Mexico WT/TPR/S/97
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I. THE ECONOMIC ENVIRONMENT AND TRADE
(1) OVERVIEW
1. The Mexican economy performed very well between 1997 and 2000, driven in good part by
growing domestic demand, trade, and investment.  Over the period, Mexico's trade attained the fastest
growth rate among the WTO's twenty largest single Members, and foreign direct investment has
flowed copiously.  Growth has benefited large se gments of the society, GDP per capita having
reached US$6,000 in 2000.  Sound macroeconomic policies, denoted by a stable exchange rate,
falling inflation, and moderate fiscal deficits, have buttressed the good performance.  However, a
better outcome might have been desirable as concerns fiscal deficits, in view of the economy's strong
perfomance.  The fiscal position also remains exposed to fluctuations in petroleum revenues, and to
significant contingent liabilities.
2. Since late 2000, in the wake of falling U.S. demand and declining international oil prices,
trade and GDP growth have slowed, accompanied by a contraction in employment.  The policy
options open to the authorities to address these trends appear limited with respect to both monetaryand fiscal policies.  The resumption of growth thus depends largely on a turnaround in the worldeconomy, and in particular in the United States, by far Mexico's largest trading partner.
(2) R
ECENT ECONOMIC DEVELOPMENTS
3. Between 1997 and 2000, Mexican GDP grew at an annual average rate of 5.2% in real terms;
growth was particularly strong in 1997 and 2000, with rates close to 7%.  This pattern resulted mainly
from the strength of domestic demand, particularly of private consumption, which grew at an annual
average rate of 6.4%, and of the external sector, with imports and exports growing at a real annual
average rate of 17.2% and 13.4% respectively.  The latter reflected in part the lead of strong growth in
the U.S. economy.  The share of total trade to GDP increased from 61% in 1997 to 65% in 2000.
4. The expansion of trade in recent years has gone hand in hand with structural adjustments
carried out in Mexico, and most notably, those related to growing external openness.  This has
motivated an intense process of investment in export-related activities:  between 1997 and 2000
private investment grew at a real annual average rate of 10.6%.  Manufacturing GDP expanded at a
real annual average rate of 6.2%, outpacing gr owth in the economy as a whole;  GDP growth in
services was in line with total growth, while rates were lower in agricultural and mining GDP,respectively 1.8% and 2.3% (Table I.1).
5. Economic growth benefited large segments of the society.  Real GDP per capita increased at
an annual average rate of 3.8% between 1997 and 2000, reaching US$6,000 in 2000;  andunemployment fell from 3.7% to 2.3%.  Though progress has been made, poverty and unequal incomedistribution remain major concerns for the Mexican authorities.
1
6. From late 2000, the Mexican economy has faced a less favourable external environment,
characterized by a falling demand in the United States and declining international oil prices.  The
economic downturn in the United States and the contraction of domestic demand have particularly
affected the Mexican industrial sector in terms of both production and employment levels;  over
200,000 jobs were lost during the first nine months of 2001.  All components of aggregate demand
were expected to experience a slowdown during 2001, with private investment spending registering
the strongest contraction.  Preliminary figures for the first half of 2001, indicate that trade was also
slowing down;  exports grew by less than 2% wi th respect to the same period of 2000, while imports
grew at 3.8%.
                                                     
1 Banco de México (2000) .WT/TPR/S/97 Trade Policy Review
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Table I.1
Basic macroeconomic indicators, 1997-01
1997 1998 1999 2000 2001a
I.  Gross domestic product (GDP)
GDP current (Mex$ billion) 3,179.1 3,848.2 4,588.5 5,432.4 5,688.5
Real GDP  (1993 Mex$ billion) 1,381.5 1,449.3 1,505.0 1,609.1 1,612.9
Nominal GDP (US$ billion) 401.5 421.2 479.9 574.5 602.1
Nominal GDP per capita (US$) 4,288 4,439 4,990 5,893 6,094
Sectoral breakdown (% of current GDP)
Agriculture 5.7 5.3 4.8 4.4 4.2
Industry 28.6 28.6 28.7 28.4 27.3
Services 65.7 66.1 66.4 67.3 68.5
Breakdown by expenditure (% of current GDP)
Total consumption 74.1 77.8 78.0 78.5 81.0
Private 64.2 67.4 67.1 67.5 71.1
P u b l i c 9 . 91 0 . 41 0 . 91 1 . 0 9 . 9
Total investmentb19.5 20.9 21.2 20.9 19.3
Private 16.4 18.1 18.3 18.0 17.1
Public 3.1 2.8 2.9 2.9 2.1
Exports of goods and services 30.3 30.7 30.8 31.4 28.9
Imports of goods and services 30.4 32.8 32.4 33.2 30.8
Real rates of growth (%)
Total GDP 6.8 4.9 3.8 6.9 0.9
Agriculture 0.2 0.8 3.5 3.4 -0.6
Industry 9.3 6.3 4.2 6.6 -2.5
Services 6.4 4.6 3.7 7.4 2.5
Total consumption 6.0 5.0 4.2 8.7 ..
Private 6.5 5.4 4.3 9.5 ..
Public 2.9 2.3 3.9 3.5 ..
Total investmentb21.0 10.3 7.7 10.0 ..
Private 23.5 13.8 7.9 10.2 ..
Public 10.1 -7.5 6.2 8.6 ..
Exports of goods and services 10.7 12.1 12.4 16.0 ..
Imports of goods and services 22.7 16.6 13.8 21.4 ..
II.  Employment and prices
 Rate of unemployment (%) 3.7 3.2 2.5 2.2 2.4
 Consumer price index (% change) 20.6 15.9 16.6 9.5 4.4
III. Money and interest rates (end of period; annual change)
 M1 32.7 19.2 26.1 15.4 9.1
 M2 30.1 27.9 21.1 16.2 14.0
 M4 25.9 25.9 19.1 15.1 13.7
 28-day commercial paper rates
Real 7.8 7.0 11.3 8.1 ..
Nominal 24.8 26.9 25.0 17.8 ..
.. Not available.
a Annual estimate based on the first two quarters for section I;  Q2 estimates for real GDP growth rates and money indicators.
b Excludes change in stocks.
Source: Banco de México and Instituto Nacional de Estadística, Geografía e Informática (INEGI).
(3) PUBLIC FINANCES
7. Increasingly sound public finances have contributed significantly to Mexico's growth over
recent years.  Between 1997 and 2000, public revenues as a percentage of GDP ranged from 20.3% to
23.0%;  fluctuations were mainly explained by variable oil revenues, which generally accounted for
one third of total revenues.  In response to these variations, the authorities adjusted expenditure to
meet the fiscal objectives established yearly in the Budget Decree.  Import duties accounted for aMexico WT/TPR/S/97
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marginal share of tax revenues (less than 3% of total revenues in 2000).  Over the period, the public
sector overall deficit was maintained at some 1% of GDP (Table I.2).  The measure of overall public
sector balance should be considered cautiously, however, since the methodology used by Mexico
deviates from international practices.2  To increase transparency and comparability, from May 2001,
the authorities have started to publish a measure broadly in line with international standards, the
Public Sector Borrowing Requirement (PSBR).3  According to this indicator, the public fiscal deficit
at the end of 2000 stood at 3.7% of GDP, significantly lower than in the previous three years.4  The
Government's medium-term objective is to reduce the PSBR to 1% of GDP.
8. From 2000, the Budget Decree has included automatic adjusters that are triggered when
government revenues are lower than anticipated.5  In particular, when oil revenues are lower than
expected, adjustments are made as specified in the rules of the Oil Stabilization Fund (see Box I.1).  If
revenues decrease by 5% or less, for reasons other than a change in oil prices, the Government is
required to cut programmable expenditures and inform Congress of the sectors where these
expenditure reductions will be carried out;  if the reduction in revenues is larger than 5%,programmable expenditures are reduced and Congressional approval is required for the specificsectors where reductions will take place.
9. The evolution of public sector finances during 2001 was determined by the deceleration of
economic activity, the strength of the Mexican peso, the fall in oil prices, the increase in transfers to
states and municipalities, and the reduction of domestic and external interest rates.  Budgetary
revenues for the first nine months were lower than expected and, therefore, various adjustments topublic expenditures were made in order to comply with the objective set in the economic policy
guidelines for 2001, which are at strengthening Mexico's fiscal stance.
10. The authorities noted that the high dependence of public revenues on oil was one of the major
deficiencies of the Mexican fiscal structure.  To address fiscal vulnerabilities, a broad tax reform was
presented to Congress in March 2001;  its main objectives were to increase tax revenues, while
reducing compliance costs and barriers of entry to the formal economy, and to reduce oil revenue
dependence, in particular through a reform of the value-added tax.  After long-drawn negotiations in
Congress, a compromise fiscal package was adopted for 2002:  this was expected to increase taxrevenues by less than originally sought, and to accomplish this mainly through modifications to
income and excise taxes and a new excise tax on luxury goods and services rather than an overhaul of
the value-added tax.
6
11. The level of public debt declined significantly from 32.5% of GDP in 1997 to 25.9% at the
end of 2000.  This reduction resulted from a sharp decline of public external debt, which compensated
for the observed increase of domestic debt.  Consequently, the public debt service was reduced by
some 10 percentage points, reaching 26% of the value of exports for 2000.  The amount of external
debt held by the private sector at the end of 2000 stood at 11.3% of GDP (Table I.3).
                                                     
2 Main differences include:  revenues from privatization and unrealized capital gains on international
reserves and debt buy-back operations are recorded as income;  the inflation component of indexed bonds is notcharged as interest;  spending on some public investment projects is recorded when the financial obligations are
serviced and not when the investment is made;  and the cost of quasi-fiscal operations is not included.
3 A methodological note on the difference between the traditional measure of the fiscal balance and the
PSBR is available from the Department of the Treasury and Public Credit [online], at:  http://www.shcp.gob.mx/.
4 The PSBR is the traditional surplus/deficit minus the cost of bank restructuring, the cost of debtor
support operations, the cost of certain public investment projects, and the income from privatizations if any.
5 Article 32 of the Budget Decree for 2001 published in the Official Journal  on 31 December 2000.
6 Department of the Treasury and Public Credit (2002).WT/TPR/S/97 Trade Policy Review
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Table I.2
Consolidated public sector finance, 1997-00
(Per cent of GDP)
1997 1998 1999 2000
A. Revenues 23.0 20.3 20.8 21.9
Oil revenues 8.4 6.6 6.8 7.9
PEMEX 2.0 2.1 2.2 2.0
Federal government 5.7 4.4 4.6 5.9
Non-oil revenues 14.7 13.8 14.1 13.9
Federal government 10.1 9.7 10.1 10.1
Tax revenues 8.2 8.4 8.9 8.8
Of which
Income tax (ISR) 4.3 4.4 4.7 4.7
Value added tax (IVA) 2.5 2.6 2.8 2.9
Import duties 0.6 0.6 0.6 0.6
Non-tax revenues 1.9 1.3 1.2 1.3
State enterprises and entitiesa4.5 4.1 3.9 3.9
B. Expenditures 23.6 21.6 22.0 23.0
Programmable expenditure 16.2 15.5 15.4 15.8
Current expenditure 12.8 12.4 12.5 13.2
Wages and salariesb6.8 6.9 7.3 7.2
Other current expenditure 4.3 3.8 3.5 4.2
Aids, subsidies and transfersc1.6 1.6 1.7 1.8
Capital expenditure 3.5 3.1 2.8 2.7
Fixed capital assets 3.2 2.9 2.6 2.6
Direct 2.4 1.8 1.5 1.4
Indirect 0.8 1.2 1.0 1.1
Financial investment and others 0.3 0.2 0.3 0.1
Non-programmable expenditure 7.4 6.1 6.6 7.1
Financial expenditure 4.1 2.9 3.6 3.7
Interest payments 2.8 2.6 3.1 2.6
Federal government 2.3 2.2 2.6 2.1
State owned entities 0.5 0.4 0.4 0.5
Subsidy and economic assistance 1.3 0.3 0.5 1.1
Revenue sharing 3.0 3.0 3.1 3.3
Arrears and others 0.3 0.3 -0.0 0.1
C. Budgetary balance (A - B) -0.6 -1.2 -1.2 -1.1
D. Non-budgetary balance -0.1 0.0 0.0 0.0
E. Overall surplus/deficit -0.7 -1.2 -1.1 -1.1
External financing -0.8 0.5 0.2 -1.1
Domestic financing 1.6 0.7 1.0 2.2
Memorandum item:
Public sector borrowing requirementd (% of GDP) -5.6 -6.3 -6.3 -3.7
a Revenues and expenditures net of payment of non-tax royalties and fees.
b Excludes contributions to the Insituto de Seguridad y Servicios Sociales para los Trabajadores del Estado (ISSTE).c From 2000, aid expenditure is reclassified under other current expenditure and direct fixed capital assets.
d Excluding non-recurrent revenues.
Source: Department of the Treasury and Public Credit and Banco de México.Mexico WT/TPR/S/97
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Box I.1:  Oil Stabilization Fund
The Oil Stabilization Fund (OSF) wa s created with the intention of diminishing the impact of abrupt
movements in international oil prices or other factors on the permanent sources of revenue, on publicfinances, and on the Mexican economy in general.  Article 35 of the Budget Decree for 2000 established that
in the event of higher than expected revenues, these extra resources would be directed first to replenish
budget cuts made earlier in the year, and then to amortize public debt (60% of remaining resources) andconstitute the OSF (40% of the remaining resources).
In light of the excess revenues registered during the first nine months of 2000, the OSF was created on15 November 2000.  Future contributions to the OSF should be specified every year in the correspondingBudget Decree.  In particular, Article 31 of the Budget Decree for 2001 established that 33% of revenues in
excess of those budgeted must be directed to the OSF (the remaining resources will be directed to improve
the public sector’s balance and increase infrastructure investment).
The main rules for disbursements are as follows.
Public expenditures can be financed with no more than 50% of the OSF’s total resources accumulated in theprevious fiscal year, according to the following criteria:  if the actual price of the Mexican oil mix is higher
than projected or lower by 1.5 dollars per barrel (dpb) or less, then no resources from the OSF will be drawn
(in this case the required fiscal adjustment should  be carried out through a reduction in expenditures);  if the
observed price of the Mexican mix is lower than projected by more than 1.5 dpb, then resources from theOSF will be used (in the event that the maximum amount of resources from the OSF is used then additionalfiscal adjustments will take place through lower expenditure).
The resources from the OSF will be directed to cove r expenditures related to programmes included in the
Budget for the corresponding fiscal year.  If the funds from the OSF are insufficient to cover the total amount
of the agreed expenditures, then the Department of Finance will determine the allocation of resourcesaccording to the priority of the referred programmes.  At the end of any fiscal year, resources aboveUS$4 billion will be transferred to a special account within the OSF, which cannot be used to cover publicexpenditures and thus, will be directed to amortize debt.
Source :  Department of the Treasury and Public Credit.
Table I.3
Debt indicators, 1997-00(% of GDP, unless otherwise specified)
1997 1998 1999 2000
Public sector 32.5 32.8 30.1 25.9
Domestic 8.2 8.9 9.9 11.2
External 24.3 23.9 20.2 14.7
Medium long term 21.0 20.9 18.3 14.0
Short term 3.3 3.0 1.9 0.7
Private sector
External 13.9 14.4 14.5 11.3
Medium and long term 11.6 12.3 12.5 9.4
Short term 2.3 2.1 2.0 1.9
Total external debt 38.2 38.4 34.7 26.0
Public sector debt service (% of exports) 36.2 21.6 22.5 26.0
Source:   WTO Secretariat, based on data released by the Department of the Treasury and Public Credit and the International Monetary Fu nd.
(4) MONETARY AND EXCHANGE POLICY
12. The main objective of Mexico's monetary policy is the sustainable reduction of inflation.
Monetary policy is carried out by the Central Bank (Banco de México) in an environment in whichWT/TPR/S/97 Trade Policy Review
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both the exchange rate and interest rates are determined by financial markets.  With the adoption of a
floating exchange rate regime, following the balance-of-payments crisis in 1994-95, monetary targets
became the nominal anchor for inflation stabilization.  Since then, the monetary policy scheme has
gradually converged towards the inflation targetin g regime currently in place.  To enhance the
transparency and accountability of monetary policy, the Central Bank started publishing quarterly
inflation reports in 2000;  multi-year inflation target announcements were also introduced.  Themedium-term inflation objective was set at 3% for the end of 2003, with intermediate targets of 6.5%
for 2001, and 4.5% for 2002.  The inflation rate, measured as consumer price variations, fell from
52% in 1995 to 9.5% in 2000 (below the targeted level of 10%);  preliminary estimates for 2001
indicate that effective inflation stood at some 4.4% below the targeted level of 6.5%.
13. The Central Bank's operational target is settlement balances rather than short-term interest
rates (as in most other countries maintaining an inflation targeting policy).  The authorities noted that
the main advantage of this operational target (compare d with short-term interest rates) is that external
shocks affecting country risk are absorbed by the ex change rate and short-term interest rates, without
the need for Central Bank intervention, and thus exchange rate volatility tends to be lower.
14. Although exchange rates are freely determined, the Central Bank participates in the foreign
exchange market under two mechanisms:  dollar purchases, through put options;  and contingent
dollar sales.  The first mechanism is mainly ai med at accumulating international reserves, and does
not seek to alter the nature of the floating regime.  The authorities noted that even in the context a
flexible exchange rate regime, maintaining a suitable  level of international reserves contributes to the
country’s financial strength, in particular by reducing the risk of a roll-over crisis.7  As at end 2000,
the level of international reserves was equivalent to  the value of some three months of imports.  The
Central Bank also intervenes in the foreign ex change market through the contingent dollar sale
mechanism to help moderate the exchange rate volatility.  These interventions are not intended to
defend a specific exchange rate level.
15. Since its previous Review, Mexico's real effective exchange rate (REER) has appreciated
substantially (Table I.4).  The Mexican authorities i ndicated that the real appreciation of the peso was
consistent with a sounder economy.  However, some observers have suggested that the appreciationmight be excessive, in part as a consequence of the tight monetary policy, and have raised concerns
about the possible effect of these trends on the competitiveness of Mexico's traded goods sector.8
(5) B
ALANCE -OF-PAYMENTS AND TRADE AND INVESTMENT FLOWS
(i) Overview
16. Since 1997, current account transactions have shown increasing deficits.  The deficit
increased from 1.8% of GDP in 1997 to 3.1% in 2000.  This was mainly the result of a strong
deterioration of the merchandise trade balance;  the deficits of the factor and non-factor services
balances also increased but at significantly lower rates.  The deterioration of merchandise trade
balance was mainly explained by the sharp expansion of merchandise imports responding to strongdomestic demand, in particular for intermediate goods mainly for export production;  in 2000 imports
of intermediate goods accounted for some 76% of total imports.  Merchandise exports also expanded
substantially, albeit at a slower pace (see below).
                                                     
7 Banco de México (2001).
8 IMF (2001a).Mexico WT/TPR/S/97
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Table I.4
Balance of payments, summary 1997-01
(US$ million)
1997 1998 1999 2000 2001 QI
Current account balance -7,448.4 -16,089.8 -14,375.1 -18,079.2 -4,388.1
Merchandise trade balance 623.6 -7,913.5 -5,583.7 -8,003.0 -2,220.5
Exports 110,431.4 117,459.6 136,391.1 166,454.8 39,642.1
Of which
Petroleum and derivatives 11,323.2 7,134.3 9,928.2 16,382.8 3,520.9
Manufacturesa94,802.2 106,062.3 122,084.5 145,334.2 34,601.6
Importsa109,807.8 125,373.1 141,974.8 174,457.8 41,862.6
Consumption goods 9,326.0 11,108.5 12,175.0 16,690.6 4,531.2
Intermediate goods 85,365.7 96,935.2 109,269.6 133,637.3 31,608.7
Capital goods 15,116.1 17,329.4 20,530.1 24,129.9 5,722.7
Factor services, net -12,789.5 -13,283.7 -13,305.9 -14,746.5 -4,016.0
Revenues 4,560.4 5,047.1 4,516.8 6,090.7 1,523.1
Interest 3,749.6 4,034.3 3,735.7 5,024.5 1,255.0
Other factor income 810.8 1,012.8 781.1 1,066.2 268.1
Expenditures 17,349.9 18,330.8 17,822.7 20,837.2 5,539.1
Of which
   Interest 12,436.2 12,499.7 13,018.2 13,981.3 3,710.0
Non-factor services, net -529.9 -904.9 -1,798.7 -2,323.4 -275.2
Revenues 11,270.1 11,522.6 11,692.0 13,712.3 3,590.4
Transportation 1,416.9 1,433.1 1,342.6 1,369.3 344.6
Tourism 5,747.6 5,633.3 5,505.7 6,435.4 2,009.3
Tourists (border and cruises) 1,845.0 1,859.8 1,717.2 1,858.8 484.4
Other non-factor services 2,260.6 2,596.4 3,126.5 4,048.8 752.1
Expenditures 11,800.0 12,427.5 13,490.6 16,035.7 3,865.6
Freight and insurance 3,312.4 3,699.1 4,109.2 5,006.4 1,218.8
Miscellaneous transport 1,694.6 1,602.8 1,664.9 1,983.1 428.5
Tourism 1,821.2 2,001.9 1,950.4 2,444.9 561.8
Tourists 2,070.7 2,207.2 2,590.9 3,054.2 759.7
Other non-factor services 2,901.1 2,916.4 3,175.3 3,547.0 896.7
Transfers 5,247.4 6,012.4 6,313.1 6,993.7 2,123.5
Revenues 5,272.9 6,039.5 6,340.0 7,023.1 2,124.6
Expenditures 25.5 27.1 26.9 29.4 1.1
Capital account balance 15,762.7 17,652.1 14,385.6 18,044.2 8,063.8
Foreign direct investment 12,829.6 11,602.4 11,964.6 13,286.1 3,596.9
Portfolio investment  5,037.1 -579.2 10,965.0 -2,224.6 1,719.2
Loans and deposits -8,819.7 6,197.4 -4,539.3 -560.5 2,964.7
Other financial assets, netb6,715.8 431.5 -4,004.7 7,543.2 -217.0
Errors and omissions 2,179.4 574.6 583.2 2,856.5 804.9
Valuation adjustments 17.8 1.5 -1.4 2.7 3.6
Change in net reserves (increase -) -10,511.5 -2,138.4 -592.2 -2,824.2 -4,484.2
Memorandum items:
Crude oil price (average world; US$/bbl) 19.27 13.07 17.98 28.21 26.78
Exchange rate (Mex$/US$) 7.92 9.14 9.56 9.46 9.70
Real effective exchange rate (1990=100)c86.0 84.8 77.9 69.1 67.2
International reserves (months of imports) 3.1 2.9 2.6 2.3 2.7
a Includes maquiladoras .
b Refers to active capital accounts.
c Based on CPI; 111 partner countries included. A decrease in the value represents an appreciation of the Mexican peso in real
terms.
Source: Banco de México and International Monetary Fund.WT/TPR/S/97 Trade Policy Review
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17. The persistent deficits of the factor services balance were mainly due to interest payments,
which, despite the reduction of external debt (see  section (3)), increased slightly between 1997 and
2000.  The non-factor services deficit increased sharply, from some US$530 million in 1997 to over
US$2,300 million in 2000.  This was explained by a re lative stagnation of non-factor services exports
compared with the sustained growth of imports, mainly of freight and insurance and tourism services
(section (iii) below).
18. The only balance item of the current account that consistently registered positive values over
the period was the transfer component.  In 2000, net transfers amounted to some US$7,000 million,
equivalent to 87% of the merchandise trade deficit.  The bulk of these transfers corresponded to
remittances from Mexicans residing abroad.
19. The worsening current account position observed between 1997 and 2000 was generally
compensated by the capital account surplus;  foreig n direct investment was the main financing source.
Indeed the favourable capital account position permitted the accumulation of foreign exchange
reserves (Table I.4).
(ii) Developments in merchandise trade
20. The expansion of Mexico's merchandise trade since the mid-1990s has contributed
significantly to the good performance of the Mexican economy up to 2001.  Between 1997 and 2000,merchandise trade grew at an annual average rate of 17.1%, with merchandise imports slightly
outpacing merchandise exports (respectively 19.4% and 14.7% growth rates).9  Imports of both
agricultural and manufactured products increased markedly although, as a result of the dynamism of
the manufacturing sector, the share of manufactured imports increased by three percentage points and
reached 86.5% of total imports in 2000 (Table AI.1).  Machinery and transport equipment accountedfor half of total merchandise imports;  within this category, imports of office and telecommunicationequipment and automotive products were particularly dynamic.
21. Merchandise exports showed a similar pattern with the share of manufactured goods
increasing by some three percentage points, reaching 83.4% of total exports in 2000 (Table AI.2).Mainly as a result of the geographic proximity between Mexican and U.S. producers and Mexico's
maquiladora programme, which have encouraged both intra-industry and intra-firm trade, the largest
Mexican export industries tend also to be the mo st important importers (Chapter IV(4)).  Thus, not
surprisingly, export growth was particularly sharp for office and telecommunication products (20.5%
of total exports in 2000);  the contribution of the automotive industry as well as of textiles andclothing to total exports remained relatively constant at some 18% and 7% respectively.  Fuels
exports, mostly crude petroleum, accounted for a significant share of Mexico's exports, though, they
were subject to substantial fluctuations.
22. The United States was by far Mexico's principal imports source, though its share of total
imports declined slightly, from 74.3% in 1997 to 73.1% in 2000 (Table AI.3).  Over that period,
imports from the Americas countries represented some 78% of total imports, with increasing, albeit
modest, participation of Canada, Brazil, and Chile .  In Europe, Germany and Italy were the main
suppliers of goods to Mexico, with 3.2% and 1.3% of imports in 2000.  Japan remained the major
supplier in the Asean region (some 4%), the Republic of Korea and China increased significantly theirparticipation in the Mexican market.
23. Between 1997 and 2000, the United States consolidated its position as Mexico's major export
market, increasing its share in total Mexican merchandise exports by some four percentage points to
                                                     
9 These figures are based on trade data reported by Mexico to the UN Comtrade database;  reported
merchandise imports for 2000 appear to be substantially higher than the figure reported in the balance-of-
payments table, according to which merchandise impor ts grew at an average annual rate of 16.7%.Mexico WT/TPR/S/97
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some 89% in 2000 (Table AI.4).  Exports to non-NAF TA American partners grew at a much slower
pace, as a result, their share in total Mexican exports fell from 6.5% to 4.1%.  Exports to Asia
contracted markedly with their sh are in total exports falling from 2.7% to 1.4%.  The importance of
European countries as export markets remained roughly constant over the period, at a relatively
modest level of less than 4%.  With respect to individual countries, Canada was the second largest
destination for Mexican products, accounting for some 2% of exports.  Outside NAFTA, no individualcountry absorbed more than 1% of total Mexican exports.
(iii) Trade in non-factor services
24. Between 1997 and 2000, trade in non-factor services grew at an average annual rate of 8.8%
(substantially below merchandise trade growth).  This expansion was mainly due to dynamic imports,
and resulted, as noted above, in a widening of Mexico's non-factor services trade deficit.  Incomparison with merchandise trade, non-factor services trade is relatively modest.
25. In 2000, freight, insurance, and transport services accounted for some 43% of total non-factor
services imports, while tourism expenditures represented 34% of non-factor imports.  The strength ofthe Mexican peso together with the favourable domestic economic conditions explain in large part the
increase in expenditures for tourism activities, from US$2.9 billion in 1997 to US$5.5 billion in 2000.
With respect to exports, the main source of revenue was tourism activities, which in 2000 generated
60% of non-factor services exports.  Despite expanding merchandise trade, transportation services
exports decreased slightly over the period, both in absolute value and share of total exports(Table I.4).
(iv) Foreign direct investment
26. Mexico remained one of the main magnets fo r FDI in the developing world.  Between 1997
and 2000, Mexico continued to receive important foreign direct investment (FDI) flows, whichcovered a large proportion of current account deficits.  Over the period, the level of FDI inflows
accounted for some 2.7% GDP on average.  Between 1994 and 2000, the major magnets for FDI
were:  manufacturing (62% of total FDI flows);  fi nancial services (14%);  and commerce (11%).  FDI
increased in most sectors, although from low base in primary activities, utilities, and construction
(Table AI.5).  By origin, the bul k of FDI flows came from the United States (some 63%);  other
significant FDI sources included the Netherlands (8.5%), and Canada and Japan (4.3% each) (Table
AI.6).  In recent years, Mexico had also become a sizable source of FDI flows.
(6) O
UTLOOK
27. Driven by the slowdown in the global economy, economic activity in Mexico during 2001
was weaker than anticipated;  real growth was expected to be at best nil.  The inflation rate for 2001was 4.4%, significantly lower than its target level of 6.5%.  With the exception of private
consumption, expected to grow at a real rate  of 2.9%, all components of aggregate demand were
expected to contract during 2001, private investment and exports experiencing the strongestcontraction (respectively 5.8% and 3.8%).  Imports were also anticipated to decline by some 4%.
28. For 2002, in a context of high uncertainty in external markets, the Mexican economy was
expected to grow at an annual real rate of 1.7%;  with inflation meeting its targeted level of 3%.
Investment was expected to be the most dynami c component of aggregate demand, driven by lower
interest rates and by the promotion of public investment projects.  Public sector deficit was expectedto remain at a 0.65% of GDP, although increasing public investment spending, not counted in the
traditional public finance balance, should increase the public sector borrowing requirements to 3.65%
of GDP.  Imports and exports of goods and services were expected to grow at rates of 1% and 2.4%.