us. Both the U.S. and Mexico deserve nothing less than a system that works, that is compassionate, and is comprehensive.
And we need to extend the benefits of free trade to other nations in the hemisphere. Pending FTA’s with Peru, Panama and Colombia are an important priority for the Administration. We know that the better these three economies perform, the better for Mexico as well. Frankly, when we look at Mexico’s growing exports to Korea, and the U.S. products sold to Korea that have Mexican inputs, it is not unrealistic to suggest that the U.S.-Korea FTA might be of greater benefit to Mexico than even these vital Latin America FTAs.
On the Mexican side, there are a number of challenges as well. One barrier is redundant testing and certification procedures. Mexico has not authorized foreign testing bodies, such as Underwriters Laboratories, to operate in Mexico, in spite of a NAFTA commitment to do so. This results in unnecessary re-testing and re-certifying of electrical products. Consumers have fewer choices and the cost of this redundancy is invariably passed on to them, and in the end they are no safer.
A second challenge is the need to increase the effectiveness of the rule of law. Companies need to be sure that commercial disputes will be addressed through civil proceedings. They want to know that their executives will not be subjected to criminal charges against them personally, or threatened with jail time if their company has a dispute with a Mexican entity.
A third related issue is intellectual property rights. Strong IPR protection can give Mexico a significant competitive advantage. Companies invest in high technology processes and products in places where their IP rights are protected. As a result innovation takes place more often where IP rights are protected. With a strong IPR regime Mexico can be on par with the U.S. and Canada, and significantly ahead of most of the rest of the hemisphere. President Calderon know what you and I know, that if we want to help consumers and if we want to keep investment on track, all of our countries need strong IP protection.
Lastly, as Mexico continues to grapple with reform, it needs to think about steps that would improve the lives of the ordinary citizens, such as telecoms and broadcasting.
A more competitive broadcasting sector provides more content choices—from entertainment to educational programs--for Mexican consumers. And cell phone users in Mexico pay some of the highest rates in the world for fixed line and cell phone service rates—about six times the U.S. average for international and cellular calls, according to press reports. To be competitive, Mexico needs to end monopolies and open up these markets.
So we both have our work cut out for us, from border crossings to broadcasting. I am optimistic about our ability to grapple with these issues. I see in my discussions with Mexican leadership, businesses, and citizens, a sense of optimism about the future. People know that changes are needed, and that Mexico has a solid reform agenda. And for our part, the United States is also committed to growth-oriented economic policies as we continue to improve our vital relationship with [Mexico].
Franklin L. Lavin is the U.S. Under Secretary of Commerce for International Trade. This column is based on excerpts from a recent speech at the American Chamber of Commerce of Mexico City. Republished with permission from the U.S. Commerce Department.