Trade in Mexico

Mexico

Formal Name: United Mexican States (Estados Unidos Mexicanos).
Short Form: Mexico.
Term for Citizen(s): Mexican(s).
Capital: Mexico City (called México or Ciudad de México in country).
Date of Independence: September 16, 1810 (from Spain).
National Holidays: May 5, commemorating the victory over the French at the Battle of Puebla; September 16, Independence Day.

Geography

Mexico in Map

 

Size: 1,972,550 square kilometers--third largest nation in Latin America (after Brazil and Argentina).
Topography: Various massive mountain ranges including Sierra Madre Occidental in west, Sierra Madre Oriental in east, Cordillera Neovolcánica in center, and Sierra Madre del Sur in south; lowlands largely along coasts and in Yucatan Peninsula. Interior of country high plateau. Frequent seismic activity.
Drainage: Few navigable rivers. Most rivers short and run from mountain ranges to coast.
Climate: Great variations owing to considerable north-south extension and variations in altitude. Most of country has two seasons: wet (June-September) and dry (October-April). Generally low rainfall in interior and north. Abundant rainfall along east coast, in south, and in Yucatan Peninsula.

Society

Population: Estimated population of 94.8 million persons in mid-1996. Annual rate of growth 1.96 percent.
Language: Spanish official language, spoken by nearly all. About 8 percent of population speaks an indigenous language; most of these people speak Spanish as second language. Knowledge of English increasing rapidly, especially among business people, the middle class, returned emigrants, and the young.
Ethnic Groups: Predominantly mestizo society (60 percent); 30 percent indigenous; 9 percent European; 1 percent other.
Education and Literacy: Secretariat of Public Education has overall responsibility for all levels of education system. Compulsory education to age sixteen; public education free. Government distributes free textbooks and workbooks to all primary schools. Official literacy rate in 1990 was 88 percent.
Health and Welfare: Health care personnel and facilities generally concentrated in urban areas; care in rural areas confined to understaffed clinics operated mostly by medical graduate students. Life expectancy in 1996 estimated at seventy-three years. Infant mortality twenty-six per 1,000 live births. Leading causes of death infections, parasitic diseases, and respiratory and circulatory system failures.
Religion: About 90 percent of population Roman Catholic, according to 1990 census. Protestants (about 6 percent) ranked second. Number of Protestants has increased dramatically since 1960s, especially in southern states.

Economy

Companies of Mexico in map

 

Overview: From a colonial economy based largely on mining, especially silver, in the twentieth century, the economy has diversified to include strong agriculture, petroleum, and industry sectors. Strong growth from 1940-80 interrupted by series of economic crises, caused in part by massive overborrowing. 1980s marked by inflation and lowering standard of living. Austerity measures and introduction of free-market policies led to a period of growth from 1990-94. Membership in North American Free Trade Agreement (NAFTA) in 1993 led to hopes of continued economic growth. However, growing trade deficit and overvalued exchange rate in 1994 financed by sale of short-term bonds and foreign- exchange reserves. Series of political shocks and devaluation of new peso in late 1994 caused investor panic. Inflation soared, and massive foreign intervention was required to stabilize situation. Although overall economy remains fundamentally strong, lack of confidence makes short-term prospects for strong growth unlikely.
Gross Domestic Product (GDP): Estimated at US$370 billion in 1994; approximately US$4,100 per capita.
Currency and Exchange Rate: Relatively stable throughout most of twentieth century, the peso (Mex$) began to depreciate rapidly during economic crisis of 1980s. In January 1993, peso replaced by new peso (NMex$) at rate of NMex$1 = Mex$1,000. Exchange rate in January 1993, US$1 = NMex$3.1; rate in April 1997, US$1 = NMex$7.9.
Agriculture: Contributed 8.1 percent of GDP in 1994. Main crops for domestic consumption corn, beans, wheat, and rice. Leading agricultural exports coffee, cotton, vegetables, fruit, livestock, and tobacco.
Industry: Mining, manufacturing, and construction contributed 28 percent of GDP in 1994. Industrialization increased rapidly after 1940. By 1990 large and diversified industrial base located largely in industrial triangle of Mexico City, Monterrey, and Guadalajara. Most industrial goods produced, including automobiles, consumer goods, steel, and petrochemicals. World's sixth largest producer of petroleum and major producer of nonfuel minerals.
Energy: More than 120 billion kilowatt-hours produced in 1993, about 75 percent from thermal (mostly oil-burning) plants, 20 percent from hydroelectric, and the rest from nuclear or geothermal plants. One nuclear plant with two reactors at Laguna Verde in Veracruz State. Huge petroleum deposits discovered in Gulf of Mexico in 1970s. In 1995 sixth-largest producer of oil and had eighth-largest proven reserves.
Exports: US$60.8 billion in 1994. Manufactured exports include processed food products, textiles, chemicals, machinery, and steel. Other important export items are metals and minerals, livestock, fish, and agricultural products. Major exports to United States are petroleum, automotive engines, silver, shrimp, coffee, and winter vegetables.
Imports: US$79.4 billion in 1994. Main imports are metal-working machines, steel-mill products, agricultural machines, chemicals, and capital goods. Leading imports from United States include motor vehicle parts, automatic data processing parts, aircraft repair parts, car parts for assembly, and paper and paperboard.
Debt: Massive foreign debt. Buoyed by discovery of large petroleum reserves, government borrowed heavily in 1970s. When severe recession hit in 1982, government declared moratorium on debt payments, precipitating international economic crisis. Austerity measures and renegotiation of the debt eased crisis, but in 1995 debt stood at US$158.2 billion.
Balance of Payments: Large trade deficits from 1989 to 1993 pushed current account deeply into deficit. Dramatic improvement in trade balance in 1994 and 1995, however, nearly eliminated deficit. Heavy international borrowing allowed international reserves to rise to US$15.7 billion at end of 1995.
Fiscal Year: Calendar year.

Financial System

Banking System

Mexico has one of Latin America's most developed banking systems, consisting of a central bank and six types of banking institutions: public development banks, public credit institutions, private commercial banks, private investment banks, savings and loan associations, and mortgage banks. Other components of the financial system include securities market institutions, development trust funds, insurance companies, credit unions, factoring companies, mutual funds, and bonded warehouses.
The central bank, the Bank of Mexico (Banco de México), regulates the money supply and foreign exchange markets, sets reserve requirements for Mexican banks, and enforces credit controls. It serves as the fiscal agent of the federal government, the issuing bank for the new peso, and a discount house for private deposit banks. It supervises the private banking sector through the National Banking Commission, and it provides funds for government development programs. Legislation in 1984 required the Bank of Mexico to limit its lending to the government to an amount fixed at the beginning of each year. To ensure continued control of inflation, the central bank was made autonomous in April 1994.

Mexico gun shop

Mexico has a number of other official banks for agriculture, foreign trade, cooperatives, public works, housing, transportation, and the sugar industry, among other specialized purposes. The most important such development institution is the Nafinsa, which provides financial support for Mexico's industrialization program. Nafinsa provides medium-term financing and equity capital for productive enterprises, promotes Mexican investment companies, oversees the stock market and the issuance of public securities, and serves as the legal depository of government securities. By 1993 Nafinsa had divested itself of some of its interests, but it remained under state ownership. Mexico's other most important state development bank is the National Bank of Public Works and Services (Banco Nacional de Obras y Servicios Públicos).
The private banking sector consists of more than 200 banks, which together have more than 2,500 branches. The proliferation of banking institutions resulted from regulations that prohibited any single bank from combining more than two banking functions. Mexico's two largest private banks are the Bank of Commerce (Banco de Comercio--Bancomer), comprising thirty-five affiliated banks with more than 500 branches, and the National Bank of Mexico (Banco Nacional de México--Banamex). Development banks, known as financieras and organized by commercial banks in association with major industrial enterprises, provide most of the private sector's development financing.
In an effort to stem massive capital flight, President López Portillo decreed the nationalization of the country's private banks in September 1982. In August 1983, the government authorized the return of up to 34 percent of the equity shares in these banks to the private sector, and it eliminated eleven banks and merged fifty others into twenty-nine national credit institutions in an effort to improve the banking system's efficiency. In March 1985, the government announced a further reduction in the number of commercial banks, from twenty-nine to eighteen.
The government took its first actual step toward reprivatizing the commercial banks in 1987, when it returned 34 percent of their capital to private investors in the form of nonvoting stock. In 1990 it allowed the sale to foreign investors of 34 percent of nonvoting shares in state-owned commercial banks. Reprivatization began in earnest in June 1991. By July 1992, all eighteen commercial banks had been sold to private owners, yielding more than US$12 billion. The privatization program dramatically increased the number of investors holding stock in Mexican commercial banks from just 8,000 on the eve of the 1982 nationalization to 80,000 in January 1993.
To improve the availability of credit, the government allowed the establishment of new domestic banks in Mexico in 1993, and the following year it allowed United States and Canadian banks to begin operating in Mexico. At the end of 1994, there were some fifty commercial banks in operation in Mexico, up from nineteen at the end of 1992. Mexico had forty-five brokerage houses, fifty-nine insurance companies, seventy-four leasing companies, sixty-five factoring houses, and forty-nine exchange houses.
Following the currency crisis of late 1994, the government was forced to raise interest rates sharply in order to protect the new peso by retaining existing short-term foreign investment and attracting new capital inflows. High interest rates during 1995 sharply increased the payments owed by Mexican individual and business borrowers, many of whom could not shoulder the increased burden. As a result, the share of nonperforming to performing loans held by Mexican banks rose significantly, creating a major crisis for the financial sector. During the first three quarters of 1995, the ratio of bad debts to the banking system's total loan portfolio increased from 8 percent to 17 percent. Partially as a result, the rate of growth in commercial bank financing of private-sector activities declined to just 1 percent during this period, compared with 19 percent a year earlier.
The interest rate increase also raised the cost to banks and the government of the various efforts to resolve the problem of banks' nonperforming loans. In late 1994, the government took over Banca Cremi, and a year later it was forced to take control of Inverlat. The government also agreed to assume problem loans held by Banamex and Bancomer.

World Tread Center of Mexico

In the wake of the financial sector crisis, the government introduced in mid-1995 a program for rescheduling bank loans using index-linked investment units. In September 1995, the government unveiled another emergency program of aid for bank debtors, which was to provide relief for 8 million bank debtors. By February 1996, 83 percent of eligible loans had been restructured under this program. By mid-1996, the cost of the government's various efforts to prevent a banking system collapse was estimated at 91 billion new pesos. The government held control of 25 percent of bank assets, despite having privatized the banking system only four years earlier. The government's efforts to restore the financial sector's stability were rewarded by a sharp drop in interest rates in late 1995 and early 1996.

Foreign Trade

Stabilization and adjustment policies implemented by the Mexican government during the 1980s caused a sharp fall in imports and a corresponding increase in exports. Average real exchange rates rose, domestic demand contracted, and the government provided lucrative export incentives, making exportation the principal path to profitable growth. The 1982 peso devaluation caused Mexico's imports to decline 60 percent in value to US$8.6 billion by the end of 1983. After years of running chronic trade deficits, Mexico achieved a net trade surplus of US$13.8 billion in 1993.

Imports

After 1983 the government eliminated import license requirements, official import prices, and quantitative restrictions. This trade liberalization program sought to make Mexican producers more competitive by giving them access to affordable inputs. By 1985 the share of total imports subject to licensing requirements had fallen from 75 percent to 38 percent. In 1986 Mexico acceded to the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), and in 1987 it agreed to a major liberalization of bilateral trade relations with the United States.
As a consequence of trade liberalization, the share of domestic output protected by import licenses fell from 92 percent in June 1985 to 18 percent by the end of 1990. The maximum tariff was lowered from 100 percent in 1985 to 20 percent in 1987, and the weighted average tariff fell from 29 percent in 1985 to 12 percent by the end of 1990. The volume of imports subject to entry permits was reduced from 96 percent of the total in 1982 to 4 percent by 1992. The remaining export controls applied mainly to food products, pharmaceuticals, and petroleum and oil derivatives.

Top trade partners of Mexico

The value of Mexico's imports rose steadily from US$50 billion in 1991 to US$79 billion in 1994 (19 percent of GDP). It rose in response to the recovery of domestic demand (especially for food products); the new peso's new stability; trade liberalization; and growth of the nontraditional export sector, which required significant capital and intermediate inputs (see table 11, Appendix). As a result of the new peso devaluation of December 1994, Mexico's imports in 1995 were US$73 billion, 9 percent lower than the 1994 figure. In 1995 Mexico imported US$5 billion worth of consumer goods (7 percent of total imports), US$9 billion worth of capital goods (12 percent), and US$59 billion worth of intermediate goods (81 percent). Renewed growth and the new peso's real appreciation were expected to increase demand for foreign products during 1996. Imports rose by 12 percent in the first quarter of 1996 to US$20 billion.
The government tried to curb the early 1990s' rise in imports by acting against perceived unfair trade practices by other countries. In early 1993, Mexico retaliated against alleged dumping of United States, Republic of Korea (South Korean), and Chinese goods by imposing compensatory quotas on brass locks, pencils, candles, fiber products, sodium carbonate, and hydrogen peroxide. Antidumping duties were applied to steel products, and all importers were required to produce certification of origin.
But Mexico also was subject to complaints by other countries, which charged that Mexico itself engaged in unfair practices. The European Community (now the European Union--EU) and Japan lodged complaints with the GATT about Mexico's invocation of sanitary standards in late 1992 to limit meat imports.

Exports

The mid-1980s decline in world petroleum prices caused the value of Mexico's exports to fall from US$24 billion in 1984 to US$16 billion in 1986, reflecting the country's continued heavy dependence on petroleum export revenue. Lower oil earnings helped to reduce Mexico's trade surplus to almost US$5 billion in 1986. Export revenue rose slightly to US$21 billion in 1987, as oil prices began to recover. Exports continued to rise modestly but steadily thereafter, reaching US$28 billion in 1992. The government promoted exports vigorously in an effort to close a trade gap that began in 1989 and widened in subsequent years. The state-run Foreign Commerce Bank channeled finance to a wide range of potential exporters, especially small and medium-sized firms and agricultural and fishing enterprises. In 1993 it provided US$350 million for the tourist sector, representing a 35 percent increase over 1992.

Exportable products of Mexico

The value of Mexico's exports rose steadily from US$43 billion in 1991 to US$61 billion in 1994, despite the new peso's overvaluation. The currency devaluation of late 1994 contributed to a significant jump in the value of Mexico's exports to US$80 billion in 1995, a 31 percent increase over the previous year.
Total export earnings for the first quarter of 1996 were US$22 billion. Manufactures accounted for US$67 billion (84 percent) of Mexico's exports in 1995, followed by oil exports (US$9 billion or 11 percent), agricultural products (US$4 billion, or 5 percent), and mining products (US$545 million, or less than 1 percent). This improved export performance resulted from the new peso devaluation, weak domestic demand because of the recession, new export opportunities opened by NAFTA, and improved commodity prices. Export growth was expected to slow during 1996, as a result of recovery of domestic demand, expected drops in the prices of oil and other nonfood items, capacity constraints, and strengthening of the new peso.

Composition of Exports

The 1985 peso devaluations and the 1986 oil price collapse produced a dramatic shift in the composition of Mexico's exports. The value of Mexico's oil exports plummeted from US$13 billion in 1985 to less than US$6 billion in 1986. The oil sector's share of total export revenue consequently fell from 78 percent in 1982 to 42 percent in 1987. Oil export revenue recovered in 1987 to US$7.9 billion as petroleum prices rose. Prompted by the peso devaluation and low domestic demand, nonoil exports rose 41 percent in 1986 and an additional 24 percent in 1987. In 1987 manufactured exports (especially engineering and chemical products) constituted 48 percent of total exports by value, eclipsing petroleum and reducing Mexico's vulnerability to fluctuations in the world oil price. Between 1988 and 1991, petroleum exports fell 22 percent in value because of lower world oil prices and declining sales, while nonoil exports rose 15 percent in value. By 1992 petroleum contributed only 30 percent of total exports by value.

Exchange road of Mexico

In 1994 petroleum and its derivatives accounted for US$7 billion, or 12 percent, of Mexico's total export revenue of US$62 billion. Transport equipment and machinery exports earned US$33 billion, or 54 percent of total exports. Chemicals earned US$3 billion, or 5 percent, and metals and manufactured metal products earned US$3 billion, or 5 percent. Agricultural, processed food, beverage, and tobacco products accounted for US$3 billion, or 5 percent of total exports.

Foreign Investment Regulation

Restrictions on direct foreign investment were eased during the administrations of presidents de la Madrid and Salinas. In 1990 the government revised Mexico's 1973 foreign investment law, opening up to foreign investment certain sectors of the economy that previously had been restricted to Mexican nationals or to the state. The new regulations permitted up to 100 percent foreign ownership in many industries.
However, in 1992 the government continued to retain sole rights to large parts of the economy, including oil and natural gas production, uranium production and treatment, basic petrochemical production, rail transport, and electricity distribution. Economic sectors reserved for Mexican nationals included radio and television, gas distribution, forestry, road transport, and domestic sea and air transport. The government limited foreign investors to 30 percent ownership of commercial banks, 40 percent ownership of secondary petrochemical and automotive plants, and 49 percent ownership of financial services, insurance, and telecommunications enterprises. However, foreign investors could obtain majority ownership of certain activities by means of a fideicomiso , or trust.
In November 1993, the government announced a new foreign-investment law that vastly expanded foreign-investment opportunities in Mexico. The new law replaced Mexico's protectionist 1973 investment code and united numerous regulatory changes that Salinas previously had imposed by decree without congressional approval. The new law allowed foreigners to invest directly in industrial, commercial, hotel, and time-share developments along Mexico's coast and borders, although such investment had to be carried out through Mexican companies. Foreigners previously had been prohibited from owning property within fifty kilometers of Mexico's borders, and their investments in areas beyond fifty kilometers had to be carried out through bank trusts. In practice, however, foreigners already had invested in many of the listed border industries and areas through complex trust and stock ownership arrangements, although risk and bureaucratic requirements had deterred some potential investors and financiers.
The new investment code also opened the air transportation sector to 25 percent direct foreign investment and the secondary petrochemical sector to full 100 percent direct foreign investment. Mining also was opened to 100 percent direct foreign ownership; previously foreigners could provide 100 percent investment but had to invest through bank trusts for limited periods of time. Other sectors opened to foreign investors included railroad-related services, ports, farmland, courier services, and cross-border cargo transport. The new code eliminated performance requirements previously imposed upon foreign investors, along with minimum domestic content requirements.

The Future of the Economy

The market-oriented structural reforms of the 1980s and early 1990s transformed Mexico's economy from a highly protectionist, public-sector-dominated system to a generally open, deregulated "emerging market." President Salinas's moves to privatize and deregulate large sectors of the Mexican economy elicited widespread support from international investors and the advanced industrial nations. With its positive effect on trade and capital flows, NAFTA was widely interpreted by Mexican decision makers as a validation of their market-oriented economic policies. The currency collapse of December 1994 and the ensuing deep recession, however, erased the economic gains that Mexico had achieved in previous years, shook the nation's political stability, and depressed hopes for an early return to growth.
Although Mexico remained in a difficult economic condition in mid-1996, the worst of the recession had passed and the country appeared headed toward recovery. The economy registered positive growth in the second quarter of 1996, inflation and interest rates abated, and portfolio investment returned, as reflected in Mexico's rising stock exchange index. Despite continuing problems exacerbated by low investor confidence, analysts agreed that Mexico's economy in the mid-1990s was fundamentally sound and capable of long-term expansion.