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IV. TRADE POLICIES AND PRACTICES BYSECTOR
(1) Overview
1. Since 1993, practically allsectors oftheMexican economy havecome under strong pressures
forchange from intensified liberalization oftrade andinvestment rules under theNAFTA, building
ontheunilateral opening begun inthemid-1980s. Following thefinancial crisis andpesodevaluation
inlate1994, themanufacturing sector wasabletoachieve anexceptional export rally, builtonefficiency
gains resulting fromtheliberalization, andfostered bylarge, newinvestment inflows andgreater cross-
border integration withU.S.production.
2. Alongsidetheoutward-orientedmanufacturingsector,Mexicoalsohasalargeimport-competing
sector composed oftechnologically lessadvanced, under-capitalized unitsthathavehadgreatdifficulty
inadapting toamore liberal environment. Inaddition, some major export industries, such as
automobilesandparts,competefrombehindaheavilyprotecteddomesticmarket.Inagriculture,Mexico
isinternationally competitive intheproduction ofseveral commodities andprocessed foods and
beverages, butalsohasalarge, subsistence farming sector. Inservices, Mexico hasanumber ofworld-
classsuppliers, butweaknesses inindustrial services, stemming, interalia,frominadequate investment
inports andlandtransport, impose constraints ontheeconomy asawhole. Inaddition, thebanking
industry hasfaced serious difficulties, particularly in1995/96.
3. Since 1993, anumber ofpolicies inhibiting theefficient allocation ofresources havebeen
modified, including administered prices inagriculture andenergy. Asrequired bytheNAFTA and
WTO Agreements, Mexico converted allitsnon-tariff measures intotariffs ortariffquotas; although
prohibitively highout-of-quota duties wereintroduced forsome sensitive products, market access has
beenpossible inmostcasesunder in-quota tariffs. Strong echoes ofMexico 'searlier import-substitution
strategy linger inpolicies towards themotor vehicle industry and,toalesser degree, toward textiles,
clothing andfootwear. Recent increases inanti-dumping actions andintariffratesinthelatter, although
within bound levels, appear tocounter thedrive towards greater neutrality ofsectoral protection under
theliberalization programme. Inview ofthesharp pesodevaluation andsubsequent strong growth
inMexican automotive, textile andfootwear exports, therationale forsuchsectoral intervention appears
weak.
4. Structural changes arelikely tocontinue inmajor sectors oftheMexican economy, stimulated
bytheNAFTA liberalization programme. Continued extension oftradeliberalization onanMFN basis
should ensure thatMexican producers have access tothelowest costinputs, making them more
competitive vis-à-vis foreign producers. Theprocess ofstructural change willalsobefacilitated by
further opening oftheenergy sector toprivate, domestic andforeign investment.
(2) Agriculture andRelated Processing Industries
(i) Main features
5. Agriculture isanimportant sector fortheMexican economy interms ofoutput, employment
andtrade. Thesector currently accounts foraround 7percentofGDP, andaquarter oftotal
employment; itprovides themain income andemployment inruralareas. Many ofthose employed
inagriculture areseasonal orpart-time workers, whocomplement theiragricultural incomes withwork
inurban areas. Large differences existwithin thesector: ontheonehand, alargenumber offarmers
work small plotsofrain-fed landforsubsistence; ontheother, there isamodern sector withlarge,
irrigated plots whose production issoldondomestic andinternational markets.Mexico WT/TPR/S/29
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6. Thegeography ofMexico favours theproduction ofagreat variety ofcommodities, ranging
fromtemperate totropical crops (Chart IV.1). Around twothirds ofthevalue ofagricultural output
isfromcropproduction.Maize(principallyforhumanconsumption)isthemainagriculturalcommodity,
byvalue andinterms ofcroparea, followed bysugar, beans, wheat andsorghum. Coffee, fruitand
vegetables arealsoimportant. Beefandvealarethemajor livestock products, followed bydairy
products.
7. Involume terms, cereals (notably maize) arethedominant agricultural commodity (Table IV.1).
Theauthorities noted thattheoverall volume ofagricultural output hasgrown onaverage byaround
2percentannually since 1990, mainly achieved through increased yields, withlittle change in
agricultural landarea. These increases haveresulted fromimproved farming techniques, better seed
varieties,higherlevelsofpurchasedinputs,especiallyfertilizers,andirrigationinsomeareas.However,
there remains averyhighvariation inyields among Mexican farms.
8. Mexico isalarge exporter offresh vegetables, coffee, tomatoes andother fresh fruits; ithas
alsobecome animportant exporter ofprepared foods, notably beer, tequila andtinned products
(Table IV.2). Ontheother hand, theoutput ofcereals, oilseeds andmilkhasbeeninsufficient tomeet
growing consumption, making Mexico alarge netimporter ofthese products. Thetrade balance in
agricultural products (including fisheries) registered asurplus ofUS$1,275 million in1995
(US$1,638 million including processed products), resulting from improved export prices andafall
inimports linked tothepesodevaluation inlate1994. In1996, adeficit ofUS$1,268 million
(US$1,969millionincludingprocessedproducts)arosefromaslightfallinexportsandavirtualdoubling
ofimports.WT/TPR/S/29 Trade Policy Review
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Table IV.1
Volume ofagricultural production, 1990-96
('000tonnes)
1990 1991 1992 1993 1994 1995a1996b
Main crops
Barley 492 580 550 541 307 501 536
Beans 1,287 1,379 719 1,288 1,364 1,274 1,388
Cotton 293 307 50 42 187 369 551
Maize 14,635 14,252 16,929 18,125 18,236 18,306 18,005
Rice 394 347 394 288 374 367 381
Sesame 60 37 23 23 9 22 25
Safflower 159 88 41 64 64 114 165
Sorghum 5,978 4,308 53,553 2,581 3,701 4,193 4,862
Soyabeans 575 725 594 496 523 190 162
Wheat 3,931 4,061 3,621 3,582 4,151 3,458 3,308
Fruit
Avocados 686 780 725 709 800 789 806
Bananas 1,986 1,889 2,095 2,207 2,295 2,069 2,494
Lemons 685 717 777 725 813 932 971
Mangoes 1,074 1,118 1,076 1,151 1,118 1,340 1,420
Oranges 2,220 2,369 2,541 2,914 3,191 3,703 3,550
Other crops
Coffee 308 342 360 336 325 363 368
Tomatoes 1,885 1,860 1,413 1,693 1,368 1,968 1,907
Animal products
Beef 1,114 1,189 1,247 1,257 1,365 1,412 1,375
Eggs 1,010 1,141 1,161 1,234 1,246 1,242 1,371
Honey 66 69 64 62 56 49 60
Milk (million litres) 6,266 6,848 7,114 7,555 7,461 7,538 7,973
Pork 757 812 820 822 873 922 962
Poultrymeat 773 879 922 1,058 1,144 1,303 1,323
a Preliminary data.
b Forecast.
Source: Poder Ejecutiveo Federal (1996), Segundo Informe deGobierno, Anexo, September.
9. Mexican agriculture hashadtoadjust tovarious shocks since 1993, including alongdrought
period, andthepesodevaluation oflate1994. Thelatter boosted theprofitability ofexport crops and
translated intohigher producer prices formost agricultural goods, butalsoincreased input costs,
particularly offertilizers andfeedstocks, aswellasinterest rates, while thesubsequent recession
depressed thedomestic demand forfoodproducts. Consumption patterns foragricultural products
havealsobeenundergoing rapid changes: percapita consumption ofriceandbeans, twoofMexico 's
staple foods, hasdeclined; maize consumption isincreasing butagrowing share isbeing produced
forindustrial usesandfeedstock. Incontrast, theconsumption ofwheat, meat(especially poultry),
andoilseeds isincreasing, asisthedemand forvegetables andfruit. Theauthorities havepointed
outthatsuchtrends point tomore diversified consumption patterns.1
1Ministry ofAgriculture (1996).Mexico WT/TPR/S/29
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Table IV.2
Trade inagricultural products, January-December 1996
Imports Exports
Total imports US$7,751 million Total exports US$5,782 million
Share oftotal Share oftotal
Agriculture andForestry 56.0 Agriculture andForestry 55.3
Maize 13.7 Fresh vegetables 12.8
Soybeans 11.6 Coffee beans 11.7
Oilseeds related products 5.7 Tomatoes 9.3
Wheat 5.5 Other fresh fruit 7.2
Cotton seeds 4.5 Cotton 2.6
Sorghum 4.3 Melon andwatermelon 2.2
Fresh ordried fruit 1.9 Fresh strawberries 0.9
Natural rubber 1.4 Tobacco (raw) 0.8
Beans 1.1 Others 7.7
Others 6.3
Cattle, Apiculture 4.0 Cattle, Apiculture 3.3
Leather/hides, untanned 1.9 Cattle 2.2
Cattle 1.2 Honey 0.8
Others 0.9 Others 0.2
Manufactured products 40.0 Manufactured products 41.4
Fresh/refrigerated meat 6.7 Beer 6.5
Other oilandfat 4.8 Tinned fruits/vegetables 5.7
Powder milk 4.7 Tequila andother liquors 3.7
Special foodpreparations 2.8 Roasted coffee 1.2
Prepared animal food 2.0 Orange juice 1.1
Sugar 1.2 Others 23.2
Tinned vegetables 0.9
Liquors 0.6
Others 16.0
Source: Centro deEstadística Agropecuaria (SAGAR).
(ii) Policy objectives
10. Economic andtrade liberalization, particularly theentry intoforce oftheNAFTA, havehad
astrong influence ontheMexican agricultural sector. Theauthorities point outthatMexico hasmade
substantial efforts toreduce support andmove away fromthemostdistorting andconsumer-financed
forms ofmarket price support andtrade barriers. Such efforts havecontinued theprogramme of
agricultural policy reform begun in1989toincrease efficiency inresource use,while allowing cheaper
imports torestrain price increases andincrease thewelfare oftheruralpopulation. Theprogramme
hasinvolved aprocess ofreduced Stateintervention fundamental structural changes, including theshift
fromproduction-linked pricesupport todirect payments tofarmers, inparticular through PROCAMPO
(see(iii)below); thenumber ofstate-owned agencies involved intheimplementation ofagricultural
policy hasbeenconsiderably reduced through downsizing andrestructuring, liquidation orprivatization.
11. Theobjectives oftheagricultural policy reform have been reaffirmed intheAlliance for
Agriculture Programme (Alianza paraelCampo )for1995-2000. Theprogramme consists ofspecific
measures primarily aimed atimproving farmers 'skills andstimulating technological development to
increase theproductivity andcompetitiveness ofthefarmsector. Akeyfeature oftheAlliance isthe
decentralization ofdecision-making from Federal toStatelevelthrough State Agricultural Councils,
involving StateGovernments andagricultural producers. TheCouncils areresponsible forassessing
andapproving technological packages andtheirfinancing bystatetrustfunds. Theauthorities considerWT/TPR/S/29 Trade Policy Review
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thisdecentralized approach todecision-making essential forimproving efficiency ofresources, given
Mexico 'slarge regional differences. Themain specific objectives ofagricultural policy areto:
- raiseproducers income;
- increase agricultural andlivestock production more rapidly thanpopulation growth;
- reach balance inagricultural trade;
- obtain self-sufficiency inbasic foodstuffs;
- reduce regional differences inproductivity, employment andincome; and
- contribute toruralpoverty alleviation, natural resource conservation andalessdisperse
spatial distribution ofthepopulation.
12. Despitemarkedchangesinrecentyears,Mexico'sagriculturalsectorstillsuffersfrominsufficient
investment, lowproductivity, regional inequalities inproduction techniques andtheconcentration in
thesector ofthree quarters ofthepopulation considered toliveinextreme poverty.2Theauthorities
attribute thistothelackofresources, notably land, capital andqualified labour. Toaddress these
problems, the1995-2000 Agrarian Sectoral Programme establishes thegeneral objective ofmaking
landownership thebasisofruraldevelopment andakeyfactor inasustainable increase inproduction,
productivity andprofitability, which should inturnimprove incomes andthewelfare oftherural
population.3
(iii) Policy instruments
(a) Instruments directly affecting trade
13. During theUruguay Round negotiations onmarket access foragricultural products, Mexico
initially sought toexclude from tariffication particularly sensitive products (maize, beans anddairy
products), butfinally joined allWTO members inagreeing totariffy allproducts.4Mexico hadalready
converted allitsnon-tariff measures intotariffs ortariffquotas foritsNAFTA partners (atpreferential
rates). Inbothcases, theduties onout-of-quota supplies weregenerally bound atprohibitive levels,
reflecting therestrictiveness ofthequota andlicensing schemes theyreplaced. Suchduties aregenerally
equal forbothNAFTA andMFN suppliers. MFN tariffs typically taketheformofspecific rateswhich
mustnotbelower thanstipulated alternative advalorem rates(e.g.formaize, US$206 pertonne or
215percent, whichever ishigher). Particularly highduties apply to(minimum advalorem ratein
parentheses): animal fats(139percent), barley (128percent), beans (139percent), maize
(215percent), malt(175percent), milk(272percent), potatoes (260percent), andpoultry meat
(260percent). While thespecific ratesaresubject totheUruguay Round reduction commitments,
theiradvalorem equivalents arenotconstrained.
14. Thein-quota tariff under theWTO Agreement onAgriculture hasbeensetat50percentfor
mostagricultural products, although theratesactually applied in1995weregenerally lower. Forseveral
agricultural products subject totariffquotas, actual imports havebeenhigher thanthequantities indicated
inMexico 'sUruguay Round schedules. Import concessions agreed under theNAFTA wereincluded
intheUruguay Round minimum access commitments, withmosttariffquotas being allocated toCanada
2Poder Ejecutivo Federal (1996b), p.206.
3Poder Ejecutivo Federal (1996d).
4OECD (1996), p.89.Mexico WT/TPR/S/29
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andtheUnited States. Tariff-rate quotas areallocated bySECOFI directly toimporters onthebasis
ofpastimports.
15. Imports ofbeefandvealweredutyfreebetween 1989and1992; in1993, import tariffs were
introduced at15percentforlivecattle, and20and25percentforfresh andfrozen beef. Under the
WTO Agreement onAgriculture, a50percentbound rateapplies tolivecattle, beefandveal,although
thelower ratesintroduced in1993 continue toapply inpractice. The15percentseasonal rateon
sorghum introduced in1991 applies onanMFN basis, buttherateiszeroforNAFTA imports. The
10percentseasonal tariff onsoybeans, alsointroduced in1991, continues toapply toMFN imports,
while theout-of-season rateis50percent; thisseasonal tariffwillbeeliminated forNAFTA imports
by2003.
16. Theimport ofseveral agricultural commodities issubject tothe"special safeguard" clause
available under theWTO Agreement onAgriculture; however, Mexico hasnotinvoked thisprovision
todate. Specific safeguard provisions foragricultural products arealsocontained inMexico 'sfree-
trade agreements, including theNAFTA (Chapter III(2)(xvi)).
17. UndertheNAFTA,separatebilateralagreementsonagriculturewereestablishedbetweenMexico
andCanada, andbetween Mexico andtheUnited States. TheMexico-Canada agreement provides
fortheelimination ofallMexican tariffs andtariff-rate quotas, withtheexception ofthose ondairy,
poultry andeggproducts andtariffs onsugar andsugar-syrup products. Mexico andtheUnited States
haveagreed toeliminate alltariffandtariff-rate quotas without exception. Specific sanitary regulations
continue toapply under theNAFTA; however, acommittee hasbeenestablished toseektoharmonize
regulations andfacilitate technical cooperation andconsultations, while theconcept ofzones freefrom
sanitary problems hasalsobeenintroduced.
18. Specific provisions govern Mexican-U.S. tradeinsugar; Mexican exports under NAFTA will
betariff freeafteryearseven ofimplementation oftheNAFTA ifMexico attains netexporter status
fortwoconsecutive years.
19. Domestic sugar saleshavefallen inrecent years asaresult ofreduced demand and,mostly,
because soft-drink bottlers, whoaccount forabout onethirdofthedomestic market, arereplacing sugar
withhigh-fructose cornsyrup. Most fructose isimported from theUnited States, atadutyrateof
9percentunder theNAFTA; however, tocompensate fortheU.S. tariff increase onbroom-corn
brooms, Mexico hasincreased thedutyoncornsyrup to12.5percent(Chapter II(3)). InFebruary
1997, SECOFI accepted toinitiate ananti-dumping investigation against imports ofhigh-fructose corn
syrup from theUnited States.
(b) Agricultural policy instruments
20. TheAlliance forAgriculture programme wasannounced attheendof1995forimplementation
during theperiod 1996-2000. Theprogramme consist ofsome 22distinct schemes, covering:
- PRODUCE: oneofthemostimportant schemes under theAlliance programme, under which
grants aremade asone-off payments forcapital goods, infrastructure andtechnical support;
- Ferti-irrigation: theFederal Government provides upto35percentandState Governments
upto10percentofthetotalinvestment inprojects toincrease productivity inirrigated lands,
including through thegreater useofirrigation andfertilizer systems;WT/TPR/S/29 Trade Policy Review
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- Prairies: theFederal Government provides upto40percentofinvestment inimproved
technology inlivestock activities;
- Rural equipment: thisprovides fortheFederal andStateGovernments tocontribute fixedannual
amountstopromotetheacquisitionofintermediatetechnologytoenhanceproductiontechniques;
- Mechanization: theFederal Government contributes upto20percentofthevalue ofequipment
andnegotiates discounts withmachinery producers toexpand andreview theexisting machinery
plant;
- Milk production: thisseeks toincrease milkproduction andreduce theshare ofimports in
consumption through theuseofother Alliance schemes;
- Activity-specific schemes: tosupport maize, beans, coffee, oilseeds andrubber production;
and
- Other mechanisms: toimprove marketing, animal andplant health, genetics, machinery
maintenance, extension programmes, technology transfer andrural employment.
21. PROCAMPOwascreatedin1994asa15-yearprogrammetoprovidedirectpaymentstofarmers,
following areduction ofmarket pricesupport andtransfers fromconsumers. PROCAMPO payments
areprogressively replacing price support policies forgrains andoilseeds. TheMexican authorities
view PROCAMPO, together withthegradual liberalization ofimport measures under theNAFTA
andtheUruguay Round agreements, asamajor shiftinpolicy direction, inlinewiththe1987OECD
Ministerial principles concerning improvement ofmarket orientation. Theobjectives ofPROCAMPO
areto:
- grant direct income support toabout 3million farmers, including those whodidnotbenefit
from administered price schemes;
- promote shifts inproduction patterns tobetter reflect comparative advantage;
- support producer incomes bygiving certainty overfuture income support levels;
- compensate fortheadverse effects onworld markets ofproducer subsidies granted inother
countries;
- encourage theorganization ofproducers toachieve greater efficiency inmarketing and
distribution;
- allow consumers tohaveaccess tofoodatmarket prices within anopeneconomy; and
- stopenvironmentaldegradationbypromotingforestrecoveryandsoilconservation,thusmoving
towards more environmentally sustainable agriculture.
22. Thefirstpayments under PROCAMPO weremade fortheautumn 1994/winter 1995 period
formaize, beans, wheat, sorghum, rice,soybeans andcotton; forthespring/summer 1995cropseason
payments forbarley andsafflower wereintroduced. In1994, farmers eligible under theprogramme
could allocate landtoanyjobcreation activity; in1995, payments wererestricted tofarmers growingMexico WT/TPR/S/29
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onlyoneoftheeligible crops. Asfromtheautumn 1995/winter 1996season, farmers candevote land
toanycrop, livestock orforestry activity, oranapproved environmental programme.
23. Inautumn1995/winter1996PROCAMPOpaymentsweresetat440pesosperhectare;payments
werefixedinrealterms from1996. Theauthorities noted that,because payments arebased onhistorical
acreage andnotrelated tothelevelofcurrent output, theyallow agreater roleformarket mechanisms,
while promoting theefficient useofland, water, labour andcapital. Theauthorities acknowledged
thatlarger farmers would continue toreceive thegreatest share ofsupport, butpointed outthatpayments
would alsobenefit subsistence farmers whopreviously didnotreceive price support andwereoften
taxed byhaving topayhigher supported prices forthemaize theypurchased fortheirownconsumption.
Moreover, thetransfer efficiency (theincrease infarmhousehold income asaratiooftheincrease
intransfers fromtaxpayers andconsumers) ofdirect payments, isseenasbeing greater thanthesupport
provided tofarmers through market price policies. PROCAMPO payments arenotlinked tothe
production ofaparticular commodity, nortocurrent output volumes. Producers 'decisions andresource
allocation thusdonotdepend onthepayments butonlyonpricedevelopments. PROCAMPO payments
impose noburden onconsumers, andproduction andtrade distortions arealsosmaller.5
24. Agreed(or"concerted")priceswereintroducedin1989asatransitionalstepforwheat,sorghum,
rice,soybeans andother oilseeds; thechange followed theremoval ofguaranteed prices andtheend
ofCONASUPO 'spurchases ofproducts subject totheseprices. Agreed prices werefixedbytheFederal
Government inagreement withbuyers andproducers. In1995, agreed prices forgrains andoilseeds
wereeliminated, andguaranteed prices forcornandbeans replaced withreference floorprices linked
tointernational prices. Official prices apply totortillas, andcornflour inbulk(Chapter III(4)).
25. ASERCA(SupportServicesforAgriculturalMarketing)wascreatedin1991,afterCONASUPO
withdrew frommarketing mostcrops, topromote thedevelopment ofprivate agricultural markets and
facilitate direct transactions between producers andbuyers. ASERCA isresponsible forpromoting
themarket forwheat, sorghum, rice,soybeans andother oilseeds, andcotton byproviding market
information andhelping producers finddistribution channels; itdoesnotitself purchase agricultural
commodities. Inthecaseofrice,ASERCA payments aregranted directly toproducers foreachtonne
produced. ASERCA alsoassists cotton producers through ahedging programme, andgrants them
payments forthepurchase ofimproved seedandpesticides. Until 1995, ASERCA granted payments
toprovide millers whobought thedomestic production ofwheat, sorghum andoilseeds inareas distant
fromthemain consumption centres. Between 1992 and1994ASERCA payments amounted tomore
than1.4billion pesos (close toUS$500 million) ayear; in1995, theyfellto297million pesos (close
toUS$50 million). Since 1994, ASERCA hasbeenresponsible forimplementing thePROCAMPO
direct payments programme through its16regional branches.
26. Under theProgramme toSupport Marketing inEjidos (PACE), marketing subsidies aregranted
tosmall andcommunal properties (ejidatorios) producing maize andbeans innon-irrigated areas.
Until spring/summer 1995, payments pertonne were provided byCONASUPO tooffset marketing
costsinruralareas. Theprogramme waseliminated intheautumn 1995/winter 1996season. Currently
CONASUPO serves asthebuyer oflastresort formaize andbeans inStates withstructural problems.
5Inanearly report, theOECD noted thatunder PROCAMPO theburden ofproviding support tofarmers
wassharedamongalltaxpayers,whilepreviously,consumersborethefullcost;itwasalsonotedthatPROCAMPO
wasaverycostly programme thatmayhavebeeninsufficiently targeted tosmaller farmers andcould delay some
ofthepublic investments needed toboost productivity inthelongterm (OECD, 1995, p.91).WT/TPR/S/29 Trade Policy Review
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27. Anewmarketing mechanism wasadopted forwheat in1995. Until May1995, marketing
along thewheat-flour-bread chain wasbased onagreement among theproducers, theindustry andthe
Federal Government; producer prices were guaranteed andofficial prices were fixed forflour and
bread. TheFederal Government channelled subsidies tothemilling industry. Under anewmechanism
introduced inMay1995, wheat prices reflect world prices, while theprices offlourandother products
havebeenliberalized.
28. CONASUPOimportsmilkpowderunderNAFTAandWTOtariff-ratequotas.6Itsellspowdered
milktoindustrial users bypublic auction, inwhich afloorprice issetatinternational prices plusthe
transport andmanagement cost. Participants obtain apriceaslowasthatoffered bythelowest bidder.
CONASUPO isalsoinvolved instorage anddistribution (Chapter III(4)); plans areinprogress to
transfer CONASUPO 'sstorehouses progressively toproducers.
29. Aprivate firm, IASA, operated bybeerbrewers, isapparently committed topurchasing all
domestic barley production. Until 1994, IASA purchased barley atprices agreed between brewers
andproducers withtheMinistry ofAgriculture acting afacilitator; since 1995, IASA hasseemingly
purchased barley atan"indifference" price calculated withtheparticipation oftheMinistry. Inthe
tobacco industry, prices aresetdirectly between tobacco growers, processors andexporters, withthe
Tobacco Regulating Committee acting asmediator.
30. Theagricultural sector isserviced byvarious development banks, notably theTrust Fund for
Agriculture (FIRA), andBANRURAL (section (5)(ii)). TheFIRA isasecond-tier entity thatchannels
credit through commercial banks; itsloans cover some 12.4percentofMexico 'scultivated area.
In1989, BANRURAL wasrestructured anddown-scaled, resulting inthereduction ofsubsidies given
toagricultural activities. Thebankhassubstantially decreased thecredits itprovides tolargeproducers,
small producers without productive potential, andthose withoverdue loans. In1995, theareacovered
byBANRURAL loans stood at1.2million hectares (5.7percentofthecultivated area)andsuchloans
benefited 493,000 producers (11percentofallproducers).
31. Theauthorities noted thatMexican farmers haveexperienced considerable difficulty inobtaining
credit, andhave been exposed tohigh, volatile interest rates associated withhighinflation rates.
Commercial banks consider farmers tobeahighriskgroup, andthecredit guarantees theyrequire
areoutofreach formany farmers, hence theimportance ofofficial credit tosupport agricultural
producers. Under theAlliance forAgriculture programme, theGovernment subsidizes interest rates
granted byFIRA andBANRURAL, which arethelowest inthemarket; theprogramme envisaged
channelling interest ratesubsidies for2.1billion pesos oflending in1995and3.3billion pesos in1996.7
Under theprogramme, subsidies toBANRURAL aretobemaintained inrealterms.
32. In1996, agricultural credit programmes reached almost 24billion pesos. Inmid-1996,
outstanding loans totheagricultural sector amounted toclose to65billion pesos, andthelevel of
non-performing loans hasbecome amajor problem; inDecember 1996, thevalue ofsuchloans was
estimated at14.5billion pesos (64percentcontracted from commercial banks andtherestfrom
development banks). FIRA andBANRURAL havemaintained loanrestructuring programmes since
1994; inmid-1996, theFederal Government, commercial banks andagricultural producers agreed
onanewscheme (FINAPE) tohelpdebtors tohonour theirloanrepayments.
6SeealsoChapter III(4) -State-trading, public enterprises andprivatization.
7Mexican Consulate inNew York (1995).Mexico WT/TPR/S/29
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33. Specialized insurance services fortheagricultural sector areprovided byAGROASEMEX at
Government subsidized rates. TheGovernment isalsoencouraging theparticipation ofprivate firms
inagricultural insurance, andextending coverage beyond primary producers. In1995 and1996, the
gross value ofagricultural insurance andinsurance funds issued byAGROASEMEX reached about
133and210million pesos. In1995 AGROASEMEX policies insured asurface ofsome
915,000 hectares, orsome 4.2percentofthetotalcultivated area. AGROASEMEX alsoprovides
premium subsidies onagriculture-related policies issued byothercompanies. In1996insurance through
private agencies covered 105,000 hectares.
34. Assistance toagricultural inputs isgranted through several schemes under theAlliance for
Agriculture programme, inparticular, PRODUCE, Mechanization andRural Equipment. In1995,
asasupport measure foragriculture, theauthorities delayed linking theprice ofammonia toworld
prices; thecostreductions werethenpassed ontofarmers byfactories anddistributors ofnitrogenous
fertilizers. With theFederal Electricity Commission, agreements havebeenestablished between the
Federal andStateGovernments andfarmers tosubsidize theelectricity supplied toagricultural producers
("tariff 09"); thesubsidy appears tocome toabout 72percent(section (3)(ii)). Itwasalsodecided
thatelectricity prices would increase byonlyonequarter oftherateofinflation. Agricultural producers
alsobenefit from aspecial income taxregime.
35. Exporttariffshavebeensporadicallyusedtoinhibitexportsofagriculturalproducts,forexample,
a200percenttariff onmaize flour exports.
(iv) Indicators ofassistance toagriculture
36. OECD estimates ofthetotalProducer Subsidy Equivalent (PSE) indicate thatthevalue of
transfers toMexican farmers fromagricultural policies reached some US$1.9 billion in1996, higher
thanin1995 when domestic commodity prices fellinrealterms duetothepesodevaluation, butless
thanhalfthevalue oftransfers in1994 (Table IV.3).8Such transfers amounted to13percentofthe
value ofagricultural production in19969;asaproportion ofGDP, theywereequivalent to2.3percent
in1994, 0.58percentin1995, and0.8percentin1996. TheMexican authorities noted thattotal
transfers percapita andperhectare offarmlandwere onlyaquarter oftheOECD average.
37. In1996, budgetary expenditures intheagricultural sector reached justunder 19billion pesos,
orsome US$2.5 billion (Table IV.4). Production assistance absorbed thelargest share, 37percent,
which included support formarketing andproduction granted bySAGAR, andconsumption subsidies
tothemaize-flour-tortilla complex from CONASUPO. PROCAMPO received some 36percentof
totalexpenditures, while theAlliance forAgriculture programme received about 6percent. Aslightly
smaller allocation wasmade forresearch andeducational activities, including research undertaken by
theInstitutoNacionaldeInvestigacionesForestalesyAgropecuarias,andsupportforagriculturalcolleges
8ThePSEindicates thevalue ofthemonetary transfers toproducers resulting from agricultural policies in
agiven year; itcovers transfers from consumers, through domestic market prices, andfrom taxpayers, through
budgetary ortaxexpenditures.
9Theauthorities noted thatmisgivings have been expressed invarious foraabout several methodological
considerations underlying PSEestimates. Anumber ofsuch issues were pending fordiscussion between the
authorities andtheOECD Secretariat.WT/TPR/S/29 Trade Policy Review
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andother teaching centres (e.g.Universidad Autónoma deChapingo ).Smaller amounts were spent
onsubsidies forelectricity usedinirrigation systems (Tariff 09),andondrought relief.10
Table IV.3
Producer subsidy equivalents, 1993-96
(Million pesos andpercent)
1993-95 1994 1995a1996b
Wheat Total PSE 464 853 -235 1,429
Percentage PSE 19 30 -6 22
Maize Total PSE 6,599 6,663 6,054 4,662
Percentage PSE 42 47 26 18
Other grains Total PSE 637 716 825 1,795
Percentage PSE 25 33 16 20
Rice Total PSE 47 36 67 41
Percentage PSE 16 14 15 6
Oilseeds Total PSE 108 156 53 16
Percentage PSE 23 28 15 9
Sugar (refined equivalent) Total PSE 839 1,321 -686 2,255
Percentage PSE 22 32 -13 29
Crops Total PSE 8,693 9,745 6,078 10,198
Percentage PSE 34 40 16 20
Milk Total PSE 2,607 3,636 480 3,322
Percentage PSE 37 53 5 24
Beefandveal Total PSE -11 1,052 -2,428 -131
Percentage PSE 3 14 -23 -1
Pigmeat Total PSE 1,794 2,541 1,267 2,657
Percentage PSE 31 45 16 21
Poultry Total PSE -265 671 -2,098 174
Percentage PSE -1 15 -31 2
Eggs Total PSE -204 104 -1,027 -1,367
Percentage PSE -2 3 -18 -15
Livestock products Total PSE 3,921 8,004 -3,805 4,656
Percentage PSE 16 29 -10 8
ALL PRODUCTS Total PSE(million pesos) 12,614 17,749 2,273 14,853
(US$ million) 3,771 5,238 354 1,954
Percentage PSE 25 34 3 13
a Provisional.
b Estimate.
Source: OECD (1997), Agricultural Policies, Markets andTrade inOECD Countries, Paris.
38. InitsUruguay Round commitments, Mexico undertook tocutfinancial support foragricultural
producers, asdefined forthepurposes ofthenegotiations, fromjustunder 29billion pesos, thelevel
oftheAggregate Measurement ofSupport (AMS) inthebaseperiod 1986-88, toalittleover25billion
10TheOECDhasnotedthatwhilesubsidiesanddirectincometransfersareinlinewithMexico'scommitments
ondomestic support reductions intheWTO, such measures carry significant budgetary implications (OECD,
1996, p.90).Mexico WT/TPR/S/29
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pesos in2004at1991prices.11Initsnotification concerning domestic support commitments for1995,
Mexico indicated thattotalAMS was1.36billion pesos at1991prices, compared withacommitment
levelof28.62 billion pesos fortheyear.12Themaincommodities benefiting fromsuchsupport were
(percentofAMS inparentheses): milk(34), maize (17), wheat (10),cotton (5)andcanesugar (4).
Under "green box"measures, thelargest itemwasPROCAMPO withavalue ofabout 3.5billion pesos;
other measures suchasresearch, pestcontrol andinfrastructure amounted tocloseto1.4billion pesos.
"Development programmes" comprised transfers intheformofinsurance premia subsidies ofjustunder
1.1billion pesos, andasinterest ratesubsidies of869million pesos.
Table IV.4
Government expenditure inagriculture, 1996
(Million pesos andpercent)
Million pesos Percent
Production assistance 7,018.8 37.0
ASERCA 757.6 4.0
CONASUPO 6,261.2 33.0
PROCAMPO 6,908.9 36.4
Alliance forAgriculture Programme 1,191.8 6.3
Research 1,049.6 5.5
Drought assistance 263.1 1.4
Sanitary programmes 150.3 0.8
Electricity (Tariff 09) 50.0 0.3
Administrative expenses 2,155.7 11.4
Other 185.3 1.0
TOTAL 18,973.5 100.0
Source: SAGAR, Informe deLabores ,1995-96.
39. Under theWTO Agreement onAgriculture, Mexico iscommitted toreducing itsbudgetary
outlays forfiscal credits toexports ofcorn, beans, sorghum, sugar andwheat overaten-year period
starting in1995. Theagreed finaloutlays forthefiveproducts totalUS$553 million.13Mexico reserved
itsrighttomatch theexport subsidy pertonne granted byanyWTO member. TheOECD hasnoted
thatMexico didnotgrant export subsidies butdeclared some subsidies inthebaseperiod toretain
theflexibility ofgranting subsidies infuture.14Mexico hasnotified thatitdidnotgrant anysubsidy
toagricultural exports during 1995.15
11Mexico 'sWTO Schedule LXXVII, PartIV,Section I.Using the1991 average exchange rateof3,018
pesos perUS$, thefinal AMS would beabout US$8.3 billion.
12WTO document G/AG/N/MEX/5, 3March 1997.
13Schedule LXXVII -Mexico, PartIV,Section II.
14OECD (1996), p.90.
15WTO document G/AG/N/MEX/4, 28November 1996.WT/TPR/S/29 Trade Policy Review
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(v) Fisheries
40. Between 1993and1996, fishery production inMexico averaged 1.3million tonnes, reaching
1.5million tonnes in1996. Justoverthree-fourths oftheproduction wasdestined todirect human
consumption, andtherestwasprocessed intoproducts suchasfish-meal andoil.Sardines werethe
mainspecies fished; other important types weretunaandshrimp. In1995, thefishprocessing industry
included some 296freezing plants, 48canning plants, 54producers offish-meal andoil;justover
70percentofthese operation arelocated onthePacific coast. Thefishing fleetcomprised close to
75,000 boats, withjustover3,000 considered commercial-scale vessels. Annual exports averaged
some US$670 million, while imports amounted toUS$193 million. Themainexport product invalue
terms wasshrimp, followed bytuna.
41. Theimproved performance ofthefishing industry appears tobelinked totheenactment of
anewFederal Fishing Lawin1992, which established thebasis formore efficient management of
fishresources andoffered thepossibility forincreased foreign investment. Moreover, theauthorities
have provided technical andfinancial support totheindustry. Those measures coincided witha
favourable evolution ofenvironmental conditions andstrong international demand forfishproducts,
factors which combined havelargely offset thedifficulties resulting from theembargo placed bythe
United States ontunaimports fromMexico, under theMarine Mammal Protection Act(Chapter II(3)).
Nevertheless, theMexican authorities estimate thattheembargo resulted inalossofexport revenue
ofsome US$250 million between 1991and1995, inaddition, leading totheclosure ofseveral processing
plants andareduction of46percentinthePacific tunafleet, withalossofsome 6,000 jobs. The
authorities indicated thatnofurther recourse hasbeenmade totheWTO orNAFTA dispute settlement
mechanisms, inviewofindications thattheUnited States would lifttheembargo in1997.
(3) Mining andEnergy
(i) Mining, excluding hydrocarbons
(a) Main features
42. Mexico hasalongtradition asamining country buttherelative economic importance ofthe
mining sector, excluding hydrocarbons, hasdiminished significantly inrecent decades. In1994, the
sector accounted forabout 1percentofMexico 'sGDPandemployment. Thatyear,about 53percent
oftheindustry 'svalue added wasrelated totheproduction ofconstruction materials; theextraction
andrefining ofnon-ferrous metals accounted forafurther 18percent, ofcoalandrelated products
forabout 10percent,andofironorefor7percent. Value added inthesector hastraditionally been
subject tomarked variations. Thesector ishighly concentrated, withonlyfourcompanies apparently
accounting forsome twothirds ofoutput.
43. In1994, themining sector contributed some 1.6percentofMexico 'stotalexports and
1.5percentofimports; thesector 'sshare inbothtotalexports andimports hasfallen markedly since
themid-1980s.Nevertheless,Mexicocontinuestoplayanimportantroleintheworld'sminingindustry;
thecountry isamong theworld 'stenlargest producers ofantimony, barite, bismuth, cadmium, graphite,
fluorite, lead,mercury, molybdenum, silver, sulphur andzinc. Invalue terms, themainmineral exports
in1994were, indecreasing order ofimportance, silver, zinc,copper, aluminium andsalt;mainimports
were aluminium, copper, coke, phosphorite andpotassium.Mexico WT/TPR/S/29
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(b) Policy objectives andinstruments
44. Article 27oftheConstitution specifies thattheNation hassovereignty overallnatural resources
andminerals, andprovides thatsuchsovereignty isnotalienable orsubject toacquisition. Thus, mineral
production mayonlybecarried outunder concessions granted bytheFederal Executive.
45. AnewMining Lawwasissued inJune1992(amended in1996) topromote mining activities;
regulations tookeffect on30March 1993. TheLawprovides fortwotypes ofmining concessions:
exploration andexploitation concessions. Exploration concessions aregranted forasix-year period,
whereas exploitation concession haverenewable fifty-year terms. Thelegislation alsoprovides for
thecreation, bydecree, ofNational Mineral Reserves forreasons ofpublic interest ortosatisfy Mexico 's
future resource needs. Exploration concessions areprecluded inareas within these Reserves.
46. Expressly excluded from theapplication oftheMining Lawof1992 arepetroleum andany
other formofhydrocarbons. Theexploration andextraction ofradioactive minerals isalsoreserved
fortheState. Regarding theforeign purchase ofstock options inMexican mining companies, theMining
Lawrefers tothe1993Foreign Investment Law(Chapter II(4)), which haslargely eliminated previous
restrictions onforeign investment inmining activities.
47. Mineral treatment activities arealsosubject tothemining legislation. There seem tobeno
specific programmes aimed atpromoting thefurther processing ofmining products inMexico. On
theother hand, there isconsiderable tariff escalation onmineral processing activities.
(ii) Energy
(a) Main features
48. Mexico hasalarge energy-resource base, particularly inhydrocarbons. In1994, theenergy
sector accounted for3.7percentofGDP andjustunder 1percentoftotalemployment. Thatyear,
themainenergy activities byvalue were(sectoral GDP share inparentheses): theelectricity, gasand
water industry (50percent), hydrocarbons extraction (34percent), petroleum products (13percent),
andcoalanditsproducts (3percent). In1995, fuelproducts, almost exclusively intheformofcrude
petroleum,represented10.3percentoftotalexports,and2.2percentofimports(TablesAI.3andAI.4).
49. Mexico istheworld 'sfifthlargest oilproducer, andthesecond largest inLatin America.
Mexico 'shydrocarbon reserves areamong theworld 'stenlargest; however, between 1984and1995
reserves declined from72to63billion barrels ofoilequivalent. After years ofstagnation, petroleum
production experienced anincrease from 2.6million barrels perdayin1993 to2.8million in1996;
natural gasproduction hasfollowed asimilar pattern, being largely associated withoilextraction
(TableIV.5).Theauthoritiesviewfallingreservesandslowproductiongrowthasreflectingpublic-sector
financial constraints onnewinvestment.16
50. Although thevolume ofoilexports hasgrown littleinrecent years, theirvalue hasrisensharply
since1994, reflecting higher world oilprices. Despite thedramatic diversification overthelastdecade
awayfromoilexports,petroleumpricescontinuetohaveaconsiderableimpactontheMexicaneconomy,
defining toalarge extent thepublic-sector budget.
16Poder Ejecutivo Federal (1995), pp.13and17.WT/TPR/S/29 Trade Policy Review
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Table IV.5
Basic hydrocarbons statistics
1993 1994 1995 1996a
Production volume
Crude petroleum ('000barrels/day) 2,673 2,685 2,617 2,853
Natural gas(million cubic feet/day) 3,576 3,625 3,759 4,196
Export volume
Crude petroleum ('000barrels/day) 1,337 1,307 1,306 1,544
-U.S. share 66 73 79 78
Petroleum products ('000barrels/day) 116 110 119 91
Natural gas(million cubic feet/day) 5 19 22 39
Export value (US$ million)
Crude petroleum 6,441 6,624 7,480 10,705
-U.S. share 68 73 80 79
Petroleum products 828 602 663 596
Natural gas 3 15 12 31
Import volume
Petroleum products ('000barrels/day) 177 189 140 171
Natural gas(million cubic feet/day) 97 125 173 83
Import value (US$ million)
Petroleum products 1,341 1,327 1,074 1,322
Natural gas 78 82 99 57
a Preliminary figures; trade dataonpetroleum products andnatural gasexcludes December.
Source: Petróleos Mexicanos.
51. Thenationaloilcompany,PetróleosMexicanos(PEMEX),istheworld'ssixthlargestpetroleum
firm. PEMEX isstructured asaholding company withfourseparate subsidiaries: (i)exploration
andproduction; (ii)refining; (iii)natural gasandbasic petrochemicals; and(iv)secondary
petrochemicals. In1996, PEMEX paidjustoverUS$19 billion intaxes androyalties totheMexican
Government, acontribution greater thanallthetaxespaidbytherestofMexico 'scompanies together;
thatyear, PEMEX 'staxbillamounted to66percentofitsprofits, financing more thanonethirdof
allgovernment expenditures.
52. Although technically notpartoftheenergy sector, thepetrochemicals industry isincluded with
thesector because ofthelinkage between hydrocarbons andpetrochemicals. Mexico istheworld 's
seventeenth largest petrochemicals producer andthesecond largest inLatin America. Theindustry
accounts forapproximately 1.2percentofGDP. Thelargest producer isPEMEX, thesolebasic
petrochemicals manufacturer, butseveral important private firms, foreign anddomestic, operate in
other areas oftheindustry. PEMEX 'spetrochemicals operations havesuffered inrecent years from
under-investment; littleornoinvestment hastaken place since 1994, resulting inaslow-down inthe
development ofthepetrochemicals industry ingeneral.17
17Statement bytheMinister ofEnergy (ElEconomista -Internet edition, 3February 1997).Mexico WT/TPR/S/29
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53. Thefertilizer industry hastraditionally beenoneofthemostvisible partsofthepetrochemicals
industry because ofitscloseassociation withagriculture. Fertilizer production increased substantially
between 1980 and1990, butfelltojustoveronemillion tonnes in1995. Consumption hasfollowed
asimilar downward trend, resulting inanexportable fertilizer surplus ofsome 200,000 tonnes.
54. Theelectrical energy industry hasexperienced rapid growth, Mexico 'sgenerating capacity
having risen from14.6to31.6GWbetween 1980 and1994, when 54percentofsuchcapacity was
hydrocarbon-based, and29percenthydroelectric. Electricity demand grew atanannual average of
5.1percentbetween 1985 and1994, when itreached 111TWh. Theauthorities haveestimated that
electricity demand willcontinued togrow rapidly, anincrease of25percentbeing forecast forthe
period 1994-2000. Amodest amount ofelectricity istraded withtheUnited States: in1994 exports
andimports reached US$84 million andUS$49 million, respectively.
55. TheMexican electricity industry isdominated bytheFederal Electricity Commission (CFE),
astate-owned decentralized organism withindependent legalstatus. TheCFEcontrols some90percent
oftotalassets intheindustry; itsoperations spanpower generation, transmission anddistribution.
(b) Policy objectives andinstruments
56. Articles 27and28oftheConstitution givetheNation theexclusive righttoexploit hydrocarbons
andtosupplyelectricitytothepublic.Theseconstitutionalprovisionshaverestrictedprivateparticipation
inthesector, and,overtime, haveceded quasi-monopoly powers onhydrocarbon activities toPEMEX
andonthepublic distribution ofelectricity totheCFE. Inrecent years, within theconstraints imposed
bytheConstitution, theauthorities havesought ways toallow greater private sector involvement in
thesector.
57. TheDevelopment andRestructuring Programme fortheEnergy Sector 1995-2000, noting the
keyroleofenergy intheeconomy, preserves acentral rolefortheState instrategic energy-related
activities, while acknowledging theneedforgreater private participation. Theprogramme considers
itnecessary tomaintain subsidies forlow-income groups, aswellas,onatemporary basis, forspecific
regions andactivities. Italsorequires theMinistry ofEnergy, SECOFI andstate-owned enterprises
intheenergy sector toensure thedirect andautomatic useofpublic procurement insupport ofdomestic
producers ofcapital goods, totheextent permitted inMexico 'sfree-trade agreements.18
58. Toencourage private-sector participation intheenergy sector, theauthorities havesought to
re-define andstrengthen thesector 'slegal framework andregulatory institutions. Changes made in
December 1994tothelegislation ontheorganization ofpublic administration reformulated theMinistry
ofEnergy 'sresponsibilities toinclude: theexercise oftheNation 'srights overpetroleum andelectricity,
theformulation ofenergy policies, participation inenergy-related international matters, theformulation
ofshort- andlong-term plans forthesector, theestablishment ofguidelines forstate-owned enterprises
inthesector, theissue ofpermits asprovided bythelaw,andthedefinition ofofficial standards in
areas under itsresponsibility.
59. On31October 1995, Congress enacted alawcreating theEnergy Regulatory Commission
(CRE) asadecentralized, autonomous agency under theMinistry ofEnergy. Thenewlawgives the
CREresponsibility foroverseeing areassuchasthesupply andsaleofelectricity; electricity generation,
18Both theCFEandPEMEX arerequired toopenup50percentoftheirprocurement contracts toimmediate
competition from Canadian andU.S. companies, subject tocertain exclusions (Chapter III(4)(vi)).WT/TPR/S/29 Trade Policy Review
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tradeandexport byprivate firms; acquisition ofelectricity forpublic distribution; thefirst-hand sales
ofnatural gasandliquified petroleum gas; transport andstorage ofnatural gasnotrelated toits
production; natural gasdistribution; andthepipeline transportation anddistribution ofliquified
petroleum gas(LPG). TheCommission alsohasauthority tograntandrevoke permits, andparticipates
inthesetting ofelectric power rates. These activities arecomplemented bythework oftheMinistry
ofEnergy, which, except forpipeline transportation anddistribution, wasgiven in1995 direct
responsibility fortheregulation oftheLPGmarket (previously under SECOFI 'scontrol).
Hydrocarbons
60. TheDevelopment andRestructuring Programme fortheEnergy Sector 1995-2000 notes the
excellent economic opportunities available fortheexploitation ofpetroleum resources, especially off-
shore. Provided thefiscal resources aremade available, theprogramme envisages oilproduction
exceeding three million barrels perdaybefore theyear2000; itsetsasanobjective maintaining at
leastthecurrent levelofpetroleum exports. Theproposed export strategy alsoenvisages thecontinuous
monitoring oftheworld oilmarket, seeking itsstability andpredictability, tobeachieved through the
maintenance andenlargement ofinformal consultations withother market participants, exporting and
importing governments andfirms.
61. Aseries ofmajor legislative changes haveaffected thehydrocarbons industry since 1995.
While these changes confirm thestrategic character oftheindustry andPEMEX 'smonopoly on
extraction, theyhavealsoclarified theindustry 'slegalframework andsetthebasisfortheliberalization
ofanumber ofactivities. Amendments ofMay1995totheRegulatory LawofConstitutional Article 27
onPetroleum opened upthetransport, storage anddistribution ofnatural gas,andthetransport and
distribution through pipelines ofLPG. Regulations wereissued inNovember 1995 onthefirst-hand
salesofnatural gasandrelated activities (e.g.pipelines andgasequipment) notformally considered
partofthepetroleum industry.
62. Further amendments inNovember 1996 totheRegulatory LawofConstitutional Article 27
onPetroleum formally defined thepetroleum industry ascomprising (i)theexploration, exploitation,
refining, transport, storage, distribution andfirst-hand salesofpetroleum andtheproducts obtained
from itsrefining; (ii)theexploration, exploitation, manufacturing andfirst-hand sales ofnatural
gas,aswellasthetransport andstorage operations required foritsexploitation andproduction; (iii)
themanufacture, transport, storage, distribution andfirst-hand sales ofrefined petroleum products
thatmaybeusedasbasic rawmaterials, andgasproducts considered asbasic petrochemicals. Such
petrochemicals embrace methane, ethane, propane, butane, pentane, hexane, heptane, naphtha and
rawmaterials forlamp-black.
63. Thefirstconcession forgasdistribution wasgranted inOctober 1996 (inMexicali); the
Government expects US$3.5 billion ofprivate investment ingastransport anddistribution willfollow
overthenextfiveyears. However, interest from potential investors hasreportedly beenreduced by
Mexico 'sheavily subsidized electricity tariffs (seebelow), which make private investment intheenergy
sector lessattractive.19
64. Thedomestic priceofhydrocarbons andrefined products issetadministratively withreference
toworld prices, ingeneral reflecting opportunity costs aswellastheneedtoensure competitiveness
19Financial Times, 23October 1996.Mexico WT/TPR/S/29
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andencourage rational useandconservation. Price changes areconsidered andapproved bythe
Committee onPetroleum Product, Natural GasandPetrochemical Prices.
65. Asnoted intheprevious Secretariat report fortheTrade Policy Review ofMexico, the
Government hasbeentrying toincrease domestic hydrocarbons prices tointernational levels. This
gradual approach appears tohavebeenlargely successful, butLPGremains animportant exception.
LPGissubject toanadministered priceandwhattheauthorities describe asacomplex marketing system,
withnumerous deficiencies, large distortionary subsidies andmarket irregularities.20According to
estimates byPEMEX-Gas andBasic Petrochemicals, subsidies toLPGamounted toUS$650 million
in1995 andUS$681 million in1996, orabout 36percentofsalesvalue. TheMinistry ofEnergy
wasplanning tophase outthese subsidies bymid-1997.
Petrochemicals
66. Theproduction ofpetrochemicals inMexico isdivided intotwosub-sectors: basic
petrochemicals, reserved forPEMEX, andnon-basic petrochemicals, inwhich therearenorestrictions
onprivate domestic orforeign investment. PEMEX isthesolesupplier ofinputs tothepetrochemicals
industry. Inthepast,itprovided inputs atprices below world market rates; buttheauthorities noted
thatsince 1992 PEMEX prices arebased onformulas thatreflect theopportunity costoftheproducts
intheNorth American market. Thesame mechanism isapplied toammonia prices, although after
thefinancial crisis oflate1994, SECOFI, PEMEX andfertilizer producers agreed touseahigher
exchange rateintheammonia price formula "toreduce volatility" inammonia andfertilizer prices.
Thisscheme wasphased outduring thefirstfourmonths of1996.
67. TheGovernment isseeking tofoster investment andgrowth inthepetrochemicals industry
byselling offtheassets onnon-basic petrochemicals currently controlled byPEMEX-Petrochemicals.
Itwasoriginally planned tosellacontrolling stakeof70to80percentin61plants, which wereexpected
tonetUS$1.5 billion. These plans werescaled down following aruling byMexico 'scomptroller 's
office thatthelawsdefining which petrochemical plants could beprivatized needed clarification and
reform.21Instead, anewstrategy wasannounced inOctober 1996, followed bynecessary legalreforms
inNovember, whereby theGovernment proposes tosellminority holdings ofupto49percentin
PEMEX subsidiaries; byJune1997, sixoftenplanned subsidiaries hadbeencreated. Thesaleof
theminority holdings wasexpected tobegin during thesecond halfof1997. Although theprogramme
wasaccompanied byaliberalization ofrules forprivate investment innewpetrochemical projects,
industry observers consider thattheliberalization willtakelonger thanprivatization toexploit Mexico 's
potential inpetrochemical production.22
Electricity
68. Although theconstitutional provisions introduced in1960 creating astatemonopoly forthe
distribution ofelectricity asapublic service stillstand, theElectric Energy Public Service Lawof1992
haseased theterms forprivate-sector investment, bothforeign anddomestic. Private concerns may
nowbuild andownplants forself-consumption andco-generation, aswellaspower generation plants
oflessthan30MW. Electricity mayalsobeshared among private producers andusers through the
20Poder Ejecutivo Federal (1995), p.22.
21Financial Times, 14October 1996.
22Financial Times, 15October 1996.WT/TPR/S/29 Trade Policy Review
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establishment ofajointly owned firm, either using theirowninfrastructure orcontracting Federal
Electricity Commission (CFE) services. Private producers arenotallowed todistribute electricity to
thepublic butmaysellexcess power totheCFE. Investments inthese areas require apermit from
theEnergy Regulatory Commission; ifforeign participation exceeds 49percent,authorizations from
SECOFI andtheForeign Investment Commission arealsorequired. Electricity imports mayonlybe
usedbytheimporting firm.
69. TheDevelopment andRestructuring Programme fortheEnergy Sector 1995-2000 foresees
astrengthening ofinternational electrical inter-connections, which would notonlyfacilitate trade in
electricity butalsobecome aregulating factor inthedomestic supply. Anunderpinning ideaofthe
programme isthatgreater private participation inelectricity generation isessential tosupport thework
oftheCFEandmake financial resources available forinvestment intransmission anddistribution.
Accordingly, theauthorities wereconsidering revising various energy-related regulations toprovide
thegreater transparency required byprivate investors.23InOctober 1996, theEnergy Regulatory
Commission issued resolutions oninter-connection contracts between theCFE, andself-consumption
andco-generation producers withoutputs ofmore than10MW.
70. Electricity ratesaresetbytheMinistry ofFinance, which takes account ofconsumer interests
andtheneedtoencourage investment. Price policy hasthussought toincrease electricity ratestowards
thelevel required forfullcostrecovery. However, formacroeconomic reasons, thispolicy was
temporarily abandoned in1995, andenergy analysts estimate thattheprice ofelectricity inMexico
doesnotcover theCFE'soperating costs, letalone capital depreciation.24According todatafrom
theMinistry ofEnergy, electricity rates aresubsidized by59percentinthehousehold sector, by
72percentinagricultureandby25percentinserviceindustries.Overall,annualsubsidiestoelectricity
andLPGwereestimated tohaveamounted tosome 24billion pesos (US$3.2 billion) in1996; energy
subsidiesthusremainsignificant,andtheauthoritiesacknowledgethatthisunderminestheGovernment's
ownefforts toachieve more efficient energy use.25
(4) Manufacturing
(i) Main features
(a) Manufacturing including maquiladora activities
71. Themanufacturing sector accounted forjustover18percentofGDP in1996; thissector
isquitediversified. Thetwolargest manufacturing industries aremetal products andmachinery, and
foodproducts, beverages andtobacco; chemicals andplastics constitute thethirdlargest industrial
group (Chart IV.2).
72. Between thefirstquarter of1993 andthelastquarter of1996, manufacturing GDP roseby
atotalofalmost 15percentinrealterms, outpacing thegrowth oftheeconomy asawhole. However,
productionfluctuatedsignificantlyoverthesameperiod;the5.9percentexpansionin1994wasfollowed
23Regulations related tothepurchase ofelectrical energy bypublic entities from independent producers;
thetypeofsupport thatthese producers receive from public entities; thetransmission ofenergy generated by
private firms; andtheacquisition ofsurplus energy from self-consumption andco-generation plants.
24Financial Times, 23October 1996.
25ElEconomista ,Internet edition, 11March 1997.Mexico WT/TPR/S/29
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byadecline of0.1percentin1995 (inthewake ofthefinancial crisis), andstrong recovery in1996
to7.4percent. Strong cyclical fluctuations alsoaffected activity inindividual industries (Chart IV.3).
Particularly striking isthelarge fallinmetal products andmachinery inlate1994, followed bya
remarkable recovery frommid-1995, reflecting mainly theperformance ofthemotor vehicle industry.
WT/TPR/S/29 Trade Policy Review
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Mexico WT/TPR/S/29
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73. Mexican manufacturing hascome under strong pressure toincrease productivity byshedding
workers. Adownward trend inthenumber ofpersons employed inthesector isevident frommid-1993,
evenasmanufacturing output wasgrowing (Chart IV.4). Thesharp downturn in1995 exacerbated
thistrend and,although theexpansion ofoutput in1996 wasassociated withhigher employment, the
number ofpersons employed inmanufacturing bytheendof1996wasalmost 10percentlower than
inearly 1993.
74. Average realremuneration inmanufacturing tended togrow during theexpansions in1993
and1994, somewhat compensating theslight decline inemployment levels (Chart IV.4-December
remunerations reflect special end-of-year payments). Thesituation wasreverse in1995, since when
realsalaries inthesector havecontinued toslide.
75. Overall, theevidence toearly 1997 suggests thatthemanufacturing sector asawhole has
recovered from theeffects ofthefinancial crisis. Thevolume ofproduction andvalue added have
increased; moreover, increased productivity appears tohavepermitted higher profitability. Theoverall
increase invalue added, combined withthefalling average remuneration andemployment between
1993 and1996, strongly suggest thatlabour 'sshare invalue added hasfallen while profit margins
haverisen.26Thisappears consistent withtheauthorities 'aimofusing tariff reductions toincrease
thelevel ofprofitability inindustry (seesection (ii)below). Inthisrespect, itwould appear that
manufacturing asagroup hasnotonlyadapted to,buttaken significant advantage ofthetrade
liberalization programme begun inthemid-1980s.
26Thedatarequired foradetailed analysis oflabour shares andprice-cost margins were notavailable for
thisreport.WT/TPR/S/29 Trade Policy Review
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76. Asdiscussed inChapter I,theMexican manufacturing sector overcame the1995 slump in
domestic demand bydiverting production toexport markets. Ithasbeenrecently noted thatonefourth
ofmanufacturing production isexported; however, thesector hasalsodisplaced imports, increasing
itsshare ofdomestic consumption from 86percentin1994 to96-97 percentin1995 and1996.27
Although thestrong export performance may,inpart,reflect atransitory vent-for-surplus phenomenon,
themore widespread view isthattheperformance islinked tosignificant, permanent increases in
productivity. Studies haveshown thataverage costshavefallen inmostindustries, withtradeable-goods
producers registering thelargest reductions.28Among importables, thesecostreductions canbetraced
inparttoimprovements inrelative productivity; among exportables, theyareduetofavourable changes
inrelativeprices,asMexico'stradeliberalizationprogrammemadeimportedintermediategoodscheaper
andthenominal depreciation made Mexican exports cheaper inforeign markets.
77. Despite theprogress made since1993, structural weaknesses stillaffect Mexico 'smanufacturing
sector, including thelimited availability oflabour skills, high-quality suppliers andanefficient
transportation system.29Asnoted bysome observers, oneofMexico 'smost significant challenges
istoadopt adequate policies toraisethelabour force'straining levelsothatlabour, andthecountry
asawhole, mayreapthebenefits ofeconomic liberalization.30
78. Ithasalsobeennoted thatmanufacturing industries thathavehighimport penetration rates
alsohavehighexport rates. Inthisrespect astudy ofintra-industry trade between Mexico andthe
United States showed arather highlevelofthistypeoftrade, comparable withtypical levels between
industrialized countries.31Twofactors appeared toexplain this: thegeographic proximity between
thetwocountries, andMexico 'smaquiladora programme which hadencouraged bothintra-industry
andintra-firm trade.
(b) Themaquiladora industry
79. Oneofthemoststriking characteristics oftheMexican manufacturing sector isthelarge and
growing roleplayed byin-bond ormaquiladora industry, based ontheduty-free temporary importation
ofinputs (including machinery) foruseinexport-oriented manufacturing activities; adescription of
thespecific instruments comprising themaquiladora regime isprovided inChapter III(4).
80. Themaquiladora industry hasexpanded rapidly since the1970s, butgrowth hasaccelerated
evenmore inrecent years. Indeed, therecent performance ofmanufacturing aswhole reflects inlarge
parttheremarkable expansion ofthemaquiladora industry, which managed togrowin1995-reflecting
thestrength ofU.S.demand -evenastheslump indomestic demand sharply reduced production in
other manufacturing activities (Chart IV.5).
27Banco Nacional deMéxico (1997).
28Tybout andWestbrook (1995).
29Kenney andFlorida (1994).
30Seeforexample Villarreal andJiménez (1995).
31Incontrast, theother Latin American countries analysed presented lowlevels ofintra-industry trade with
theUnited States (Gonzalez andVelez, 1995).Mexico WT/TPR/S/29
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81. Themaquiladora industry comprises some 2,520 firms employing justunder 900,000 workers
or24percentofthemanufacturing total; almost halfofthese positions were created since 1993.
Maquiladora firms generated avalue added ofjustunder 39billion pesos in1996, ofwhich domestic
inputs contributed about 7.5percent.Inthesameyear,exports bythemaquiladora industry represented
some 40percentofMexico 'stotalexports and47percentofitsmanufactured exports, while
maquiladora imports amounted tojustover40percentofthecountry 'stotalimports.
82. Themaquiladora industry isconcentrated along Mexico 'sborder withtheUnited States: about
21percentoffirms werelocated inTijuana, 11percentinCiudad Juarez and5percentinMexicali.
Halftheinvestment intheindustry isofUnited States origin, 44percentisMexican, 4percentAsian
andtherestEuropean orLatin-American. Main activities are(percentoftotalemployment/per cent
oftotalvalue added between parentheses): electric andelectronic materials (26/26); automotive
equipment andaccessories (20/21); textiles andclothing (18/12); andelectric andelectronic
machinery (9/11).
83. Despite itsproven capacity togenerate employment, themaquiladora industry hashadmore
limited success inestablishing strong backward linkages withother activities andinencouraging the
transfer oftechnology toMexican industry asawhole.32TheMexican contribution totheinputs of
maquiladora hashistorically beenlowingeneral; ithasbeenreported that,inextreme cases, firms
32Sklair (1993).WT/TPR/S/29 Trade Policy Review
Page 116
were unable tosource locally eventhesimplest products (e.g. cardboard boxes).33Most activities
undertaken bythose firms havebeenlabour intensive, inthepastoften involving lowlabour skills
anddesigned totakeadvantage ofrelatively inexpensive labour. However, since 1994 maquiladora
firms appear tobeusing moremodern technology andrequiring higher skills.34Skilled technical workers
andmanagers appear toberelatively scarce, andthustheirsalaries tendtobeconsiderably higher than
wages foroperators.35Theauthorities pointed outthat,through theIndustrial Policy andForeign Trade
Programme (PPICE) theyareseeking toreintegrate Mexican firms intothedomestic production chains,
making those firms competitive suppliers forexport companies.
84. Themaquiladora industry operates under regulations thatinmany respects approximate free
trade. However, theindustry isexpected toshrink inthecoming years, andperhaps eventually disappear
under NAFTA.36Ithasalsobeenargued thatthetrade andinvestment opening provided forbythe
NAFTA mayresult inthedevelopment patterns ofthemaquiladora industry being replicated throughout
Mexican manufacturing asawhole, asthesector becomes tightly integrated intoaNorth-American
dominated productive structure.37Thiswould beapositive development provided theMexican industry
canexpand itsroleasanindependent North-American supplier capable ofpursuing itsowneconomic
niches. However, itwould alsodepend onindustry notlocated inthemaquiladora industrial parks
intheborder area, developing comparable efficient transport linkages toUnited States railheads and
highways.
(ii) General policy objectives andinstruments
85. There hasbeenaradical change inMexico 'sapproach toindustrial policy sincethemid-1980s,
andpromotion oftheinward looking manufacturing sector haslargely beenabandoned. Bymost
measures, theresults havebeenremarkable; many industries previously reliant onobsolete technology
andunable tofaceforeign competition without government support have been transformed into
world-class suppliers ofsuchhighly competitive items ascement, steelandfoodproducts. Nevertheless,
echoes oftheprevious import-substitution strategy linger inMexico 'scurrent industrial policies. The
most conspicuous caseisthatofthespecial regime forthemotor vehicle industry. More recently,
lessimportant industry-specific programmes havebeendeveloped forthetextiles, clothing, footwear
andleather industries (seebelow). Sectoral programmes havealsobeenestablished forfurniture, toys,
sports articles andbicycles, steel, andmedical equipment; preliminary work hasbeenundertaken in
relationtopossibledevelopmentprogrammesforaluminium,capitalgoods,preservedfood,construction,
editorial andgraphic work, electronics andtelecommunications, rubber, jewellery, plastics, andglass.
86. Mexico 'sgeneral industrial policy objectives arecontained intheIndustrial Policy andForeign
Trade Programme (PPICE -Chapter II(2)). According tothePPICE, greater competitiveness requires
theStatetosupport theindividual efforts offirms bycreating conditions forhighprofitability inexport
activities;expandingaccesstoforeignmarkets;acceleratingthedevelopmentofregionallyandvertically
33Kenney andFlorida (1994).
34Villarreal andJiménez (1995).
35Kenney andFlorida (1994).
36OECD (1996). Theauthorities noted thatalthough under theNAFTA themaquiladora regime willundergo
modifications, maquiladora firms willcontinue toenjoy various benefits.
37Sklair (1993).Mexico WT/TPR/S/29
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integrated industrial groups; andencouraging "efficient import substitution". Theprogramme isaimed
atgenerating faster growth inmanufacturing relative totherestoftheeconomy, creating alargenumber
ofjobs. Italsosetsaspriorities thedefence ofMexico 'stradeinterests andgreater reciprocity intrade
relations.
87. Theuseoftariffescalation toprovide processing industries withhigher protection fromimport
competition hadbeenalong-standing feature ofMexico 'strade regime andispartofcurrent policy.
However,since1993appliedMFNtariffsinsomeindustrieshavedivergedfromthetraditionalescalation
pattern (Chapter III(2)(iv)). While theaverage MFN tariff inmanufacturing hasdecreased slightly
since 1993, more marked fallshaveaffected non-electrical machinery and"other" chemical products;
incontrast,tariffprotectionincreasedsharplyforfoodandbeverages,clothingandfootwear,andtobacco
products. Theauthorities noted thatthesepatterns areduetoMexico 'sunilateral liberalization ofMFN
tariffs oninputs andcertain machinery notproduced domestically, aswellastariffication inagriculture.
88. Amore novel useoftariffs asanindustrial policy instrument isthescheme implemented in
relation totheNAFTA, whereby tariffs onequipment andother inputs notproduced inMexico are
reduced more rapidly thantheprotection granted totheoutput oftheindustries using suchinputs.38
According totheauthorities, theobjective istoincrease temporarily thelevels ofeffective protection
tothose industries, andinsodoing boost profitability andhelpthem toadapt toafreerenvironment.
These distortions, coupled withthefalling labour share inanexpanding value added (seeabove), should
result inhigher profit margins, andpotentially release resources forinvestment. However, there are
some dangers infostering dependency onincreased protection, evenonatemporary basis, andthere
seems tobenomechanism inplacetoensure thatadditional profits arereinvested towards moreefficient
allocation ofresources. Moreover, theapproach makes Mexican consumers payforindustry assistance
through ascheme oflimited transparency.39Ontheother hand, theauthorities emphasized thatcurrent
policies should foster nodependency, astherules inMexico 'strade agreements areclear andno
exceptions willbemade tocompliance withthem.
89. Several trade-related measures described inChapter IIIalsohaveastrong industrial focus.
Among themostimportant istheuseofgovernment procurement rulestoprovide domestic firms an
advantage inpublic tenders (especially affecting pharmaceuticals andcapital goods); programmes
involving thedevolution, reduction orelimination ofimport taxes (e.g.PITEX); andspecial financial
support (channelled mainly through NAFIN andBANCOMEXT). Theactive useoftrade-defence
instruments, particularly anti-dumping, suggests thattheytooareanimportant element ofthe
Government 'ssupport strategy forthemanufacturing sector.
(iii) Developments inselected industries
(a) Motor vehicles
Industry performance
90. Themotor vehicle industry, largely composed offoreign-owned companies, isoneofthelargest
manufacturing activities inMexico, having accounted forslightly more than13percentofthetotal
38SECOFI (1996), p.19.
39Despite theiruseaspolicy targets, norecent estimates ofeffective ratesofprotection areavailable forthe
Mexican industry.WT/TPR/S/29 Trade Policy Review
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value ofproduction inmanufacturing in1993 and10percentofvalue added. In1994, theindustry
accounted forabout 2percentofGDP, andemployed some 0.7percentoftheworkforce.
91. The1995economic downturn seriously affected production, which fellby17percentrelative
to1994, while domestic salescollapsed by70percent. However, activity began torecover in1996,
when production reached some 1,220,000 unitsanddomestic salessome 340,000 units(Table IV.6).
Sales ofautomotive parts followed asimilar pattern ofdecline andrecovery. Therecent export
performance ofthemotor vehicle industry hasbeenremarkable; while exports exceeded domestic
salesforthefirsttimein1994, in1996almost onemillion unitswereexported, i.e.some 80percent
ofthedomestic production. Theauthorities forecast motor vehicle production reaching some2.1million
unitsbytheyear2001, ofwhich 68percentisexpected tobeexported. Mexico isalsoamajor exporter
ofautomotive parts, having become themajor supplier ofseveral products totheUnited States market.40
Table IV.6
Basic automotive statistics, 1993-96
1993 1994 1995 1996
Production ofmotor vehicles ('000units) 1,081 1,123 935 1,219
Domestic market 587 547 155 246
Exports 494 575 779 973
Sales ofmotor vehicles ('000units) 1,075 1,192 971 1,319
Domestic market 603 624 189 341
Exports 472 568 783 978
Sales ofautomotive parts (US$ million)a6,418 6,795 5,420 5,652
Exports (US$ million)b8,900 10,796 15,235 17,652
Motor vehicles 4,922 5,904 9,382 8,466
Parts andcomponents 3,978 4,892 5,853 9,186
Imports (US$ million)b9,445 11,438 9,471 8,648
Motor vehicles 491 1,399 474 396
Parts andcomponents 8,954 10,039 8,998 8,252
a Preliminary 1996 data.
b Includes maquiladoras ;datafor1996 excludes December.
Source: SECOFI.
92. Theauthorities attribute much oftherecent strong performance oftheautoindustry totheentry
inforce oftheNAFTA, which intheirviewhasledtoincreased investment, economies ofscaleand
efficiency inthesector. Between 1988 and1994, some US$10 billion wereinvested intheindustry
(assembly andparts), much intheform ofnewfacilities whose production istargeted primarily for
export totheUnited States. Changes intheglobal automobile industry hasalsoplayed amajor role,
withMexico becoming animportant element oftheindustry 'sinternational distribution ofproduction
facilities based onincreased specialization. Although mostoftheMexican tradeinautomotive products
40Official Mexican datashow thatMexico accounts forsome three quarters ormore ofU.S.imports ofvarious
parts andcomponents, including axels, safety-belts, cables andspark-plugs, tachometers andspeedometers, and
windscreen wipers.Mexico WT/TPR/S/29
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takes place under theNAFTA, Mexico 'sother free-trade agreements arealsoaiding vehicle andparts
producers established inMexico intheirexport efforts.41
93. Intheviewoftheauthorities, theautomotive decrees haveconstituted aneffective industrial
policy instrument thathasalsohelped toachieve scale economies, theadoption ofappropriate
technologies, andincreased competitiveness andproduction levels. Other important factors underlying
thegoodperformanceoftheMexicanautomotiveindustryisthewishofU.S.producerstotakeadvantage
ofMexico 'sgeographic proximity totheUnited States andfavourable wage-productivity ratio, both
forvehicle manufacture andautomotive parts. TheMexican experience hasinvolved theinsertion
oflocaloperations intointernational production systems through intra-firm investment andtrade. It
hasbeenargued thatsuchinsertion seems more closely related tothedecision made bytransnational
firms torestructure theirproduction systems tobetter compete intheNorth American market, rather
thantheconsequenceofthepoliciesadoptedbytheMexicanGovernmentinsupportoflocalproduction.42
Theauthorities consider thatbothfactors played important roles.
Policy objectives andinstruments
94. Themotor vehicle industry hasbeenapriority sector inindustrial policy sincetheearly1960s.
Over thelastthree decades, support hasbeengiven through strong tariff protection, taxincentives,
andlocal-content requirements, while restrictions onforeign investment havebeenusedtopromote
thedomestic autoparts sector. Themotor vehicle industry wasrelatively unaffected byMexico 's
unilateral liberalization inthelate1980s, astheindustry successfully argued thatitrequired more time
toadjust andthatchanging theautomotive regime would jeopardize future investment.43
95. Mexico 's1996Industrial Policy andForeign Trade Programme stillconsiders theautomotive
industry tobeacentral element inthecountry 'sindustrial modernization. Inrelation tomotor vehicles,
theprogramme envisages:
- continuing theefforts toopennewmarkets through trade negotiations;
- facilitating theimportation ofinputs notproduced domestically;
- streamlining thespecial regimes providing forduty-free importation linked toexport
performance; and
- establishing efficient mechanisms toprevent theillegal import ofvehicles, considered agrowing
problem inthedomestic market.
96. Mexico 'smotor vehicle industry continues tobegoverned bythetwo1989decrees described
intheSecretariat report fortheprevious Trade Policy Review ofMexico: theDecree forthe
Development andModernization oftheAutomotive Industry (theAuto Decree), regulating theauto
partsandtheautomotive assembly industries, andtheDecree fortheDevelopment andModernization
oftheCommercial Vehicles Industry, regulating thetransportation vehicle assembly industry. The
special commercial vehicles regime willexpire on31December 1998. Attheendofthetransition
periodprovidedbytheNAFTA,allperformancerequirementsmaintainedbyMexicomustbeeliminated.
41Forexample, General Motors exported 12,000 Cavaliers from Mexico toChile dutyfree; exports ofthe
samemodelfromtheUnitedStateswouldhavefacedan11percenttariff(UnitedStatesDepartmentofCommer ce,
1996).
42Mortimore (1995), p.65.SeealsotheSecretarial report fortheprevious Trade Policy Review ofMexico.
43Clavijo andValdivieso (1994), p.43.WT/TPR/S/29 Trade Policy Review
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Suchcriteria wereincorporated intheAutoDecree through adecree of31May1995, futher amended
on20January 1997.
97. Thecurrent legislation requires aminimum localvalue-added of34percent,tofallannually
byonepercentage point starting in1998 untilitreaches 29percentin2003. Thisrequirement may
befulfilled through theacquisition ofpartsandcomponents fromnational suppliers forincorporation
inassembled vehicles, ortheacquisition oflocalparts orcomponents bylocalsubsidiaries forsale
totheirparent companies. Local partsandcomponents suppliers mustthemselves incorporate anational
value added ofatleast20percentintotalsales, thispercentage remains fixed untiltheyear2003.
98. Motor vehicle producers withproduction facilities inMexico areallowed toimport automobiles
tosupplement theirdomestic production. Therequirement thattotalimports during ayearcould not
exceed agiven percentage ofvehicles soldinMexico, 20percentin1993, waseliminated in1994.
Toimport vehicles, finalassemblers mustmaintain apositive foreign exchange balance, which takes
intoaccount theirexports ofassembled vehicles aswellaspartsandcomponents manufactured bythem
orpurchased fromMexican suppliers. Surpluses achieved byassemblers maybeusedtoimport finished
vehicles orparts andcomponents subject toa"compensation factor".
99. Notincluded intheautomotive decrees, butpartoftheNAFTA, areotherrequirements relating
toregionalcontentandtariffreductions.TheNAFTArulesoforiginprovideproducerswithanincentive
touseintermediate inputs produced intheregion. Inorder toreceive preferential tarifftreatment under
suchrules, automotive vehicles andpartsmustcontain aspecified percentage ofNorth American content
(based onthenetcostmethod): until1997, regional products must represent atleast50percentof
thenetmanufacturing cost; overthefollowing fouryears, thisshare should increase to55percent
formaincomponents andcommercial vehicles. Thecorresponding share forengines andtransmissions
andlightcommercial vehicles is56percent. From year2002 therespective shares havebeensetat
60and62.5percent.
100. Bothassemblers andmanufacturers ofpartsandcomponents mustberegistered withSECOFI
toallow thisMinistry tomonitor compliance withthemotor vehicles regime. Within theframework
ofthecurrent programme topromote theautomotive industry, developed jointly bySECOFI and
BANCOMEXT, thelatter maybeinformed byfinalassemblers oftheirsupply requirements inorder
toallow thebanktoidentify existing local suppliers orhelpestablish newonesthatcanmeet such
requirements.
101. Toopentheautomotivepartsindustrytoincreasedforeigninvestment,the1989decreeredefined
theindustry, reducing thenumber offirms subject tothe40percentlimitation onforeign participation.
Under theAuto Decree, since 1989 Mexico haspermitted foreign investors tomake investments of
upto100percentinMexican "national suppliers" ofauto-parts; since 1994, foreign investment of
upto49percenthasbeenallowed inother automotive partsfirms, increasing to100percentby1999.
102. Asprescribed bytheNAFTA, Mexico immediately reduced tariffs onpassenger carsandlight
trucks by50percent, from arateof20percent, andistophase outtheremaining tariffs overten
years forpassenger carsandoverfiveyears forlighttrucks. Tariffs onallother vehicles willbephased
outovertenyears. Forautomotive parts, starting from anaverage tariff of13.9percent, Mexico
eliminated tariffs on16percentoftherelevant tariff lines, should dothesame within fiveyears to
anadditional 54percent, andeliminate alltariffs within tenyears.
103. The1989 decrees authorized theimportation ofnewmotor vehicles byindividual consumers
when domestic prices (before taxes) wereabove thecorresponding international listpriceforequivalentMexico WT/TPR/S/29
Page 121
vehicles. Themain objective wastoadvantage consumers, andhasalsoserved asacontrol onthe
domestic industry 'spricing policies. According totheauthorities, themechanism hasbeenusedfive
times, forcing domestic prices down.
104. Except forimports intotheborder zone, which aresubject tospecial rules, imports ofused
motor vehicles areprohibited. NAFTA provides foragradual liberalization ofthisprohibition, which
willremain until2009 forusedcarsatleasttenyears old; fullliberalization willtakeplace on
1January 2019. Liberalization willapply onlytoNAFTA-originating vehicles.
105. Since1989,theproductionofautomobilesfor"popularconsumption"hasbeenpromotedthrough
fiscal exemptions ontheacquisition ofnewvehicles andonimported parts usedfortheirassembly.
These concessions arecontingent onthevehicles meeting various requirements, including theuseof
low-lead fuel,acapacity offivepassengers andamaximum salepricesetbySECOFI (about US$8,000
in1997). Assemblers mustberegistered withSECOFI, make commits toproduce atleast40,000 such
unitsperyear, andcomply withtrade-balancing andminimum local-content requirements. Inpractice,
theonlymodels tohavebenefited todatefrom thisprogramme havebeentheVolkswagen sedan
("beetle") andcertain General Motors Chevy (Corsair) models.
106. InNovember 1995, theGovernment eliminated thesales taxonpurchases ofnewcarsand
lighttrucks andreduced taxesoncarsandlighttrucks purchased forcommercial use;italsointroduced
asystem ofaccelerated taxdeduction onnewunits. Thechanges were made inanattempt tospur
domestic salesbymaking vehicles more affordable following theeconomic recession of1995. Gradual
reintroduction ofthesalestaxbegan in1997 (Chapter III(2)(vi)).
107. Under theAgreement onTrade-Related Investment Measures (TRIMs), Mexico notified in
March 1995theinvestment-related instruments maintained inrelation tothemotor vehicles industry.44
(b) Textiles andclothing
Industry performance
108. Mexico hasalarge textiles andclothing industry which, however, wassubject topressures
inthelate1980s andearly 1990s. Value added inthetextiles sector fellbetween 1980 and1993 at
anaverage rateof1.8percentperyear, while value added intheclothing industry stagnated; asa
result, theircombined share ofmanufacturing GDP fellfrom 7.9percentin1988 to7.1percentin
1993, andto6.9percentin1995. The1995recession ledtoaslowdown inproduction, butin1996
activity began torecover inbothsectors.
109. Trade liberalization inthe1980s wasaccompanied byadeterioration ofthetrade balance in
textiles: negative balances began in1989andgrewtoreach justoverUS$1,100 million in1994, when
textile exports amounted toabout US$990 million andimports toUS$2,100 million. However, in
1995exports rosesubstantially, partly duetoalower exchange rateandpartly because ofbetter market
access under theNAFTA, helping tosoften theoverall effects oftherecession. Thetrade deficit was
reversed, registering asurplus ofjustoverUS$590 million (excluding maquiladora operations); relative
to1994, exports increased by86percentandimports fellby40percent. However, adeficit ofUS$264
million wasregistered in1996 (excluding maquiladoras ).
44Selective investment incentives intheform ofpreferential tariffs onimports ofluxury vehicles appear to
have been introduced inlate1996 (Chapter III(4)(xiv)).WT/TPR/S/29 Trade Policy Review
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110. Thetextiles andclothing industry ischaracterized bysubstantial intra-industry trade. Themain
import categories include cotton, notcarded orcombed; woven cotton fabrics; synthetic fibres; and
woven synthetic fabrics; while major exports include t-shirts; suits; dresses; trousers; blankets;
bedclothes; andlinen.
111. TheUnited States hastraditionally beenthelargest foreign market andsupplier forbothtextiles
andclothing, withproduction ofapparel forexport totheUnited States concentrated inthemaquiladora
industry, stimulated byoutward processing provisions. TheNAFTA hasgiven further impetus tothe
flowofgoods andinvestment between Mexico anditsnorthern partner, Mexico having risentothird
placeintheU.S.import market. There hasbeenasignificant increase infabric-yarn exports (e.g.denim
fabric) asaresult oftheelimination ofquotas ongoods thatcomply withrulesoforigin, andseveral
joint-ventures havebeenformed totakeadvantage oftheNAFTA.45In1996, Mexico became the
largest foreign supplier ofblue-jeans totheU.S.market.
112. BANCOMEXT attributes theindustry 'srecent goodperformance toMexico 'slowlabour costs,
theavailability ofquality rawmaterials, spare capacity, geographic proximity andtariff preferences
notenjoyed byother suppliers. Closeness tothelarge U.S.market hasbeenasignificant advantage
forMexico'stextilesandclothingindustry,particularlyinviewofthegrowingimportanceofjust-in-time
andquick-response procedures attheproduction stage, andtheneedtomeetrapid andconstant changes
atthefinalconsumer stage. Shipments totheUnited States from Mexico bytruck involve about a
six-day journey, compared witha30-day boat-trip fromAsia; transport costs fromMexico areonly
halfthose from Asia.46Electricity costs inMexico arehalfthose intheUnited States. Moreover,
under theNAFTA Mexico enjoys trade preferences denied tomany other producers (U.S. tariffs on
Mexican products willbephased outby1999). Given these advantages, Mexico could achieve sales
totheU.S.market ofsome US$14.5 billion within 15years, thuscapturing amarket share equivalent
tohalfthatoftheAsian suppliers atcurrent values. However, Mexican producers areaware thatthey
musttakeadvantageofsuchpreferencesbeforethe"integration"measuresnegotiatedduringtheUruguay
Round erode Mexico 'sposition (althrough Mexico willstillbenefit fromsubstantial tariffadvantages).
Ontheother hand, many firms intheindustry stillsuffer from having obsolete equipment andhigh
indebtedness.
113. Mexican producers arealsoexploring ways tocapitalize further ontheNAFTA bysupplying
U.S.demand forwoolproducts (most Mexican exports ofwoolproducts enter theUnited States duty
free). Withthisobjective, Mexico andAustralia signed acooperation agreement on26September 1996,
negotiated between SECOFI andtheInternational Wool Secretariat (IWS), todevelop thewooltextile
andgarment industry. Theagreement envisages technical support, product development advice and
market analysis assistance bytheIWStoMexico; thisistobefollowed byjointventures tosellproducts
intheU.S.market. Australia already supplies some 90percentofMexico 'swool imports, which
amounted tosome 2,400 tonnes in1995; domestic wool production reached justunder 1,400 tonnes
thatyear.
114. While integration withU.S.industry isstrong, particularly inthemaquiladoras ,integration
among Mexican firms inthesector remains limited.47Ithasbeennoted thatthemainobstacle tocloser
45Mexican Investment Board (1996).
46These andsubsequent estimates inthisparagraph were cited bytheManager ofStrategic Planning forNew
Markets, DuPont Nylon (ElEconomista -Internet edition, 23January 1997).
47Mexican Investment Board (1996).Mexico WT/TPR/S/29
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integrationwithinthedomesticindustrywasaninstitutionalframeworkthatinhibitedcooperationbetween
firms; especially problematic wastheineffectiveness ofthelegalsystem tosolvedisputes overcontracts,
thenon-existenceofvoluntaryarbitration,ineffectuallabourassociations,andobstaclestosub-contracting
posed bythelabour legislation.48Theauthorities pointed outthatthissituation haschanged withthe
deregulation programme undertaken since 1995.
Policy objectives andinstruments
115. Thespecial programme forimproving theproductivity ofthetextiles andclothing industry,
created in1992, remained themainsupport instrument until1995. Thisprogramme sought tostrengthen
vertical linkages, speed uptheresponse todemand shifts, andtoensure greater financial support for
themodernization ofequipment aswellasproduct design andpresentation. Theprogramme also
envisaged steps tostamp outcontraband andunder-invoicing, tostrengthen protection against unfair
trade practices, andtofine-tune protection granted tothesector through tariff escalation. Inviewof
theprogress made under thespecial programme, inMay1995 theauthorities introduced asuccessor
programme thatseeks stronger vertical integration andthemodernization ofmicro, small and
medium-size enterprises. Thisprogramme alsoproposes tomake thetextiles andclothing industry
more competitive inworld markets, allowing ittotakeadvantage ofthepreferential terms accorded
toMexico under free-trade agreements. The1995 programme establishes specific aimsinrelation
totraining, export promotion, financing, strategic producer associations, government procurement,
statistical information, tariffs andcustoms controls.49
116. Tariff protection forthetextiles andclothing industry hastraditionally beenamong thehighest
oftheeconomy; theindustry isalsosubject tostrong tariff escalation (Chapter III).InMarch 1995,
tariffs ontextiles andapparel from countries without aspecial trade agreement withMexico were
increased from 20percentto35percent. In1996, duty-free treatment wasaccorded tomachinery
usedforgarment-making, which before wasgenerally subject toatariff of10percent. Closer
monitoring oftextile imports wastobeenforced tofight"unfair tradepractices", which forkeyproducts
would allow weekly statistical tracking ofimported products andfaster actions todefend theinterests
ofthedomestic industry.50Requests havealsobeenmade tostrengthen theinspection systems run
byBureau Veritas andtheSociété Générale deSurveillance .Bothcompanies havebeenauthorized
bySECOFItocertifytheoriginoftextiles,clothingandfootwearthroughin-situinspectionsinnon-WTO
members, andthusdetermine ifsuchgoods aresubject totrade defence measures.
117. Mexico doesnotapply anyimport quotas ontextile andclothing products; theonlyquantitative
restriction applied inrelation tothese products isrelated toprohibitions ontheimportation ofused
48Clavijo andCasar (1994), p.450.
49Ithasbeen reported thatbetween January andAugust 1996 contraband seized bytheauthorities included
some 100,000 newclothing items, 130tonnes ofusedgarments, 29,000 square metres ofcloth, 10,000 square
metres ofcarpet and69tonnes ofcloth waste (ElEconomista ,3December 1996).
50Statement bytheVice-Minister ofNorms, andIndustry andTrade Services, SECOFI (ElEconomista -
internet edition, 25November 1996).WT/TPR/S/29 Trade Policy Review
Page 124
clothing. These import restrictions werenotified totheWTO Secretariat inFebruary 1995asrequired
under Article 3oftheAgreement onTextiles andClothing.51
118. MexicohasretaineditsrighttousethetransitionalsafeguardmechanismoftheWTOAgreement
onTextiles andClothing.52Ithasalsosubmitted totheWTO thelistoftextile andclothing products
included inthefirstandsecond phases ofintegration intoGATT 1994. Thelistforthefirstphase
ofintegration covers, justover16percentofthevolume ofimports in1990; itcomprises 30eight-digit
HSitems, mainly fabrics (woven fabrics offibreglass andpolyethylene filmbeing themain items by
volume), andtopsandyarns (yarns oftextile bastfibres being themainitems).53Thelistforthesecond
phase includes 17percentofthevolume ofimports in1990; itcovers 147eight-digit tariff items,
mainly topsandyarns (acrylic fibres, "other" polypropylene fibres, "other" articles ofyarn, androvings
ofglass fibres), andfabrics.54
119. Upon entry intoforce oftheNAFTA, theUnited States removed import quotas ongoods
produced inMexico thatmeetNAFTA rules oforigin. Non-originating Mexican goods aresubject
toquantitative restrictions; these restrictions, originally under theMultifibre Arrangement (MFA)
butnowunder NAFTA, arescheduled tobeeliminated fortencategories bytheyear2001, andfor
theremaining fourcategories bytheyear2004. Formostproducts, theNAFTA ruleoforigin is"yarn
forward";55a"fibre forward" ruleisprovided forproducts suchascotton andman-made fibreyarns.
These rulescover mostoftheproducts inthetextiles andclothing industry, since thespinning ofyarn
andproduction offibres occur attheinitial stages ofproduction. TheNAFTA rulesoforigin fortextile
andclothing products aretobereviewed in1998.
120. Under NAFTA, nonewquotas maybeimposed except under thesafeguard provisions. Specific
products thatdonotmeetNAFTA rules oforigin canstillqualify forpreferential treatment uptoa
fixed import levelor"tariff preference level" (TPL) negotiated among thethree NAFTA countries.
TPLallocations toandbyMexico areshown inTable IV.7. In1994, preferential quotas forjustunder
1.8million equivalent square metres (em2)ofcotton andsynthetic-fibre clothing weredistributed, of
which 1.6million wereusedforexports valued atUS$2.4 billion. Aquota ofsome 418,000 em2of
wool clothing wasalsodistributed, ofwhich about 374,000 em2wasused forexports worth
US$2.2 billion. SECOFI assigned thesequotas onafirst-come, first-served basis. In1996, preferential
quotas forcotton andsynthetic-fibre clothing amounted to4.6em2,andforwool clothing to
about 286,5000 em2.
51Thenotification expressed doubts astowhether thenotified measures were covered bythedefinition of
"restrictions" contained infootnote 4oftheATC, andadded thatMexico 'sProtocol ofAccession toGATT 1947
provided thelegal basis forthose measures (WTO document G/TMB/N/70, 28April 1995).
52WTOdocumentG/TMB/N/19,6March1995.Mexicoparticipatedinthearrangementsontextilesnegotiated
inGATTsince1962,andenteredintobilateralagreemen tswiththeUnitedStatesandtheEuropeanCommunities;
noexport quotas were established under theagreement withthelatter.
53WTO document G/TMB/N/45, 28April 1995.
54WTO document G/TMB/N/249, 27May 1997.
55Theyarnforward rulerequires textile andapparel goods tobeproduced from yarnmade inaNAFTA
country tobenefit from preferential treatment.Mexico WT/TPR/S/29
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Table IV.7
Preferential textiles andclothing quotas under theNAFTA.
(Annual equivalent square metres (em2)orkilogrammes (kg.)).
Mexico 'squotas forduty-free
imports from:Quotas forMexico 'sduty-free
exports to:
Canada United States Canada United States
Products from maquiladora firms ('000em2) n.a. n.a. 0 25,000
Cotton andsynthetic fibres clothing ('000em2) 6,000 12,000 6,000 45,000
Wool garments ('000em2) 250 1,000 250 1,500
Fabrics andtextiles ('000em2) 7,000 2,000 7,000 24,000
Cotton andsynthetic yarns ('000kg.) 1,000 1,000 1,000 1,000
n.a. Notapplicable.
Source: Mexican authorities.
121. Countries intheCaribbean Basin haveraised thepossibility thatMexico 'spreferences under
theNAFTA mayhaveadiversionary impact ontheirexports totheUnited States. Within theWTO,
some Members haveexpressed particular concern thattheNAFTA rulesoforigin mayresult inserious
tradedistortion tothedetriment ofexporters ofyarnandfabric fromthirdcountries, considering that
the“fibreforward ”policy isexcessively restrictive; theNAFTA viewpoint isthatsuchrulesoforigin
donotfunction inarestrictive manner withregard toimports ofgoods fromnon-NAFTA countries.56
(c) Footwear andleather
122. Thefootwear andleather industry grew considerably during the1970s andtheearly 1980s.
However, trade liberalization putpressure ontheindustry, withbothoutput andemployment tending
tofall. Between 1980 and1993, value added decreased atanaverage annual rateof2.5percent;
asaresult, theindustry 'sshare ofmanufacturing GDP fellfrom 3.0percentto1.7percentinthe
same period. Theslow-down indomestic demand in1995 further depressed production, which fell
by60percentinthefirst halfoftheyear. Thesubsequent recovery hasbeendriven largely bya
sharp increase inexports; in1996, footwear exports rose60percentrelative totheprevious year.
Preliminary estimates forthatyearindicated thatsome 20million pairs ofshoes were exported, of
which 80percentwere soldtotheUnited States.
123. Until 1995 themain support instruments fortheindustry werethose established inthe1992
Programme toPromote theCompetitiveness andInternationalization oftheFootwear andLeather
Industry.TheProgramme'sobjectivesincludedpromotingtheindustry'sintegrationandmodernization,
providing financing under improved conditions, eliminating contraband andunder-invoicing, better
protection against unfair tradepractices, andexport promotion. Asuccessor programme wasintroduced
inMay1995 toencourage vertical integration andstrengthen theindustry 'scompetitiveness inthe
domestic andforeign markets. Theprogramme establishes specific aimsfortraining, export promotion,
financing, strategic associations, government procurement, statistical information, customs controls
andtariffs.
124. AstheMexican industry came under growing pressure from imported products, definitive
countervailing duties were applied inDecember 1993 toimports from China atthefollowing rates:
165-232 percentforplastic footwear, 323-313 percentforleather andsports footwear, and
56WTO (1996d); andWTO document WT/REG4/1/Add.1, 22July1996.WT/TPR/S/29 Trade Policy Review
Page 126
1,105 percentforother footwear. Further protection wasgranted inMarch 1995, when tariffs on
footwear from countries without afree-trade agreement withMexico were increased to35percent.
These increases inprotection occurred despite thesharp devaluation ofthedomestic currency inlate
1994, followed bystrong growth inMexican footwear exports.
125. Under theNAFTA, customs duties formost footwear products thatmeettherules oforigin
willbeeliminated intenor15years. Theruleoforigin specifies thatinputs canbeimported from
outside theregion, withtheexception ofuppers; thefinalproduct must satisfy aregional content
requirement of55percent, calculated using thenetcostmethod.57
(d) Pharmaceuticals
126. Value added inthepharmaceuticals industry accounts forabout 2.3percentofmanufacturing
GDP, having grown atanaverage annual rateofsome 2.5percentbetween 1992 and1995.
Employment, however, hasfallen slightly fromabout 43,000 to42,500 persons. During thatperiod,
thevalue ofimports decreased from about US$840 million toUS$750 million; incontrast, exports
grew atanannual average rateof16.5percent,reaching some US$445 million in1995. Thesector
therefore appears tohaveadapted welltothegeneral trade liberalization.
127. Theapparent absence ofadjustment problems totrade liberalization mayberelated tothe
traditional close regulation oftheindustry. Theproduction andsaleofallpharmaceuticals must be
authorized bytheMinistry ofHealth, while pharmaceutical products andfirms mustberegistered with
SECOFI. Selling prices mustbeapproved bySECOFI before aproduct canbedomestically marketed.
128. Publicsectorprocurementisrestrictedtodomesticsuppliers,withapreferencegiventoMexican
firms. Theauthorities indicated thatsignificant modifications weremade in1996totheprocurement
practices formedicines usedbytheMexican Institute ofSocial Security (IMSS) andtheMinistry of
Health. TheIMSS hasnowdecentralized medicine purchases toseven regional offices, which should
eventually haveresponsibility for97percentofallprocurement. TheMinistry ofHealth hasalso
given responsibility toregional bodies forpurchasing decisions. Theauthorities consider thatthese
changes should result ingreater competition among pharmaceutical suppliers.
129. TheSecretariat report fortheprevious Trade Policy Review ofMexico noted thatstringent
qualitycontrolsregulatedpharmaceuticalimports.Stepsforliberalizationproposedin1990haveresulted
inthegradual phasing-out ofpriorimport licensing requirements, andinearly1997suchrequirements
applied toonly15tariff lines. Anewhealth lawwasunder consideration byCongress inearly 1997,
which would provide fortherelaxation ofimport requirements forpharmaceuticals andother measures
toliberalize thedomestic market forpharmaceuticals.
(e) Electronic equipment
130. Theelectronic industry comprises some 500firms andemploys some 100,000 persons, orover
300,000 ifmaquiladora firms areincluded. Thereduction oftrade barriers inthemid-1980s hada
serious effect ontheconsumer electronics industry, andresulted inincreased imports ofparts and
components. Domestic production initially contracted, followed byashifttowards export-oriented
57Ithasbeenargued thatadministrative procedures associated withNAFTA rules oforigin areburdensome;
apparently compliance withsuchrules requires certificates tolisttheexact number ofshoes bound forMexico
andtheMexican warehouses used inthedistribution process (European Union, 1997).Mexico WT/TPR/S/29
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assembly ofimported components, taking advantage ofthemaquiladora regime. Between 1993 and
1996, production increased atanaverage annual rateofjustover7percent; during thatperiod exports
expanded 30percenttoreach close toUS$4,100 million (excluding maquiladora firms). Inthesame
period, imports expanded atanaverage annual rateof9percent. Within theframework oftheIndustrial
Policy andForeign Trade Programme, theauthorities established aspecial Sectoral Programme for
theElectronics Industry inAugust 1995. Trade-related measures suchaslocal-content, trade-balancing
andcapital-origin requirements were abandoned in1990.
131. The1990 decree topromote structural adjustment inthecomputer industry expired in
December 1993. Computer-equipment manufacture seems tohaveadapted welltoMexico 'sliberalized
environment. Between 1993and1996, production inthecomputer industry grewatanannual average
of18percent,withtheequivalent rateforexports reaching 38percent; during thatperiod, exports
increased fromUS$889 million toUS$2,354 million. Imports alsoexpanded rapidly, growing from
US$1,688 in1993toUS$3,413 in1996. Since theentry intoforce oftheNAFTA, tradeincomputer
hardware andperipherals between Mexico anditsNAFTA partners hasbeenfullyliberalized. However,
import licences arestillrequired byMexico forusedcomputers, including fromNAFTA members.
(5) Services
(i) General features
132. TheMexican State usedtobethemajor supplier ofservices, including banking, transport,
telecommunications andelectricity butsuchinvolvement hasdecreased dramatically during thelast
decade. Foreign access toMexican service markets hasalsoimproved markedly, although inafew
sectors foreign involvement remains limited. Anambitious privatization programme hasbeencarried
outinrecent years, andsteps arebeing taken tostrengthen theregulatory framework. However,
persistent inefficiencies insome areas have, attimes, imposed severe constraints onother sectors of
theeconomy; themostserious problems havemore recently arisen inrelation tofinancial services,
although transport andtelecommunications services alsoremain areas ofconcern.
133. In1996, services accounted forclose to70percentofGDP; theservices activities withthe
highestvalueaddedwere(shareofGDPinparentheses):commerce,restaurantsandhotels(18percent),
social services (20percent), financial services (15percent), andtransport andcommunications
(9percent).58These activities engaged closeto65percentofallpersons employed inMexico in1993,
themost recent yearforwhich official datawere available; thelargest shares ofemployment were
insocial services (29percentofthetotal) andcommerce (15percent).
134. In1996, non-factor services exports (credits) werevalued atjustoverUS$11 billion, 12percent
higher thanin1995 andequivalent toabout 11percentofmerchandise exports (seealsoChapter I).
Tourism wasthelargest single item, accounting foralmost 50percentofservices exports; other large
items included border travel (15percent), telecommunications (8percent)andreinsurance (7percent).
In1996, thevalue ofservices imports (debits) reached close toUS$10 billion, 10percenthigher than
in1995, butstilllower thantheUS$12 billion recorded in1994 before theeconomic slowdown. In
1996, border travel accounted forjustunder 19percentofservices imports, andfreight andinsurance
services forafurther 25percent.
58Inaddition tothese activities, theservices share includes construction, electricity, gasandwater. Shares
based ondatafrom INEGI.WT/TPR/S/29 Trade Policy Review
Page 128
135. Under theGATS Agreement, Mexico hasundertaken sector-specific commitments inalarge
numberofservicesectors(TableAIV.1).Exceptforfinancialservices,inalmostallothersectorsMexico
engaged nottoplacemarket access ornational treatment limitations onconsumption abroad oroncross-
border supply, although withrespect tothelatter noengagements weremade forconstruction, health
andleasing services. Mexico alsoagreed nottoplace national treatment limitations oncommercial
presence foralmost allsectors included initsschedule. However, inmostsectors commercial presence
wassubject tomarket access restrictions intheformofmaximum foreign ownership limits, generally
setat49percentoftheregistered capital ofenterprises59;incertain sectors Mexico bound itself to
allow 100percentownership, forexample, certain professional services, distribution services, and
certain tourism services.
136. Under itshorizontal GATS commitments Mexico hasengaged nottoapply market access or
national treatment limitations inanysector withrespect tocross-border supply orconsumption abroad.
Commercial presence limitations relate toconditions forforeign participation inactivities reserved
forMexican nationals andlandownership onthecoastline andalong frontiers. Inrelation tothepresence
ofnatural persons, binding commitments weremade withrespect tointra-corporate transferees atthe
executive andmanagerial levels andspecialists.60
137. Mexico sfinallistofArticle II(MFN) exemptions covered twotourism activities: road
passenger transport andbusiness conventions; inthose twoareasMexico maymaintain measures which
would otherwise beinconsistent withtheobligation toprovide MFN treatment toother countries under
theGATS.Onroadpassengertransport,suchmeasuresrelatetoaMexican-U.S.arrangementpermitting
thesupplyofroadtransportservicesbyforeignsuppliersonlytovehiclesregisteredintheUnitedStates.61
Onbusiness conventions, themeasures concern aMexican-U.S. agreement granting taxdeductions
toindividuals attending business conventions ineither country. Allsuchexemptions areofindefinite
duration.
138. TheNAFTA establishes basic principles suchasnational treatment andMFN treatment, non-
obligatory local presence, anduniversal sector coverage withlimited exclusions (i.e.airservices).
Atthesame time, itcontains specific disciplines insectors such asprofessional services,
telecommunications,financialservicesandtemporaryentryofbusinesspersons.Thequestionofwhether
theNAFTAisconsistentwithArticleVoftheGATS(whichpermitstheconclusionofregionaleconomic
integration agreements, under certain conditions) isnowbeing examined within theframework ofthe
WTO.
139. Other agreements inwhich Mexico hasincluded provisions onservices arewithColombia
andVenezuela (G-3), Costa Rica, andBolivia. TheAgreements withCosta RicaandBolivia contain
annexes defining reservations ontheagreements 'basic principles; theannexes aresubjected toa
technical revision process stillinprogress. TheMexican authorities indicated thattheG-3Agreement
would soonbenotified under Article VoftheGATS.
59TheselimitationsrefertotheGATScommitment;higherlevelsofequityparticipationarepossibleinpractice.
60Mexico -Schedule ofSpecific Commitments (GATS/SC/56, 15April 1994).
61Mexico -Final ListofArticle II(MFN) Exemptions (GATS/EL/56, 15April 1994).Mexico WT/TPR/S/29
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(ii) Banking
(a) Market structure andperformance
140. Mexico 'sbanking system isconstituted byBanco deMéxico (Central Bank), commercial banks,
development banks, public trusts andtheNational Savings Fund.62Thetotalassets ofthefinancial
system amounted to53percentofGDPin1993.63Datafortheearly 1990s suggest thattheMexican
banking system wasrelatively inefficient, although profitability wasgenerally higher thaninU.Sand
European banks.64Thismayhaveresulted fromthehighmarket concentration thatcharacterizes the
banking sector, withthethreelargest banks, BANAMEX, BANCOMER andSERFIN, holding about
halfofallbank assets, loans andnetworth.65InSeptember 1996, thesystem included 36national
banks with5,227 branches, and18foreign banks with332branches; bankdeposits were justover
966billion pesos.66
141. TheMexican commercial banking system hasundergone extensive transformation since the
early 1980s. In1982, attheheight ofadeepfinancial crisis, thesystem wasnationalized. In1991,
aspartofMexico 'sefforts toattract private investment, there-privatization ofthebanking sector was
initiated, aprocess completed attheendof1992. Privatization wasfollowed byaprogramme of
deregulation andopening toforeign competition. Thisprogramme hasbeenseenasawaytoincrease
competition andefficiency, todiversify andspecialize Mexican capital markets, andtostrengthen the
system toallow ittofaceforeign competition more effectively. InMarch 1997, thetotalassets of
thebanking system, including banks subject tointervention, were some 1,215 billion pesos
(about US$160 billion). Inrealterms, netcredit flows from commercial banks peaked in1994, but
flows became negative in1995 and1996 aslending policies weredrastically tightened following the
financial crisis (Chart IV.6).67Withthefallineconomic activity in1995, non-performing loans (NPLs)
asaproportion oftotalcredit, which hadbeenrising during the1990s, doubled between 1994 and
1995. In1996, cumulative credit fromcommercial banks wasestimated atjustover463billion pesos
(some US$60 billion), ofwhich almost 61billion pesos were NPLs.
142. Theauthorities noted thatthefinancial crisis oflate1994 wasoneofthemost serious in
Mexico 'shistory and,unlike previous financial crises, itaffected thevastmajority ofdebtors including
individuals, small andlarge businesses, andfinancial intermediaries. Besides theconsiderable slow-
down ineconomic activity, themost detrimental effect wasthesharp increase ininterest rates. In
response tothecrisis, theGovernment hastaken aseries ofmeasures toaddress theproblem ofNPLs
thatthreatened toproduce asystemic crisis inthefinancial system asawhole. These steps tookthe
62TheNational Savings Fund carries outactivities inaccordance withtheNational Development Financing
Programme, andregulations issued bytheMinistry ofFinance; itsmain objective istopromote national savings.
63OECD (1995).
64Thenetreturn onassets forMexican banks thenreached 1.45 percent, compared with0.96 percentfor
U.S. banks (Gruben, Welch andGunther, 1993).
65European Commission (1997).
66Thisamount doesnotinclude thefollowing banks, currently subject togovernment intervention: Anáhuac,
Banpaís, Capital, Centro, Cremi, Interestatal, Inverlat, Obrero, Oriente, Unión, andSureste.
67Annual netcredit flows havebeencomputed asthedifference between cumulative credit values published
inPoder Ejecutivo Federal (1996c), pp.85-86.Mexico WT/TPR/S/29
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143. Thebanking system inMexico includes seven government-owned development banks, which
finance andpromote priority sectors. InMay1997, development banks heldassets ofabout US$67
billion, withloans representing almost 74percentofassets. In1996, totalfinancing granted by
development banks reached 190billion pesos, equivalent toabout 15percentofGDP. Atthattime,
NPLs amounted to11billion pesos (some US$1.42 billion). Inrealterms, netcredit flows from
development banks peaked in1994, when suchflows were more thanfourtimes higher thaninany
other year. Netcredit became negative in1995 and1996 astheauthorities reined inliberal lending
policies andinterest ratesrose(Chart IV.6). NPLs bythedevelopment banks accounted foramuch
smaller share oftotalcredit thaninthecaseofcommercial banks; however, NPLs asaproportion
oftotalcredit indevelopment banks alsodoubled between 1994 and1995.
144. Thethree major development banks areBanco Nacional deComercio Exterior, S.N.C .
(BANCOMEXT -BoxIV.1), Nacional Financiera ,S.N.C. (NAFIN -BoxIV.2), andBanco Nacional
deObras Públicas, S.N.C .(BANOBRAS). Thelatter offers almost exclusively long-term credit, while
BANCOMEXT andNAFIN grant bothshort- andlong-term credits (Table IV.8). Between 1993and
1995, about three-fourths ofBANCOMEXT 'scredits tooktheformofshort-term loans, aproportion
thatfellsharply in1996. NAFIN sharply increased theproportion ofshort-term credit granted during
1994 and1995, ashare thatalsofellin1996.
145. Intheearly1990s, twoimportant changes affected thelargest development banks: theymostly
became second-tier institutions, lending topriority sectors through commercial banks orotherfinancial
institutions (rather thandealing directly withthepublic); and,toimprove capitalization, asystem of
portfolio rating wasintroduced, requiring them toholdreserves linked tocredit risk. Alsotoreach
alarger number ofcompanies engaged inforeign trade, bothBANCOMEXT andNAFIN havemade
extensive useofthenetworks maintained bycommercial banks andother financial intermediaries.
Bothbanks channelled most oftheircredit through commercial banks (Table IV.9).
Table IV.8
Maturity ofcredit granted bydevelopment banks, 1993-96
(Percent)
1993 1994 1995 1996
Short- term Long-term Short-term Long-term Short-term Long-term Short-term Long-term
BANOBRAS 5.9 94.1 1.7 98.3 0.4 99.6 0.2 99.8
NAFIN 47.7 52.3 84.9 15.1 86.7 13.3 51.1 48.9
BANCOMEXT 77.8 22.2 76.2 23.8 74.6 25.4 55.1 44.9
Source: Mexican authorities.
Table IV.9
Credit channelled through financial intermediaries, 1995
Total credit
NAFIN BANCOMEXT
Total (US$ million) 10,433 58,521
Share oftotal (%): Commercial banks 86.5 76.3
Non-bank financial intermediaries 13.5 7.2
Credit unions 10 0.7
Development entities 0.9 5.4
Financial leasing brokers 2.3 0.3
Factoring companies 0.2 0.8
BANCOMEXT (direct) n.a. 16.5
n.a. Notapplicable.
Source: NAFIN andBANCOMEXT, 1995 annual reports.WT/TPR/S/29 Trade Policy Review
Page 132
BoxIV.1
BANCOMEXT, theNational Foreign Trade Bank, hasresponsibility forpromoting international
competitiveness ofcompanies, fostering exports andforeign investment andencouraging theestablishment of
jointventures between Mexican andforeign firms. In1995, BANCOMEXT 'sassets amounted to123billion
pesos (about US$16 billion), anditstotal portfolio, including endorsements andrediscounts, toalmost 96
billion pesos (some US$12 billion). During thesame year, thebank posted a202million netprofit (US$26
million).
Taking advantage ofthenature ofitsoperations, BANCOMEXT hasbeen inafavourable position toobtain
short-, medium- andlong-term resources from various sources, including international commercial banks,
international financial institutions, suchastheWorld Bank andtheInter-American Development Bank (IDB),
export-import banks, andbond issues placed oninternational capital markets.
In1995, BANCOMEXT granted financing ofclose toUS$8 billion, ofwhich almost US$7.4 billion tookthe
form ofcredits, andtheremainder ofguarantees andendorsements; thelatter twowere used tofacilitate
firms'access tocredit under more favourable terms. Thecredit wasallocated asfollows: 70percentto
direct exporters, 13percenttoindirect exporters, 6percentforimports andtherestwasused forliability
restructuring; 75percentofsuchcredit wasused inshort-term transactions. Alarge partoftheloans was
channelled tomanufacturing andservice companies (Chapter III(3)).
Besides services such ascredit, investment banking, andfiduciary operations, BANCOMEXT offers non-
financial services tohelp companies participate intheinternational markets; these include information,
advisory andtraining services, andsupport services abroad (product promotion, participation ininternational
fairs, missions andseminars, etc.).
(b) Regulatory framework
146. TheMexican banking system issupervised bytheBanco deMéxico andtheMinistry ofFinance
(Chart IV.7). Themain responsibilities ofBanco deMéxico (BM) areto:
- regulate theissueandcirculation ofthelocalcurrency; exchange transactions; intermediation
andfinancial services; andthepayment systems;
- operate asareserve bankandlender oflastresort;
- offer treasury services totheFederal Government andactasitsfinancial agent;
- actastheFederal Government 'sadvisor ineconomic andfinancial matters;
- participate intheInternational Monetary Fundandotherorganizations ofinternational financial
cooperation orwhere central banks aremembers; and
- operate withtheabove-mentioned organisms, withcentral banks, andwithotherforeign entities
thatexercise governmental functions infinancial matters.
147. TheMinistryofFinanceisresponsibleforformulatingpoliciesinareassuchascreditoperations,
surveillance, andregulation ofcommercial banks. Itauthorizes thegeneral budget ofdevelopment
banks andevaluates theoperation ofMexican banks inthecountry andabroad, aswellasofforeign
banks inMexico. TheMinistry isalsoresponsible fordefining strategies tohelpthebanking sector
recover. TheMinistry ofFinance, withinput fromtheBMandtheNational Securities andBanking
Commission (CNBV), isresponsible forapproving theestablishment ofnewbanks inthecountry,
subject to,interalia,minimum capital requirements, aswellastheestablishment offoreign subsidiaries
inMexico, andmergers orseparations offinancial institutions. Banks must present anannual plan
totheMinistry fortheopening, closing andrelocation ofbranches, offices andagencies, andseekMexico WT/TPR/S/29
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itsapproval tomake anysuchchanges abroad, ortore-assign theassets orliabilities ofanyoftheir
branches.
BoxIV.2
Themain objectives ofNAFIN, theNational Development Bank, aretosupport themodernization and
restructuring oftheindustrial sector through thepromotion ofinvestment intomicro, small andmedium-size
enterprises. Attheendof1995, NAFIN 'sassets amounted toabout 243billion pesos (some US$33 billion).
Thatyearthebank granted financial support ofclose to30billion pesos, ofwhich 57percentwaschannelled
tothepublic sector andtheresttotheprivate sector viavarious development programmes. Credit operations
amounted to17.5 billion pesos, ofwhich 60percent corresponded tosecond-tier development credit
operations, 33percent channelled through first-tier operations, andtherest was linked tospecial
development programmes. NAFIN 'smost important programmes aretheFinancial Programme forIndustrial
Modernization (PROMIN); theProgramme forRisk Capital; theProgramme forCompany Development
(PRODEM); andtheProgramme toAidSmall andMedium-Size Enterprises (PROMYP).
According toNAFIN 's1995 Annual Report, micro andsmall enterprises represented thelargest number of
firms supported, buttheyabsorbed only23percentofthetotal credit:
Concept Total credit Number ofenterprises
supported Million pesos Share (%)
Total 10,433 100.0 36,941
1.Bytypeofenterprise
Micro 729.7 7.0 28,975
Small 1,645 15.8 7,183
Medium 1,299 12.4 440
Large 6,758 64.8 343
2.Byeconomic sector
Industrial 7,975 76.4 18,376
Commercial 1,128 10.8 10,693
Services 1,330 12.8 7,872
NAFIN setsinterest rates toreflect itsown capital costs; credit terms arevariable anddepend onthe
credit-rating ofeachtypeofenterprise. InNovember 1996, theaverage interest ratecharged byNAFIN was
29.01 percent, which approximately corresponded totheprevailing treasury billrate.
148. There-privatization ofcommercial banks wasfollowed bytheestablishment ofthefinancial
holding company concept, which allowed universal banking through theaffiliation ofthree ormore
financial institutions offering different services aspartofaholding company. Suchholding companies
musthaveatleastthree ofthefollowing institutions withnomore thanoneofeachtype: (i)abank;
(ii)abrokerage house; (iii)aninsurance company; (iv)abonding company; (v)mutual funds
management; (vi)acurrency exchange broker; (vii)awarehousing company; (viii)afinancial leasing
company; (ix)afactory company; (x)alimited scope financial institution company; and(xi)apension
fundmanaging company. Holding companies must haveatleasttwoofthefollowing institutions:
(i)abank; (ii)abrokerage house; and(iii)aninsurance company. Since 1990, other keybanking
lawshavebeencreated oramended, including through thereforms inSeptember 1993 tocover the
subsidiaries offoreign financial institutions (Table IV.10).WT/TPR/S/29 Trade Policy Review
Page 134
Mexico WT/TPR/S/29
Page 135
Table IV.10
Main banking laws
Laws Date
(Publication inthe
Official Journal)
LawRegulating PartXIIIBis,section BofArticle 123oftheConstitution, asamended.
(LeyReglamentaria delaFracción XIIIBisdelApartado B,delArtículo 123dela
Constitución Política delosEstados-Unidos Mexicanos)30December 1983
General LawonOrganizations andAuxiliary Activities ofCredit, asamended.
(LeyGeneral deOrganizaciones yActividades Auxiliares delCrédito)14January 1985
Investment Company Law, asamended.
(LeydeSociedades deInversión)14January 1985
Credit Institutions Law, asamended.
(LeydeInstituciones decrédito)18July1990
LawofFinancial Groups, asamended.
(Leypararegular lasAgrupaciones Financieras)18July1990
Banco deMexico Law
(LeydelBanco deMéxico)23December 1993
Regulations fortheEstablishment ofAffiliates ofForeign Financial Institutions
(Reglas paraelEstablecimiento deFiliales deInstitutiones Financieras delExterior)21April 1994
LawonSaving Systems forRetirement
(Leydelossistemas deAhorro paraelretiro)May1996
Source: Mexican authorities.
149. According totheForeign Investment Law, foreign investors areallowed toparticipate upto
49percentinthecapital ofmultiple banking institutions, financial holding groups, stock exchange
specialist, security firms, foreign exchange companies, financial leasing companies, financial factoring
companies, limited-purpose financial companies, investment management companies, general deposit
warehouses, insurances companies, bonding companies, investments companies, pension andfund
management companies andpension fundinvestment companies. Article 33oftheCredit Institutions
Lawprohibits theparticipation offoreign investors inthecapital ofdevelopment banks. Under Article 8
oftheAuxiliary Credit Organizations Law, foreign financial institutions mayonlyinvest inthecapital
ofgeneral deposit warehouses, financial leasing companies, financial factoring companies andforeign
exchange firms.
150. Toencourage foreign investment inMexican financial institutions, newrules were adopted
inFebruary1995,whichprovidethatthecapitalstockofacommercialbankmaybedividedintodifferent
series ofshares. Series "A"shares, representing atleast51percentofcapital stock ofthebank, may
beheldonlybyMexican individuals orMexican institutions; theremaining ordinary capital takes
theformofseries "B"shares. Series "L"shares, representing contributions toadditional capital, are
issued toapercentage ofupto40percentofordinary capital. Series "B"and"L"shares maybe
subscribed byforeigners. Noindividual shareholder maycontrol more than5percentofthecapital
stock represented by"A"and"B"shares; however, holdings ofupto20percentarepossible with
theprior approval oftheMinistry ofFinance. Thecapital stock ofsubsidiaries mayinclude series
"F"and"B"shares. Series "F"shares must account foratleast51percentofthecapital stock of
affiliates andmust beowned, directly orindirectly, byforeign financial institutions; theremaining
capital takes theform ofseries "B"or"F"shares.WT/TPR/S/29 Trade Policy Review
Page 136
151. Commercial banks whose capital represents more than6percentofthetotalnetcapital of
thebanking system maynotbeacquired byaforeign financial institutions andconverted intoanaffiliate;
ineffect thisprecludes controlling foreign participation inanyofMexico 'sthree largest commercial
banks. However, foreign investors mayholdnon-controlling investments inthecapital ofsuchbanks.
Affiliates mustnotconstitute more than25percentofthenetcapital ofthebanking system. Foreign
institutions mayonlyoffer inMexico thesame services theyprovide intheirhome country. By
June1997, 96foreign financial institutions hadeither beenauthorized tooperate inMexico orreceived
anopinion favouring authorization (pending finalauthorization).
152. Thegrowing opening oftheMexican financial system andtheexperience ofthefinancial crisis
in1995haveledtheauthorities tointroduce stricter prudential, supervisory andoperational rulesmore
inlinewithinternational standards. Thus, sinceearly1997banks havebeenrequired toreport quarterly
results using accounting methods based ontheU.S.Generally Accepted Accounting Practices. The
newstandards havehadaconsiderable impact onthereported value ofoverdue loans: under theold
method, banks onlyreported theunpaid portion ofaloan, while nowtheyinclude innon-performing
credits thetotality ofthecredit (principal andinterest).
153. TheNAFTA made itpossible forCanadian andU.S.financial institutions toopensubsidiaries
inMexico, subject toforeign market share limits which are,however, scheduled forgradual elimination
by31December 1999. TheAgreement provided thatduring thetransition period subsidiaries would
besubject toindividual and/or aggregate market share limits applicable toeachtypeofinstitution.
Individual andaggregate market share limits weresetforparticular affiliates, whereas aggregate market
shares weredefined forallNAFTA affiliates established inMexico. Certain intermediaries werenot
subject tomarket share limits including securities specialists, general deposit warehouses, management
companies ofinvestment companies, foreign exchange firms, bonding companies pension fund
management companies.
154. Under Mexican financial laws, affiliates maybeestablished onlybyforeign financial institutions
based incountries withwhich Mexico hasconcluded agreements thatcover financial services. Besides
theNAFTA, Mexico hassuchagreements withColombia andVenezuela (G-3). However, negotiations
withVenezuela areonlyexpected tobeconcluded inDecember 1997. Foreign financial institutions
fromothercountriesmayonlyholdnon-controllinginterestsindomesticinstitutions.However,pursuant
toMexico 'saccession totheOECD, theMexican authorities agreed toreview itstreatment ofnon-
NAFTA investors nolaterthanthebeginning of1998andtoextend NAFTA benefits totheseinvestors.
155. UndertheGATS,Mexicoallowsforeigninvestmentofupto30percentinallfinancialservices.
Individual holdings byforeign investors maynotexceed 2.5percentinbanks andcontrolled entities,
5percentinsecurities companies, securities specialists, foreign exchange companies andfinancial
leasing companies, and7.5percentforother financial intermediaries. Foreign financial institutions
mayestablish representation inMexico, subject toprior authorization fromtheMinistry ofFinance.
(iii) Insurance
156. Attheendof1994, therewere43insurance firms, twore-insurance companies andthreemutual
benefit companies established inMexico; other market information isprovided inTable IV.11. The
insurance industry hasexperienced substantial expansion overrecent years, andobservers believe that
there aregood opportunities forfurther growth, notably inthelife-insurance market.69
69McKnight andAlbert (1993).Mexico WT/TPR/S/29
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Table IV.11
Mexico 'sinsurance market, 1993
Life Non-life Total
Direct premiums (billion pesos) 6.05 11.93 17.98
Premiums aspercentage ofGDP 0.50 1.00 1.50
Premiums percapita (pesos perperson) 66 130 197
Number ofinsurance companies 32 11 43
Source: European Commission (1997).
157. Theinsurance industry isgoverned bytheMutual Insurance Institutions andCompanies Law
of1935, asamended; other lawsapplied totheindustry arelisted inTable IV.12. Main responsibility
fortheapplication ofthese statutes restswiththeMinistry ofFinance andtheNational Insurance and
Bonding Commission, CNSF (Chart IV.7). TheMinistry actsastheregulatory body fortheindustry
andhasresponsibility forauthorizing thecreation, operation, merger orseparation ofinsurance-related
firms, bothdomestic andforeign. There isaninsurance company association, butnoself-regulatory
body.
Table IV.12
Main insurance laws
LawsDate
(Publication intheOfficial
Journal)
Mutual Insurance Institutions andCompanies Law
(LeyGeneral deInstituciones ySociedades Mutualistas deSeguros)31August 1935
Insurance Contract Law
(Leysobre elContrato deSeguro)30August 1935
LawRegulating Insurance Institutions Investment
(Leyqueregula lasinversiones delasinstituciones deSeguros, Instituciones deFianzas yBancos
deCapitalización, enTítulos deValores enserie, enInmeubles yenPréstamos Hipotecarios)31December 1947
Traveller Insurance Law
(LeydelSeguro delViajero)2September 1988
Insurance andBonding Agents Regulations
(Reglamento deAgentes deSeguros yFianzas)24September 1981
National Insurance andBonding Commission Regulations, regarding Inspection, Vigilance and
Accountancy
(Reglamento delaComisión Nacional deSeguros, yFianzas enMateria deInspección,
Vigilencia yContabilidad)14January 1991
Source: Mexican authorities.
158. Insurance agents maybeindividuals orlegalentities; bothareregulated bytheRegulations
forInsurance Agents. Legal entities arealsogoverned bytheMutual Insurance Institutions and
Companies Law. Individuals acting asinsurance agents maybeMexican orforeign; legal entities
actingasagentsmustbeestablishedinMexicoascorporationsand,withthepriorapprovaloftheForeign
Investment Commission, maybe100percentforeign-owned.
159. Foreign reinsurers mayhaverepresentatives inMexico, butthese mayonlyaccept orassign
reinsurance liabilities inthename oftheirmainoffices. Toparticipate inreinsurance operations, foreignWT/TPR/S/29 Trade Policy Review
Page 138
reinsurersmustberegisteredwiththeMinistryofFinance.Companiesengagedinreinsuranceoperations
mayusetheservicesofintermediariesresidinginMexicoorabroad.Reinsuranceintermediariesresiding
inMexico mustbeauthorized bytheCNSF, while reinsurance intermediaries residing abroad must
beregistered withboththeCNSF andtheMinistry ofFinance.
160. Only insurance companies authorized bytheMinistry ofFinance mayengage ininsurance
activities related to(i)life,(ii)injuries andillness, or(iii)damage inareas suchascivilliability and
professional risks, maritime transport, fire,agriculture andanimals, automobiles, andcredit. Insurance
companiesmayofferbothlifeandnon-lifepolicies,buttheymustbeorganizedindepartmentsspecialized
ineachtypeofinsurance. Insurance companies mustmeetminimum capital andreserve requirements
foreachtypeofinsurance. They maynotoffer banking services. Ingeneral, insurance companies
arefreetooffernewproducts; however, thisrequires thesubmission oftechnical notes totheNational
InsuranceandBondingCommission,whichverifiesthattheproductsareinaccordancewiththeInsurance
Contract Law. Insurance companies must haveaminimum paid-up capital stock foreachofthese
operations, which isdetermined bytheMinistry ofFinance during thefirstquarter ofeachyear. There
arenoobligations ondomestic economic operators toemploy specified companies forspecific insurance
services.
161. TheForeign Investment Lawestablishes thatindividual foreign investors mayholdnomore
than20percentofthecapital ofaninsurance company. Mexican nationals musthavebothmajority
ownership andadministrative control ofinsurance companies established inMexico. There areno
nationalityrequirementsforboardmembersofdomesticinsurancecompanies.Foraffiliatesofinsurance
companies, themajority ofboard members andthedirector mustreside inMexican territory, regardless
theirnationality.
162. Under theNAFTA, Canadian andU.S.companies thatowned atleast10percentofaMexican
insurance company on1July1992 mayexercise anyownership option thatmayhavebeeninplace
atthattime. Since 1January 1996, suchNAFTA companies havebeenallowed toacquire acontrolling
interests ofupto100percentinaMexican insurer. Alternatively, Canadian andU.S.insurers may
invest through jointventures withMexican insurance companies. Foreign jointventurers werelimited
toa30percentequity participation in1994; thislimitistogradually increase to51percentby1998,
and100percentby2000. Finally, NAFTA-based insurers mayestablish wholly-owned subsidiaries,
subject toanaggregate limitof6percentofthetotalinsurance market on1January 1994; thiswill
gradually increase to12percenton1January 2000. Inthisperiod, individual insurance companies
arelimited toamarket share of1.5percent. Canadian orU.S.-based insurance companies which
establish subsidiaries orhaveajointventure inMexico areaccorded national treatment.
163. Inthefinancial services negotiations under theGATS uptoJuly1995, Mexico made nospecific
commitments except intheareaofcommercial presence; commercial presence isgenerally limited
toamaximum of30percentforeign participation (market access), andindividual holdings byforeign
investors maynotexceed acertain percentage ofthecapital stock (national treatment).70Mexico is
participating inthecurrent financial services negotiations.
70WTO document GATS/SC/56/Suppl.1/Rev.1, 4October 1995.Mexico WT/TPR/S/29
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(iv) Telecommunications
(a) Market structure andperformance
164. Mexico'stelecommunicationsindustryisoneofthelargestandfastestgrowinginLatinAmerica,
bothinterms ofinfrastructure andservices provided (BoxIV.3). Telmex (Teléfonos deMéxico )and
itssubsidiaries, Mexico 'sdominant telecommunications group, employed justover55,000 persons
in1994. Participation oftelecommunications inMexico 'sGNP grew from 1.6percentin1990 to
3.1percentin1996. Since privatization in1991, thetelecommunications sector hasgrown seven
times faster thantheeconomy asawhole.
BoxIV.3: Main features ofthetelecommunications system
- Urban localities withtelephone service: 21,038;
- Telephone lines connected: 8,974,000.
- Telephone density islowvis-à-vis other OECD countries, at9.6lines per100inhabitants; this
figure isexpected toalmost double bytheyear2000.
- Thedensity ofpublic telephones isalsolowat1.5per1,000 inhabitants, butithasexpanded
rapidly inrecent years, increasing by62percentbetween 1991-96.
- Thenumber ofrural localities withtelephone services increased from 9,700 in1990 to31,600 in
1996.
- Inlate1996, cellular telephone services were provided to739,000 users; there were 166,000
users ofpaging services and1,500 oftrunking.
- Thepaging andtrunking market wasexpected toraise 42percentperyearduring until theyear
2000.
- Thepaging/trunking equipment market reached some US$970 million in1993.
- Eight percentofhouseholds areconnected tocable television services.
165. Mexico wasoneofthefirstLatin American countries toengage inamajor programme toopen
upthetelecommunications market, including deregulation, theintroduction ofcompetition andthe
liberalization offoreign investment. In1990, theGovernment initiated theprivatization ofthethen
state-controlled telephone company, Telmex; investors intheprivate consortium included aMexican
group, Grupo Carso (10percent), andtwoforeign companies: France Telecom, theFrench national
telephonecompany(5percent),andSBCCommunications,adivisionofSouthwesternBell(5percent).
Theparticular classofshares soldtotheprivate consortium gavethisgroup 51percentofthevoting
control ofTelmex, although themajority ofshares remained inMexican hands.
166. Since privatization in1991, Telmex hasinvested some US$13 billion intheexpansion and
modernization ofthetelephone network, which was90percentdigital attheendof1996. The
long-distance fibreoptic network isover40,000 kilometres. Nineregional andonenational cellular
telephony concessions havebeengranted, servicing morethan1.1million subscribers. Thegovernment
hasgranted 44trunking concessions andthere are262cable TVconcessions. Overall, liberalizationWT/TPR/S/29 Trade Policy Review
Page 140
seems tohave ledtosignificant improvements inTelmex 'service, particularly since 1996, with
consumers, including business users, receiving progressively more efficient andreliable transfer of
information.
(b) Regulatory framework
167. Theauthorities havegradually modified thelegalenvironment fortelecommunications, seeking
toattract investment totheindustry, while ensuring competition, protecting consumers andaddressing
potential conflicts ofinterest between Telmex andnewentrants tothemarket. TheMinistry of
Communications andTransport, through itsVice-Ministry ofCommunications, acted astheregulatory
authority fortheindustry untilAugust 1996. Atthattime, theGovernment established anindependent
organisation, theFederal Telecommunications Commission (CFT), asanindependent regulatory body
under theMinistry, withtechnical andoperational autonomy. ThisCommission, together withthe
Ministry, oversees compliance withtherelevant lawsandregulations. TheCFT'sspecific functions
include to(i)promote theefficient interconnection ofequipment andofpublic telecommunications
networks; (ii)propose totheMinistry ofCommunications andTransport sanctions fortheviolation
oflegal, regulatory oradministrative provisions; (iii)advise onthegranting ofnewlicences and
concessions, andsupervise theperformance oftheconcessionaires; (iv)auction andmanage spectrum
frequencies; and(v)register tariffs fordifferent telecommunication services.
168. InMarch 1995, Article 28oftheConstitution wasamended toallow foreign participation in
telecommunications andtoeliminate theStatemonopoly fortheestablishment andoperation ofsatellite
systems. ThenewFederal Telecommunications Lawof7June1995, governs theentire Mexican
telecommunications industry. Themainobjectives ofthislawareto(i)promote efficient development
oftelecommunications; (ii)exercise theauthority oftheStateonrelated matters toprotect thenational
sovereignty; (iii)promote competition among service providers toofferbetter services, diversity and
quality; and(iv)promote adequate social coverage.
169. Although Telmex stillhasadefactomonopoly inlocalexchange telephone services, itsdejure
monopoly indomestic andinternational long-distance services ended inAugust 1996, when other
providers werepermitted toenterandcompete inlong-distance services aslongasnointerconnection
tothebasicnetworkwasrequired.TheGovernmentbeganofferingconcessionsonlong-distanceservices
inSeptember 1995. Concessionaires ofpublic telecommunications networks havebeenpermitted to
provide long-distance basic telephony public services since August 1996, provided theycomply with
theexpansion andefficiency conditions included intheir concession titles. Under theFederal
Telecommunications Law, allpublic telecommunication network concessionaires withinterconnection
agreements andintending toprovide domestic andinternational long-distance telephone services may
interconnect tothelocalnetwork from 1January 1997.71Guidelines were setforth bytheMinistry
inthe"Resolution onthePlanforInterconnection withLong Distance Public Networks" of1July
1994, ofwhich Rule6oftheLong Distance Rules established procedures forcustomers toselect the
long-distancecarrieroftheirpreference.InJune1996,theGovernmentpresentedthetechnicalsignalling
andnumbering plans tofacilitate theopening ofthelong-distance market.
71Such concessionaires include Alestra (aconsortium including Mexico 'sGrupo Alfa, theU.S. firmAT&T
GTE, Bancomer andTelefónica deEspaña), Avantel (Mexico 'sGrupo Financiero Banamex-Accival andtheU.S.
firmMCICommunications), Investcom S.A.deC.V. (Grupo deComunicaciones deSanLuis, Nobelcom, Nextel
Comm andtheCarlyle Group), Iusatel (Grupo IUSA andBellAtlantic), Marcatel SAdeCV(IXC Comm,
Westel Inc,Radio Beep SAandGustavo M.delaGarza).Mexico WT/TPR/S/29
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170. Under theFederal Telecommunications Law, foreign investment participation maynotexceed
49percent,except incellular telephone services. Inthiscase,afavourable resolution fromtheForeign
Investment Commission isrequired forforeign investment toexceed 49percent. Nolimitonforeign
investment isestablished onvalue-added services, registration withtheMinistry being theonlycondition
applied. Under theForeign Investment Law, telegraph services arereserved fortheMexican State.
171. Identical treatment isgranted toinvestors fromNAFTA andnon-NAFTA countries. TheNAFTA
covers onlythesupply ofenhanced telecommunications services, butitincludes aprovision thatwould
allow itsmembers tonegotiate anagreement onbasicservices inthefuture.72TheMexican authorities
indicated that, taking intoaccount thesuccessful result intheWTO negotiations onbasic
telecommunications services andthecommitments already adopted, Mexico hadnoplans forfurther
liberalization inthissector.
172. TheForeign Investment Lawreserved satellite communications totheState; however, since
March 1995, amendments toArticle 28oftheConstitution havemade itpossible forforeign investors
toownupto49percentofaMexican firmoperating satellite communications. Until theyear2002,
telecommunicationservicesmustusetheMexicansatelliteinfrastructure.TelecomunicacionesdeMexico
(Telecomm) hasexclusive rights tolinkwithIntelsat andInmarsat.
173. Thegranting ofconcessions andpermits isgoverned bytheprovisions ofChapter IIIofthenew
Telecommunications Law, which limits access toMexican individuals orcompanies. Concessions are
available touseafrequency bandinnational territory, except forthefree-use andtheofficial-use spectra;
installing, operating orexploiting public telecommunications networks; occupying geostationary orbital
slotsandsatellite orbits assigned toMexico andexploiting theircorresponding frequency bands; and
exploiting signal transmission andreception rights offrequency bands associated toforeign satellite
systems thatcover Mexico.
174. Concessions onfrequency bands forspecific usemustbegranted through public bids. TheFederal
Telecommunications Lawprovides thatconcessions onthepublic network maybegranted forupto
30years, while frequency-band concessions maybegranted for20years; inbothcases concessions
mayberenewed forperiods equal totheoriginal term.
175. Licences arerequired toestablish, operate orexploit atelecommunications marketing company
notoperating apublic network, andtoinstall, operate orexploit landtransmitting stations. Concessions
andlicences areissued bytheMinistry ofCommunications andTransport. TheLawcontains specific
provisions fortheassignment, termination, andrevocation ofconcessions andpermits. Private
telecommunications networks donotrequire aconcession orlicence, ortobeinscribed inthe
telecommunications register, except when theyusetheelectromagnetic spectrum.
176. Onlyenterprises established inconformity withMexican lawsmayobtain concessions toprovide
telecommunications services. Enterprises withdirect foreign investment, regardless ofthenational
origin ofthecapital, must beregistered intheForeign Investment Registry andthePublic Register
72Questions have been raised bytheUnited States onMexico 'simplementation ofitsNAFTA
telecommunications commitments including Mexico 'sstandards forterminal attachment andtheexchange oftest
datarelated toproduct safety ofequipment (United States Information Service, Geneva, Daily Bulletin, 4April
1997).WT/TPR/S/29 Trade Policy Review
Page 142
ofCommerce. Inaddition, theMinistry ofForeign Affairs must confirm theuniqueness ofthe
commercial name oftheenterprise. There arenolimitations onnational treatment granted toforeign
providers.
177. Under itsinitial titleofconcession, from1992to1996Telmex wasallowed tomake adjustments
tolocalratesevery three months tophase outcross-subsidies. For1997 to1998, anewmechanism
setsanupper limittotheaverage weighted rateofthebasic service bundle. Prior totheirapplication,
theratesmustberegistered withtheMinistry ofCommunications andTransport. Operators maynot
engaged indiscriminatory practices intheapplication oftheauthorized rates. TheMinistry isauthorized
toimpose onalicensee withsubstantial market power, specific obligations related torates, quality
ofserviceandinformation;inearly1997thismeantonlyTelmex.Traditionalcross-subsidies(e.g.long-
distance ratessubsidizing localservices) arebeing phased outtoensure faircompetition ineachmarket
segment; asaresult, since Telmex wasprivatized, long-distance rateshavegenerally fallen, while
ratesforlocalservices haverisen steadily.
178. TheFederalTelecommunicationsCommission(CFT)actsasthestandardizationbody.Conformity
testsarecarried outbylaboratories withradiation, propagation andterminal equipment. TheCFT
istheonlyentity authorized torecognize testresults from national orforeign testfacilities. Under
current regulations, therearenoimport orsalesprohibitions onnon-certified equipment. Limitations
forinterconnections tothepublic telecommunications network anduseoftheradiospectrum aredefined
intheTelecommunications Regulations.
179. Inthepastsixyears, Mexico hassigned several agreements andprotocols withtheUnited States
toeaseregulations ontelecommunications intheborder region. InApril 1996, theMexico-U.S.
Reciprocity Satellite Agreement wassigned; aprotocol ondirect-to-home (DTH) services under the
agreement allows satellites fromonecountry toprovide direct-to-home satellite video services inthe
territory oftheother subject tocompliance withthelegislation ofeachcountry. InFebruary 1997,
apaging protocol wassigned withtheUnited States allowing coordination between operators onboth
sidesoftheborder. InApril 1997, aMemorandum ofUnderstanding onDigital TVservices wassigned
between Mexico andtheUnited States.
180. MFN tariffs ontelecommunications equipment haveremained relatively constant during thelast
fewyears, butunder theNAFTA, tariffs onclose to77percentoftelecommunications equipment
itemshavebeeneliminated.In1996,theseproductsaccountedforapproximately75percentofMexico's
imports oftelecommunications equipment from theUnited States.
181. Intheextended GATS negotiations onbasic telecommunications, Mexico submitted anoffer
coveringservicessuchasvoicetelephony,packet-switcheddatatransmissionservices,facsimileservices,
paging services andcellular telephone services (Table AIV.1). Oncross-border supply, Mexico agreed
toplace nolimitations, except onmarket access, thatwould require international traffic toberouted
through thefacilities ofanenterprise withaconcession granted bytheMinistry ofCommunications
andTransport.Commercialpresenceisgenerallylimitedtoamaximum49percentforeignparticipation
ineachfirm, butother provisions apply suchasdescribed previously (e.g.obtaining authorization from
theauthorities).Mexico WT/TPR/S/29
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(v) Airtransport
(a) Market structure andperformance
182. In1996, Mexico 'sairport network comprised some 1,033 aerodromes, 53international airports
and30national airports. Estimates forthatyearshow thatsome 26million passengers usedregular
commercial flights, a5percentincrease relative to1995; about 285,000 tonnes offreight were
transported, 13percentmore thanin1995 (Table IV.13).73
Table IV.13
Main indicators fortheairtransport sector
Concept 1986 1990 1994 1995b1996c
Infrastructure andairoperations:
Number ofairports 1,345 2,168 1,749 1,809 1,933
National 41 40 33 33 30
International 32 42 50 50 53
Aerodrome 1,272 2,086 1,666 1,726 1,850
Number ofaircraft 5,019 5,874 6,407 6,426 6,346
Commercial 605 847 1,309 1,283 1,239
Official 612 585 569 623 599
Private 3,802 4,442 4,529 4,520 4,508
Number ofpassengers ('000)a18,022 20,449 29,131 25,192 25,724
National services 11,563 11,438 18,394 14,857 13,484
International services 6,459 9,011 10,737 10,335 12,240
Freight transported ('000tonnes) 155 164 237 252 255
National services 89 63 70 85 85
International services 66 101 167 167 170
Percent
Participation ofnational services intotalpassengers carried 64 56 63 59 52
Participation ofinternational services intotalpassengers carried 36 44 37 41 48
a Refers toregular services provided bycommercial airline companies.
b Preliminary figures.
c Estimates.
Source: Segundo informe deGobierno, anexo, 1September 1996, p154.
183. Domestic passenger services account forjustoverhalfoftotalpassengers transported, ashare
thathasdeclined overtimeasanincreasing number ofpeople useinternational services (Table IV.13).
According todataprovided bytheauthorities, in1996there were26Mexican airservice companies:
fivetrunk lineoperators, 11regional airlines, andanumber ofspecialized service providers. There
werealso114foreign airservice companies, 36providing regular airservices andtherestinvolved
infreight andcharter services. Airtransport activity fellasaresult oftheeconomic recession of1995,
buthassince recovered. Thetotalnumber ofpassengers transported wasexpected toincrease by
6percentin1997; 8million passengers weretransported oninternational routes in1996, anactivity
thatwasforecast togrow by10in1997.
73Incontrast, roadtransport wasprojected toservice 2,700 million passengers andhandle 370million tonnes
offreight in1996.WT/TPR/S/29 Trade Policy Review
Page 144
184. Theauthorities havetaken stepstorenovate andenlarge theairport infrastructure, including
several runways (e.g. Chihuahua, Guadalajara, Mexico City, Torreon) andanumber ofterminals
(e.g.Cancún,CiudadObregón,Tepic,Veracruz,Zacatecas).Theyhavealsoopeneduptheairtransport
sector toprivate investors, including foreign investors, andinitiated aprogramme ofderegulation.
These steps have enlarged thenumber ofservice providers andairroutes, andresulted inmore
competitive pricing. However, liberalization hasalsoundermined thefinancial position ofsome air
companies, which hashadnegative effects onservice quality andefficiency ontheroutes theyserve.74
185. Privatization isseenasawayofproviding thecapital required forthemodernization ofthe
country 'sairsector andenhancing competition. Private capital participation inairport infrastructure
increased from5percentofinvestment in1989to72percentin1993, when itwasestimated tohave
accounted for16.5percentoftotalassets.75Private investors haveconcentrated theirholdings inthe
mostprofitable airports andinfrastructure, while thepublic sector remains responsible formostother
investment. Theprivatization process wasexpected toexpand in1997toinclude theconcession, through
public tenders, of35airports andalarge number ofaerodromes.
(b) Regulatory framework
186. Thepolicies andinstruments usedtopromote thesector during thelasttenyears havederived
from thevarious National Development Plans andfrom sectoral development plans forthetransport
sector, themost recent ofwhich waspublished in1996. Themost important lawaffecting theair
transport sector istheGeneral Communications Lawof19February 1940. Thislawwasrecently
reformed bytwonewstatutes: theCivil Aviation Lawof12May1995, andtheAirport Lawof
22December 1995 (Table IV.14). Bothlawsseektopromote faircompetition, increase safety and
consumerprotection,fosterthemodernizationofthesector,createanewmechanismtograntconcessions
andpermits, andliberalize tariffs.
Table IV.14
Main lawsgoverning theairtransport sector
Law/Decree Date
General Communications Law
(LeydeVíasGenerales deComunicación)19February 1940
Provisional Agreement onInternational Civil Aviation
(Convenio Provisional deAviación CivilInternacional)12September 1946
Civil Airport andAerodrome Regulations
(Reglamento deAeródromos yAeropuertos Civiles)15November 1951
General Rules fortheApplication ofRates forPublic Domestic AirPassenger Transport Services
(Reglas Generales deAplicación delasTarifas delosServicios Públicos deTransporte Aéreo
Nacional dePasajero s)24January 1964
Decree establishing theAirport andAuxiliary Services Agency asadecentralized public organism.
(Decreto quecreaelOrganismo Público Descentralizado Aeropuertos yServicios Auxiliares)12June1965
Airport Administration Regulations
(Reglamento deAdministración Aeroportuaria)16June1975
Table IV.14 (cont'd)
74Poder Ejecutivo Federal (1996), p.40.
75OECD (1995), p.83.Mexico WT/TPR/S/29
Page 145
Law/Decree Date
AirTransit Regulations
(Reglamento deTránsito Aereo)30July1975
Decree toestablish theFederal AirTransport Agency asanindependent, decentralized public
organism
(Decreto porelquesecreaunOrganismo Público conpersonalidad jurídica ypatrimonio propio,
quesedenominará Transporte Aéreo Federal )14June1984
Civil Aviation Law
(LeydeAviación Civil)12May1995
Airport Law
(LeydeAeropuertos )22December 1995
Source: Mexican authorities.
187. Thelegalbaseforforeign investment inairtransport isthe1993 Foreign Investment Law
(LIE-Chapter II(4)). Thislawallows foreign investment participation ofupto25percentinnational
airtransport andaerotaxi services. TheLIEpermits foreign investment toamaximum of49percent
inthecapital ofanyfirmwithaconcession orpermit tooperate public civilairports; foranysuch
investment toexceed 49percent,priorapproval isrequired fromtheForeign Investment Commission.
Cabotage services arereserved fornational companies. TheAviation Lawestablishes thatallforeign
firmsoperatingflightsinMexicomustcomplywiththeinternationalbilateralagreementsonairtransport
towhich Mexico isaparty, andobtain prior authorization from theMexican authorities.
188. TheMinistry ofCommunications andTransport hasultimate responsibility fortheairtransport
sector. Airlines arefreetoestablish service rates, butthese must beregistered withtheGeneral
Directorate ofTariffs. TheGeneral Directorate ofCivilAviation hasdirect responsibility forregulating
thesector, andapproves theentry ofnewairlines (Table IV.15). TheAirports andAuxiliary Services
Agency (ASA) ischarged withthedirect operation ofairports, including airport auxiliary services
aswellascommercial andother complementary activities. ASAisalsoincharge oftheprivatization
process.
189. TheCivil Aviation Lawstipulates thatpermits toprovide airtransport services maybe
granted toMexican legalentities, fornon-regular domestic services; Mexican legalentities andforeign
companies, forregular international services; Mexican legalentities orforeign companies, fornon-
regular international services; andMexican orforeign individuals orlegalentities, forcommercial
private services.
190. TheDirectorate ofTransport andAeronautical Control isresponsible forsupporting and
promoting theoperation ofregular, general andfreight services, andestablishing control systems to
ensure thequality ofsuchservices. Approval ofairline operations requires awritten application to
theDirectorate ofTransport andAeronautical Control andavalidpermit issued inMexico toconduct
charter flights, ifrelevant; foreigners mustalsopresent avalidlicence andacertificate ofairworthiness.
Theoperation ofairport services (e.g.warehousing, stowage) requires fulfilment ofthelegal, technical
andfinancial conditions established intherelevant statutes.WT/TPR/S/29 Trade Policy Review
Page 146
Table IV.15
Main organisms controlling theairtransport sector
Organism Function
Ministry ofCommunications andTransport
(Secretaría deComunicaciones yTransportes)Controls transport andcommunication services, andservice
rates.
General Directorate ofCivil Aviation
(Dirección General deAeronáutica Civil)Regulates airtransport, approves theentry ofnewairlines, and
controls theoperation ofairports, airport auxiliary and
commercial services.
Airports andAuxiliary Services Agency
(Organismo Público Descentralizado Aeropuertos yServicios
Auxiliares)Responsible foroperating, managing andmaintaining airports.
National Commission topromote International AirTransport
(Comisión Nacional deFacilitación delTransporte Aéreo
Internacional)Implements theArticle 9provisions oftheChicago Convention
(onissues suchastheexitfrom, andadmission intothe
country, ofaeroplanes, passengers, crews andmerchandise, as
wellastransit traffic andsanitary controls).
Mexican AirSpace Navigation Service (SENEAM)
(Organo desconcentrado denominado Servicios ala
Navegación enelEspacio Aéreo Mexicano)Controls airtransit.
Federal AirTransport Agency
(Organismo Público Descentralizado denominado Transporte
Aéreo Federal)Meets official airtransport needs.
Source: Mexican authorities.
191. Nopreferentialtreatmentisprovidedtoanyairline,includingnationalcompanies.Norestrictions
apply tothepurchase ofaircraft andthere arenorequirements forthepurchase oflocal inputs, or
theuseofdomestic service providers ininternational trade. Nopreferential treatment isgranted on
airport access, including under theNAFTA (which doesnotcover theairtransport sector).
192. Theprinciple ofreciprocity isthebasis ofMexico 'sinternational bilateral agreements onair
transport: through thisapproach theauthorities seektomake possible theexpansion ofMexican
companies inforeign markets. TheMexican Government hassigned 35bilateral agreements: sixwith
countries inAsia, tenintheCaribbean andSouth America, three inCentral America, 14inEurope,
andtwoinNorth America. Anewagreement withPortugal wassigned on6November 1996.
(vi) Maritime transport
(a) Market structure andperformance
193. Mexico has11,500 kilometres ofseashore and87ports withcombined commercial activity;
41ofthese ports arelocated onthePacific coast and46ontheCaribbean orGulfofMexico coasts.
There arealso55portexclusively engaged infishing activities, 38tourist ports, 33trade ports,
23oil-related ports and15forspecialized freight transportation. In1996, freight traffic through the
nationalportsystemtotalled208millionstonnes;commercialoperationsaccountedforabout26percent
ofthistotal. During thesame period, container traffic increased to684,312 TEU76,anincrease of
2percentrelative totheprevious year. Cruise-liner operations involved some 1.9million
passengers in1995.
76Twenty-foot equivalent units(TEU) isthebasic unittoexpress thecapacity tocarrying containers onfully
cellular, part-container orRo/Ro vessels.Mexico WT/TPR/S/29
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194. Maritime transport plays acentral roleinMexico 'sinternational trade, handling more than
80percentofthecountry 'stotalforeign trade, equivalent to145million tonnes offreight in1996.
Although inabsolute terms export volumes havecontinued torise,theyhavefallen asashare ofthe
total; including in-bond operations, since 1985. Alarge partofallfreight istransported inforeign
flagvessels. Themain partners inMexico 'smaritime trade are,indecreasing order ofimportance,
theAmericas, Europe andAsia. In1994, theMexican merchant fleetranked fifthinLatin America
interms ofdeadweight tonnes transported, which reached some 1.5million tonnes; asaresult ofthe
economic downturn in1995thatfigure felltoabout 1.3million tonnes in1996. Fishing boats, tankers,
andfreighters arethemost widely usedvessels inMexico.
195. Theauthorities consider thatMexico 'sportsystem lagsbehind those ofdeveloped countries
asaresult ofthelackofcompetition between ports, acentralized portadministration, limited private
participation andaninadequate communications network.77Other shortcomings include inadequate
portequipment andlimited public resources tomake improvements. In1992, theGovernment initiated
aprocessofprivatizationanddecentralizationtoaddresstheseshortcomings.Thishasinvolvedattracting
private capital intopublic infrastructure, generally improving communications across thecountry, as
wellasthedecentralization ofthenational portadministration system, which isexpected toleadto
theoperational andfinancial autonomy ofeachport. During thisperiod, efforts havealsobeenmade
tomodernize portinfrastructure, including through theconstruction ofspecialized terminals for
containers, aswellasforfluidandbulkcommodities. Between 1989 and1994, theprivate sector
played amajor roleinthisprocess, spending overUS$350 million onportdevelopments.78
(b) Regulatory Framework
196. Mexico 'slegal framework fortheportandmaritime sector includes several articles ofthe
Constitution (e.g.Articles 27and28),aswellasanumber ofrecent lawssuchasthePortLawof
June1993 andtheShipping Lawof4January 1994 (Table IV.16).
197. Theextent offoreign ownership allowed under theForeign Investment Lawisasfollows:
- upto49percentinIntegral PortAdministration entities (APIs); piloting portservices for
vessels carrying outinland navigation operations; andshipping companies commercially
explotating ships forinland andcoastal navigation, excluding tourism cruisers, explotation
ofmarine dredging andimplements forportconstruction, conservation, andoperation;
- above 49percent, withtheprior approval oftheForeign Investment Commission, inport
services forinland navigation operations suchastowing, mooring andlighterage; andshipping
companies operating ships solely forhigh-seas traffic.
Identical treatment itsgranted toinvestment from NAFTA andnon-NAFTA countries.
198. Article 34oftheShipping Lawreserves inland shipping forowners ofMexican vessels; in
theirabsence orwhere thepublic interest sorequires, Mexican shipowners maybegiven temporary
shipping permits tocarrycargo onforeign vessels and,iftherearenoMexican shipowners, suchpermits
maybegranted toforeign shipping companies. Theoperation andexploitation ofcoastal shipping vessels
77Embassy ofMexico inCanada (1996).
78Economist Intelligence Unit (1996).WT/TPR/S/29 Trade Policy Review
Page 148
maybecarried outbyMexican orforeign shipowners withMexican orforeign vessels. Foreign
shipowners orvessels require apermit fromtheMinistry ofCommunications andTransport, subject
toverification thatthere isreciprocity andequivalent treatment inthecountry ofregistration ofthe
vessel andinthecountry where theshipowner hashisregistered office andrealandeffective place
oftrade. Articles 20and21ofthePortLawstipulate thatconcessions forAPIs mayonlybegranted
toMexican commercial companies. Other concessions orpermits (forthebuilding, theoperation or
theexploitation ofports orportservices, etc.)maybegranted toMexican legalentities orcitizens.
Table IV.16
Mexican legislation onports andmaritime transport
Law Purpose Date
International Multimodal Transport
Regulations
(Reglamento para elTransporte
Multimodal Internacional)Regulates theuseoftheterritorial sea,waterways andshores. 1July1989
Economic Competition Law
(LeyFederal deCompetición
Económica)SeeChapter III(4) 24December 1992
PortLaw
(LeydePuertos )
PortLawRegulations
(Reglamento delaleydePuertos )Allows direct participation ofprivate investors inport
administration andoperation. Seeks aplanfortheintensive
andrational development ofports. Regulates port, terminal
andmarina-related activities, suchasconstruction, operation
andadministration, through, interalia,theIntegral Port
Administration entities.
(Administración Portuaria Integral -APIs).19June1993
21November 1994
Foreign Investment Law
(LeydeInversión Extranjera)SeeChapter II(4) 27December 1993
Shipping Law
(LeydeNavegación)Regulates water transportation, shipping andmaritime trade.
Promotes private firmparticipation tofoster anefficient and
regular maritime transport withcompetitive ratesandgreater
foreign vessel participation.4January 1994
Source: Government ofMexico.
199. ThemainagenciesinvolvedinpolicyformulationandimplementationareshowninTableIV.17.
Privatization hasreduced theroleofPuertos Mexicanos ,asportmanagement isnowmostly the
responsibility ofthe17APIs currently established. Equity intheAPIs wasinitially underwritten by
theGovernment, butthrough international public bids, government participation hasbeenreduced.
Inports administrated byAPIs, operation committees coordinate activities among authorities,
administration, operators andservice contractors, aswellascomplaints from users. After approval
bytherelevant committee, theportworking rules formulated byadministrators areregistered with
theMinistry ofCommunications andTransport.Mexico WT/TPR/S/29
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Table IV.17
Institutional framework forports andmaritime transport
Competent agency Main functions
Ministry ofCommunications andTransport
(Secretaría deComunicaciones yTransportes)Controls transport andcommunications services andservice
rates.
General Coordinating Agency forPorts andMerchant Marine.
(Coordinación General dePuertos yMarina Mercante)Coordinates activities related toports, merchant marine,
captaincies, Mexican merchant marine training trust, integral
portadministration entities, andthenational fundforport
development.
General Directorate forPorts
(Dirección General dePuertos)Operates astheportauthority. Participates inpolicy
formulation andprogramme implementation forthenational
portsystem. Seeks tofoster public andprivate participation in
portactivities. Defines thebases fortariff regulation and
rates.
General Directorate forMerchant Marine
(Dirección General deMarina Mercante)Operates asthemaritime authority (directly orthrough
captaincies). Proposes andimplements policies forwater
transport andMexican merchant marine. Matriculates and
flags vessels. Carries outinspections, andenforces Mexican
official standards orthose setbyinternational agreements.
General Directorate forCaptaincies
(Dirección General deCapitanías)Manages andsupervises theactivity ofportcaptaincies and
theirdelegations, andensures compliance withthelegislation.
Establishes andmaintains functional coordination withthetwo
Directorates above.
Mexican Merchant Marine Training Trust
(Fideicomiso deFormación yCapacitación paraPersonal dela
Marina Mercante Nacional)Undertakes thetraining ofstafffortheMexican merchant
marine.
Integral PortAdministration entities (APIs)
(Administración Portuaria Integral)Plan, programme andundertake thepromotion, operation and
development ofports seeking greater competitiveness and
efficiency.
National Fund forPortDevelopment
(Fondo Nacional deDesarrollo Portuario)Commercializes portareas andland-holdings.
Source: Government ofMexico.
200. There arenomeasures limiting access totheMexican shipping market (e.g.numerical quotas,
monopolies, orexclusive service suppliers). Nolimits apply tothetotalvalue ornumber ofmaritime
transport service transactions. However, ships flying theMexican flagmustbecrewed byMexican
nationals bybirth. Nopreferential treatment isgranted tonational shipping enterprises
(e.g.discriminatory portorauxiliary services fees,taxes onfreight orshipping services, loans atlow
interest rates, etc.). Mexico maintains nocargo-sharing arrangements, andnopreferential treatment
isgranted toanycountry forthesupply ofinternational transport andauxiliary services orforaccess
toanduseofportandharbour facilities. However, navigation inMexican maritime zones anddocking
atMexican ports maybedenied ifthere isnoreciprocity. Article 33oftheShipping Lawmakes it
possible toreserve wholly orpartially specific deep-sea international transport forMexican companies
ifthenational economy isaffected byanti-competitive practices byoperators from other countries.
201. Under theValue-Added Tax(VAT) Act,thetransport ofpersons andgoods within Mexico
issubject to15percentVAT, asareportservices notrelated totheexport ofgoods. However, the
international transport ofgoods isnotsubject toVAT when thetransport commences inaMexican
portandterminates inanother country. Thesame applies toportservices forloading, unloading,
guarding, stowage andhaulage supplied fortheexport ofgoods.WT/TPR/S/29 Trade Policy Review
Page 150
202. Portservices (e.g.pilotage, towing andtugassistance, fuelling andwatering, ornavigation
aids)aremade available toallvessels regardless ofcountry ofregistration. Theuseofcertain port
services ismandatory, including pilotage (Shipping Law,Article 48),towing (Shipping Law,Article 52)
andnavigation aids(inconformity withinternational agreements). Nomeasures affect access tonon-
commercial cargoes (government orhumanitarian cargoes), ortheprocurement ofmaritime transport
auxiliary services.
203. Since 6May1976, Mexico hasbeenacontracting party totheUnited Nations Convention
onaCode ofConduct forLiner Conferences. TheCode'sprovisions wereincorporated indomestic
regulations thatentered intoforce on6October 1993. TheGovernment hasnospecific requirements
fortheadmission ofnewmembers toanyconference, which must, however, apply theprovision on
the"membership ofconferences" (Article 1oftheCode ofConduct forLiner Conferences). Article
7oftheShipping Lawprovides thatconferences must filetheir rateschedules withthemaritime
authority.
204. ByNovember 1996, Mexico hadsigned 133multilateral andbilateral agreements relating to
maritime activity. TheMexican authorities noted thatalargepartofMexico 'smultilateral agreements
takeplace within theInternational Maritime Organization, theUnited Nations Conference onTrade
andDevelopment andInternational Labour Organisation. Mexico haswithdrawn from thebilateral
maritimeagreementssignedwithArgentina,BrazilandSpain,whilethosesignedwithBulgaria,Germany
andtheRussian Federation havefallen intodisuse.
205. Mexico made nospecific commitments under theGATS withrespect tomaritime transport
services. However, itparticipated actively intheNegotiating Group onMaritime Transport Services
thatfollowed theconclusion oftheUruguay Round. Aspartofthose negotiations, Mexico offered
nottoplace limitations onconsumption abroad (market access andnational treatment) orcommercial
presence (national treatment); limitations weretoapply inother areas. Forauxiliary services (cargo
handling, storage, maintenance, freight forwarding, etc.), Mexico offered nottoimpose limitations
onnational treatment withrespect toanymode ofsupply; onmarket access, nocommitments were
offered withrespect tothepresence ofnatural persons, while foreign capital limitations weretoapply
oncommercial presence.
(vii) Land transport
(a) Railways
206. Mexico 'srailnetwork covers mostofthenational territory, servicing 30ofthe32Federal
States. Thesystem comprises some 26,600 kilometres oftrack, ofwhich about 78percentareprimary
lines, 17percentareshort linesandtheremainder consists ofprivate lines. Therailway equipment
comprises justover1,300 locomotives (with anaverage ageof14years). In1994, railway transport
accounted forjustunder 9percentoffreight carried byland. In1996, thetotalvolume offreight
handled bythestate-owned company Ferrocarriles Nacionales deMéxico (FNM) wasestimated at
58.5million tonnes andthenumber ofpassengers atclose to6.4million (Chart IV.8). International
traffic accounts forabout 40percentoftotalfreight transported byrail;exports include mainly cement,
automobiles, trailers onplatforms andbeer,while imports relate mostly tocereals. Many exports from
maquiladorasontheUnitedStatesborderareshippeddirectlyonU.S.freighttrainswhichhaverailheads
attheindustrial parks.
207. Mexico 'srailway system isoperated byFNM. Theauthorities acknowledge thatthesystem
suffers from structural problems thathave limited itsdevelopment andundermined thecountry 'sMexico WT/TPR/S/29
Page 151
productivity andcompetitiveness.79Since 1979, nonewlineshavebeenadded tothenetwork; because
oflimited public resources, theFederal Government hasbeenunable tofinance therequired investment.
Thedeterioration oftherailnetwork hasresulted indeclining service quality andfalling demand,
especially forpassenger services, threatening theviability ofrailway passenger transport. Toaddress
thissituation, inthelastfewyears theFederal Government hasundertaken arestructuring and
modernization planthatseeks tomake freight transport thesystem 'scoreactivity, while eliminating
uneconomical passenger services.
208. Important legal reforms have been undertaken since 1995 inaneffort tocreate amore
competitive, integrated railway service offering adequate capacity, quality, efficiency andsafety. In
February1995,theMexicanCongressapprovedanamendmenttoArticle28oftheConstitutionallowing
private participation intherailway system. AnewLawRegulating theRailway Services waspublished
inMay1995tofoster competition within thesector, promote thedevelopment ofmultimodal transport,
andadopt atransparent bidding process. Thenewlawprovided that:
- railservices maybeoffered bytheprivate sector through concessions;
- railtransport concessions maycover passenger orfreight services;
- private operators require government permits torunauxiliary services;
- concessions maybegranted foramaximum of50years, andextended forasimilar term;
- concessions andpermits mayonlybegranted toMexican legalentities;
79Poder Ejecutivo Federal (1996), p.33.WT/TPR/S/29 Trade Policy Review
Page 152
- foreign investors mayholdupto49percentofthecapital ofaconcessionaire, andagreater
percentage ispossible ifapproved bytheForeign Investment Commission;
- concession andpermit holders arefreetosetservice ratesbutmustregister withtheMinistry
ofCommunications andTransport;
- theMinistry ofCommunications andTransport maygrant direct concessions toStates,
municipalities andstate-owned enterprises; and
- inother cases, concessions must begranted through abidding process.
209. TheMinistry ofCommunications andTransport established theMexican Railway System
Restructuring Committee inJune1995, asaconsultative body toevaluate therestructuring process
oftherailsystem. ThisCommittee proposed inJuly1995 theregional segmentation oftherailway
network bycreating fourcompanies: Ferrocarril delNoreste, delPacífico-Norte, delSureste, and
Chihuahua-Pacífico, aswellasaterminal inMexico City. Theproject wasapproved bythe
Inter-ministerial Divestiture Commission, which alsoendorsed thegranting ofconcessions forthe
operation andexploitation ofshortlines, andtheconstruction, operation andexploitation ofnewlines.
210. IntheNational RailSystem concession process, acallfortenders fortheFerrocarril delNoreste
resultedinthewinningconsortiumbiddingsomeUS$1.4billion;theMexicanGovernmentwillmaintain
a12.5percentshare intheholding company during fiveyears. Apublic tender callhasalready been
made fortheFerrocarril Chihuahua-Pacífico which involves operating ashort line.
(b) Road transport
211. Inview ofthepoorperformance ofthecountry 'srailsystem, roadtransport services have
become themain means oftransport forpersons andfreight within Mexico. In1996, thisactivity
wasestimated tohavecarried 2,700 million passengers, equivalent tojustunder 99percentoftotal
passengers transported, and370million tonnes offreight. Thefederal commercial transport sector
hasbeenderegulatedinrecentyears,whichintheviewoftheauthoritieshasresultedinmorecompetitive
pricing andgreater competition. In1996, thenumber ofbuses andtrucks wasestimated tohave
increasedby2.6percentrelativetothepreviousyear,reachingatotalofsome52,400busesand308,500
trucks.
212. However, theauthorities believe thatremaining deficiencies -suchasobsolete equipment, lack
ofcoherency between federal andstatenorms, andtheirregular operation ofvehicles -haveresulted
indecreasing productivity andefficiency inroadtransport services.80Road infrastructure hasbeen
deteriorating from lackofinvestment, alarge extension relative totheresources available for
maintenance, andhightraffic volumes. Inorder toreverse thistrend andcreate amodern, efficient
andsaferoadinfrastructure, theauthorities havesought toincrease investment inthesector, particularly
byencouraging private investment.
213. Private sector participation isconcentrated intollhighways, forwhich ithasbeengranted
operating concessions. Between 1988 and1994, some 5,800 kilometres ofhighways were builtby
theprivate sector, involving aninvestment ofnearly US$15 billion. However, alarge number ofthe
roads builtunder thisprogramme haveturned outtobecommercial failures, apparently duetoa
combination ofshort concession periods (10-15 years) andover-optimistic initial projections fortoll
revenues; indeed, thehightollssetbytheconcessionaires reduced traffic tosuchlevels thatloan
80Poder Ejecutivo Federal (1996), p.xi.Mexico WT/TPR/S/29
Page 153
repayment became unfeasible.81Thisalsoaffected thebanking sector, which wasencouraged toprovide
many suchloans (section (ii),above). In1995, bail-out plans wereannounced tohelptheconsortia
involved inallbutfourof52concessions.
214. TheForeign Investment Lawliberalized landtransport ofinternational passengers, tourists
andcargo between points inMexican territory (including imported goods entering Mexico byairor
sea)andadministration services ofcentral stations forpassengers andauxiliary automotive service
vehicles. Intheseactivities, asfromDecember 1995foreigners mayholdupto49percentofthecapital
stock ofMexican corporations, rising to51percentbytheyear2001, and100percentbytheyear
2004. Thisliberalization applies tobothNAFTA andnon-NAFTA investors. Domestic landtransport
ofpassengers andcargo (excluding messenger andparcel services) isreserved forMexican companies
withnoforeign capital participation.
215. UnderthetermsoftheNAFTA,U.S.andMexicancompanieswerescheduledtobeginproviding
cross-border truck andbusservices intoU.S.andMexican border States inDecember 1995. However,
cross-border trucking hasbeendelayed byaU.S.decision nottoprocess Mexican applications. Mexico
considers thatthisdecision violates theNAFTA, andformal consultations havebeeninitiated under
theNAFTA dispute settlement provisions.
81Financial Times, 5July1995.WT/TPR/S/29 Trade Policy Review
Page 154
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