Mexico’s Trade Policy & Trade Agreements – UPDATED
June 17, 2015
Mexico international trade is a complex and rapidly evolving issue. On June 5, 2018, the Mexican government responded to the United States tariffs on certain Mexican steel and aluminum by suspending the preferential tariff and raising the general import tax rate for a variety of goods originating from the U.S. Furthermore, according to Export.gov, “Mexico is applying tariffs to products of U.S. origin in HS codes 71 and 72 (regardless of where they are imported from)… Duties range from 5 percent to 25 percent”.
Another element to consider is the renegotiations of NAFTA to USMCA (United States-Mexico-Canada Agreement). While the negotiation of these bilateral trade policies are underway, there is still some uncertainty about rising tariffs.
Mexico and NAFTA – A Quick Overview
Mexico did not begin extensive trade with other countries until the end of the second world war. In 1944, Mexico established trade with the US and Canada. For the next half century, trade gradually increased, and when the North American Free Trade Agreement was enacted, the value of goods traded between the three countries increased by $200 million US. When trade was initiated, imports from the US were equal or near-equal to exports to the US. However, after NAFTA trade agreement was enacted, exports grew quickly and vastly outstripped imports, reaching a discrepancy of over $60 billion US.
Mexico’s Trade Policy Dependent on US
The country has long been highly economically dependent on the US; during the new millennium, an average of 80% of Mexican exports have gone to the US, and 50% of its imports come from the US. In 2017, Mexico was the second largest exporter of goods to the US. Many of Mexico’s recent actions have been taken in an effort to reduce this large dependence, reciprocate the current steel and aluminum tariffs, and Mexico is gradually moving toward taking a larger role in international trade and engaging in more communication and trading with more countries.
US and Mexico Trade Balance
In 2017, the US had a $71 billion trade deficit with Mexico. This is up 11.1% from 2016. In terms of services trade, the US has a surplus of around $7.4 billion, down 1.3% from 2016.
Mexico and US Exports in 2017
According to the Office of the United States Trade Representative in 2017, US goods exported to Mexico in 2017 were $243.3 billion, up 5.8% from 2016 and up 79% from 2007. At a high level, the top categories for exports were:
- Machinery – $43 billion
- Electrical Machinery – $41 billion
- Mineral fuels – $27 billion
- Vehicles – $21 billion
- Plastics – $17 billion.
The US exported some $19 billion in agriculture to Mexico in 2017, making this trade relationship the third largest agriculture export market for the US. Top categories include:
- Corn – $2.47 billion
- Soybeans – $1.6 billion
- Pork & Pork Products – $1.5 billion
- Dairy products – $1.3 billion
- Beef & Beef Products – $979 million
In addition to goods, the export of services also increased by 3.8% from 2016 to 2017, resulting in an estimated $32.9 billion. The leading exported services were: travel, transportation, and intellectual property.
Mexico and US Imports in 2017
In 2017, Mexico was the United States’ second largest export market with some $314.3 billion in goods. In other words, US imports from Mexico account for roughly 13.4% of overall US imports. This represents a 6.9% increase from 2016 and a 49.1% increase from 2007.
Top non-agriculture import categories include:
- Vehicles – $84 billion
- Electrical Machinery – $62 billion
- Machinery – $54 billion
- Optical and Medical Instruments – $14 billion
- Mineral Fuels – $11 billion
When looking at the total 2017 US imports of agricultural products to Mexico, they totaled $25 billion. Leading categories include:
- Fresh Fruit – $6 billion
- Fresh vegetables – $5.5 billion
- Beer & Wine – $3.3 billion
- Snack foods – $2.1 billion
- Processed Fruits & Vegetables – $1.5 billion
Used Vehicles Imports – UPDATED
In April of 2015, a decree issued applied new requirements for the business of used vehicles in Mexico. These regulations will remain in effect until March 31, 2019 or until further notice from the Mexican Government. According to Export.gov, here are a few of the new regulations:
- A Vehicle Identification Number (VIN, or NIV) along with a visible digital picture
- Used vehicles being sold in border zones are permitted if they are less than nine years old
- Used vehicles less than 10 years are assessed with a 1% ad-valorem tax
- Those older than 10 years old are subject to a 10% ad-valorem tax
- Confirmation that the vehicle was manufactured in the United States, Mexico or Canada
- The use of a customs agent affiliated with the customs house of entry of the vehicle
- The bill of lading for permanent importation for each vehicle
- An invoice stamped “shipper export” by U.S. Customs
- The RFC (the Mexican federal tax identification number), CURP (the identity number), and INE (the voter registration number) of the importer
- Proof of address of the Mexican importer including postal code
- Proof of payment of the IGI (Impuesto General de Importación or General Import Tax)
- Compliance with Mexican standard vehicle categories
- Payment of the 10 percent ad-valorem tax (one percent for the border zone) based on a minimum estimated price or “reference price”
Between the years of 1994 and 2011, the total amount of commodities exported by Mexico increased 475%; over the same time period, imports increased 342%. This was a result of the massive trade liberalization projects undertaken by Mexico starting in the early 1990s, and continued to bear fruit even after the effects of the recession that began in 2009. In fact, even after the recession, Mexico’s gross domestic product – which had already been rising throughout the 2000s – has continued to rise. It was $13,200 per capita in 2009, which was a drop from the previous year, but by 2011 it had more than recovered to that level and had risen to $14,800 per capita. This amounts to almost twice as much as what it had been in 1999, $8,500 per capita.
2014 Mexico Trade Exports
In 2014, 77.8% of Mexican exports went to the United States. 2.95% went to Canada, 1.9% to Spain, 1.54% to China, 1.53% to Brazil, 1.51% to Colombia, and 1.21% to Germany. Less than 1% went to Japan, India, and the United Kingdom; the remaining 9.32% was divided among all other countries. For comparison, as of 2008, 83.7% of Mexican exports were to the United States. 2.45% went to Canada, 1.76% went to Germany, 1.51% to Spain, 1.14% to Brazil, and 1.01% to Columbia. Less than 1% of Mexican exports went to the Netherlands, Venezuela, China, and Japan. The remaining 7.69% was divided among all other countries. This shows how Mexico is, slowly but surely, moving away from its dependence on the US and opening trade relations with other countries.
In 2014, exports accounted for 18.6% of the Mexican economy. Mexico’s primary exports, which account for 80.6% of its overall exports, are: vehicles (21.6%); electronic equipment (20.1%); machines, engines, and pumps (15.2%); oil (10.6%); medical and technical equipment (3.6%); furniture, signs, and lighting (2.4%); plastics (2.2%); gems, precious metals, and coins (2%); iron and steel products (1.5%); and vegetables (1.4%). As of 2013, Mexico surpassed Japan as the second largest exporter of vehicles to the United States, and is the 4th largest exporter worldwide of motor vehicles and parts. These Mexico trade statistics are really strong.
Mexico international trade policy has remained fundamentally the same since February 2008. The primary objective of Mexico’s trade agreements is, naturally enough, to increase the country’s economic standing and its share and role in worldwide trade. The primary means of enforcing and enacting this goal is through Mexico’s Sectoral Program for the Economy (PSE), which is itself underpinned by the National Development Plan (PND). Both of these are operated by Mexico’s Ministry for the Economy (SE). Increasing foreign trade and investment is one of four “priority areas” designated by the PSE, and to that end the PSE is tasked with optimizing and improving existing trade agreements, forging new trade agreements, merging multiple existing agreements into each other, and overall strengthening and defending Mexican trade.
Mexico Trade Barriers
There are a number of trade barriers in Mexico. One of these is the language. English is considered “the language of business”, as it is one of the most common languages spoken as well as extremely widespread. Mexico’s state language is Spanish, and a Mexican tradesman who hasn’t learned English is at a severe disadvantage. When trading with countries outside the Americas, Mexico also has the problem of distance and expense of transit to contend with; those countries are more likely to get what they need from a much closer country if they possibly can. Mexico has had problems with corruption in the past as well, which makes foreign traders and investors nervous and unsure about bringing their money and business to the country. Mexico has free trade agreements with many of its trading partners, but countries it does not have an agreement with face high tariffs. This discourages new countries from initiating trade without establishing some sort of agreement first.
Mexico is also seen as economically and politically tightly woven with the United States, which might put off countries that have shaky or negative relationships with the US. Part of the reason for that is the strong US Mexico trade agreement. Additionally, Mexico also has a system of import licensing or authorization for certain goods, including used goods, weapons, food and agricultural machinery, and medicine and medical equipment. Countries that have these as primary exports would have to leap through extra bureaucratic hoops in order to export their goods to Mexico, which discourages them from establishing trade relationships at all.
There are a large number of Mexico free trade agreements; in fact, Mexico has one of the most open and liberal trading networks in the world. Any country with a free trade agreement with Mexico faces no tariffs and vastly reduced import/export costs when trading with Mexico. In 1994, Mexico, Canada, and the US entered into the North American Free Trade Agreement, creating the largest single market in the world. In the years since then, Mexico has entered into 12 other free trade agreements, involving a total of 44 countries. At present, these agreements encompass: The United States, Canada, Costa Rica, Nicaragua, Chile, all of the countries in the European Union, Israel, El Salvador, Honduras, Guatemala, Uruguay, Iceland, Lichtenstein, Norway, Finland, Japan, Colombia, and Peru. Mexican goods can be exported to any of these countries with no tariffs and minimal other trade barriers.
Expanding International Trade
Mexico has also been invited to join the Trans-Pacific Partnership. Other countries involved in the TPP, a few of which Mexico already has free trade agreements with, include: the US, Canada, Australia, New Zealand, Brunei, Malaysia, Peru, Chile, Vietnam, and Singapore. Should the TPP be approved by each of these countries, they will all be incorporated into a massive multilateral free trade agreement.
Mexico has been making a concentrated effort to expand and liberalize its trade since the early 1990s; as a result, Mexico now has one of the most open trade policies in the world. The economic downturn of recent years has hurt the country, but its export system is still going strong and expands it’s scope to new countries at every opportunity. For vehicle, electronics, and machine parts manufacturers, relocating to Mexico opens up a huge export market and offers many, many more chances to find new buyers for their goods.