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Mexico's economy
Bringing NAFTA back home

Despite Chinese competition, Mexico’s exports are growing. But the country
is still not taking full advantage of its trade agreement with the United States

Oct 28th 2010 | Monterrey

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 forMexico, 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 inthe 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 capitalinflows. Tuning up the engine of trade
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 pavingstones, 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 inMexico 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...
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