2008-E-12
Competitive Regionalism and Mexico’s FTA Strategy
Aldo Flores-Quiroga
Assistant Professor at the School of Politics and. Economics
the Claremont Graduate University

June 2008

Paper presented at the International Symposium “Competitive Regionalism,” Ibuka
International Conference Hall, Waseda University, Tokyo, Japan. May 30 to 31, 2008.

Competitive Regionalism and Mexico’s FTA strategy
Aldo Flores-Quiroga
Draft. May 16, 2008.
Introduction

There are two distinct phases to Mexico’s modern trade strategy, each
representing a different approach to multilateral and bilateral trade negotiations.
The first phase, covering from 1970 to 1985, is characterized by two failed
attempts at opening the trade regime unilaterally, including an unsuccessful
effort to join the GATT at the end the Tokyo Round in 1979 due to domestic
political pressures. During this phase the country’s economic strategy was inward
oriented, and regionalism was not high in the priorities of Mexican policymakers.
The second phase, from 1986 to date, combines unilateral tradeliberalization, accession to the GATT, and the signing of thirteen FTAs withcountries in the Western Hemisphere, Europe, the Middle East, and Asia. It
includes Mexico’s formal entrance as a full member of APEC and the OECD. It iswhen competitive regionalism became a central component of a new outwardoriented strategy.
The transition from one phase to the next is usually explained in terms ofthe collapse of the strategy of industrialization through import-substitution (ISI)in 1982,1 but can also be seen as part of a broader trend of greater formalizationof Mexico’s increasing economic relations with the world. This trend began to

1 A large body of literature has already done this. See for example2

take shape in the early 1970s, when trade represented about 20% of Mexican
GDP, and consolidated by the late 1990s, as this proportion reached close to 60%.
Throughout

thisperiodMexicosignedalargernumber,andgeographically disperse, set of economic agreements than before, ranging frombilateral investment protection, double taxation, financial and customs
cooperation, and promotion, limited preferential trade concessions, and fullfledged free trade.
The extent to which the formalization of international economic exchanges
through legal documents was a result or a cause of a greater level of international
economic intercourse is subject to debate, but there is little doubt that the arrivalof regionalism in Mexico is part, if not the expression, of this internationalization
trend. Greater trade and investment flows required a greater degree of policy
coordination, or at least, collaboration, with the country’s main trade andinvestment partners, most notably the United States (US). As the requirements
for coordination increased, the scope of the agreements also increased, until
limited engagement gave way to greater integration under the terms of a Free
Trade Agreement (FTA).
From this broad review one might rightly conclude that functionalism
explains much of the action behind Mexican international economic policy
choices, but it is only a beginning. The story behind Mexico’s choice of trading
partners does not correlate perfectly with the intensity of economic exchange.
While a broad correspondence between these two factors does exist, deviations
are also apparent, associated with non-economic factors.

3

To understand these choices it is necessary to go beyond purely economic,
or functional, explanations for regionalism. The drive to emulate countries inNorth America and Europe who were implementing successful integration
policies, as well as countries in Asia which achieved high economic growth rates
through export promotion, supported the Mexican government’s decisions in its
effort to sell Mexico as a good destination for foreign investors, among otherobjectives. The private sector’s concerns over its competitiveness, in light ofintegration initiatives north of the Mexican border, derived into active lobbying,
and thus influenced policy shifts in the direction of free trade.
Accounting for Mexico’s sequential choice of trade partners, and of
eventual success in reaching a FTAs, requires paying attention to theinternational economic, political and legal environment in which it has been
immersed, with an eye to the challenges that have guided its foreign policy
toward its neighbors. It requires as well paying attention to developments in thedomestic arena, for Mexico adopted the strategy of competitive regionalism toadvance its own domestic reform agenda, not exclusively to accomplish foreign
policy objectives.

1. A review of Mexico’s trade negotiations, 1970-2005

Table 1 presents Mexico’s thirteen FTAs to date in chronological order,
covering a total of 43 countries:

Table

1.

Chronologyof4

Mexico’s

Free

Trade

Agreements
Year
FTA
1992
1. Chile
1994
2. NAFTA (United States and Canada)
1995
3. G3 (Colombia and Venezuela)
4. Bolivia
5. Costa Rica
1998
6. Uruguay
7. Nicaragua
2000
8. European Union (15)9. Israel
2001
10.EFTA(Norway,
Iceland,
Switzerland,
Lichtenstein)
11.Northern
TriangleofCentralAmerica(Guatemala, Honduras, El Salvador)
2004
12.European Union (15+12)
2005
13.Japan
The table refers to the year in which agreements were signed, not to thedate in which negotiations started. It does not include negotiations under way asof this writing,2 with Peru and South Korea, or suspended ones, with Ecuador or
Panama (the reasons are explained below). It excludes potential negotiations, forwhich prospective discussions have started but have not materialized into thebeginning of negotiations, for example with New Zealand or Australia. Were thebeginning of negotiations the preferred criterion for constructing the table, thefirst agreement in the list would have been NAFTA, which launched Mexico’s FTA
strategy.
The first pattern to emerge is that between 1992 and 1999 Mexico signed
FTAs only with countries in the Western Hemisphere: with the United States andCanada to the North, and with a number of Latin American countries to theSouth. The latter include three who belong to the Andean Pact (Venezuela,
2 October 2007.

5

Colombia, and Bolivia, but not Ecuador or Perú), Chile, two in Central America(Costa Rica and Nicaragua), and one member of Mercosur (Uruguay). No
Caribbean country signed an FTA with Mexico, nor did any other country fromthe Southern Cone.
The absence of an FTA with the remaining countries of Latin America does
not imply lack of interest, however. Negotiations with all of them either started,or were proposed, by the mid 1990s. As with the successful FTAs, all of thenegotiations occurred under the framework of the Latin American Association for
Integration (Asociación Latinoamericana de Integración, or ALADI), a regionwide agreement that allows for the signing of FTAs without the need for a
ratification procedure in national parliaments.3 Negotiations with the countriesof the Northern Triangle of Central America were underway and eventuallyconcluded in 2001. For practical purposes they can be included in this block of
Latin American countries that signed FTAs with Mexico. Negotiations withPanama, Ecuador, and Peru started in tandem with the others, but were stalled orsuspended by 1998. And negotiations with the other countries of Mercosur havebeen contemplated, but have not moved beyond an agreement on the automobile
industry.
So by the close of the 1990s Mexico had signed FTAs with all its neighbors,
except for Cuba and other countries with which it shared maritime borders.

3 ALADI was founded under in the early 1960s under the name Asociación Latinoamericana deLibre Comercio (ALALC, or Latin American Free Trade Association). ALADI simplifies theprocess of signing FTAs within the region because they only need to be signed by the Executives ofthe signatory countries, not by their legislatures In the 1970s the “Libre Comercio,” or free-trade
part of the name lost favor among many of its members, so the more neutral, current, name wasadopted.

6

The year 2000 inaugurates the era of Mexico’s cross-regional agreements,
with the signature of the FTAs with the European Union (EU15, expanded to
EU27 by 2006) and Israel, followed by the agreement in 2001 with European
Free-Trade Area (Norway, Switzerland, Lichtenstein, Iceland).
It was not until 2005 that Asia entered Mexico’s portfolio of FTAs, throughthe completion of negotiations with Japan. Japan, however, was not the first
Asian country to consider negotiating an FTA with Mexico; Singapore took theleading role. Today Singapore is not negotiating an FTA with Mexico, but South
Korea is.

2. Understanding Mexico’s FTA strategy

To assess which of the three hypotheses analyzed in this book –null(independent decisionmaking), emulation, and competition- carries more
explanatory potential, we can start by considering objectives frequently identified
behind Mexico’s FTA strategy: 4

1.

Securing stable access to the country’s main export markets.

2.

Reducing trade diversion caused by other countries’ FTAs.

3.

Mitigating investment diversion effects of other FTAs.

4.

Increasing access to low-cost inputs to improve competitiveness.

5.

Diversifying exports.

4 The literature is, again, vast. See, for example, Blanco (), Flores Quiroga (1998)…

7

6.

Promoting coalitions of like-minded countries in multilateral tradetalks.

7.

Promoting sub-regional political alliances.

8.

Increasing the cost of trade-reform reversals -increasing thecredibility of trade liberalization.

9.

Establishing a credible legal regime for investors.

10.

Reducing inflationary pressures.

11.

Loosening the grip of dominant local economic and political groups.

For the null hypothesis to hold, objectives 2 and 3 would have to be
removed from the list; probably 6 and 7 as well. But, as discussed in the next
section, considerable evidence on the timing of decisions, as well as numerous
remarks and testimonies from government officials and business leaders, showsthat NAFTA was proposed in reaction to international developments, especiallythe nascent wave of regionalism in Europe and North America.5 And Mexican
authorities negotiated succeeding FTAs, among other reasons, to avoid extreme
export concentration on just one market, consolidate competitiveness gains
derived from access to low-cost inputs, and even to promote regional
development – all of these related to international strategic calculations.
Domestic factors, while absolutely indispensable for a successful explanation of
Mexico’s adoption of free trade, cannot on their own account for the decision to
pursue it through FTAs.

5 A detailed review of that evidence can be found in Flores-Quiroga (1998). The discussion that

follows summarizes some of the most relevant aspects.

8

We are left with the emulation and competition hypotheses. Which is moreplausible? The answer is necessarily ambiguous, considering that the main
drivers of Mexico’s FTA approach are consistent with both. The rest of thischapter explains why.

Mexico’s Competitive Regional Strategy Begins

The trigger for the Mexican government’s decision to propose thenegotiation of an FTA with the United States –its first FTA venture- involves ashift in the international strategic environment which, combined with thetransformation of Mexican trade policy and politics throughout the 1980s,
increased the opportunity cost of not joining a regional trade area.
Two international factors are most relevant: the launch of the US-Canada
FTA and the fall of the Berlin Wall, both occurring in 1989.6 The first mobilized
the members of the country’s pro-export lobby in favor of an FTA with the UnitedStates. The second added weight to their arguments with respect to importcompeting interests, tipping the government’s hand toward a proposal for a USMexico FTA.
As soon as the US-Canada Free Trade Agreement (USCFTA) entered intofull force in Janaury 1989, Mexico’s outward-oriented entrepreneurs and theirpartners in the United States expressed their concern that trade and investment
flows would be diverted away from Mexico. This was the message the head of the

6 The USCFTA was signed in 1988; it started operating on January 1, 1989. The free crossing ofEaster European citizens through the Berlin Wall started on November 9, 1989.

9international arm of Mexico’s peak business association, the Foreign Affairs
Business Council, told the Mexican president at its annual meeting, with the joint
recommendation of negotiating a similar free trade agreement with the UnitedStates and softening the laws on foreign investment.7 He echoed arecommendation that for at least two years the Mexico-US Business Committee(MUSBC), a prominent bi-national group of businesspersons and academicians,
had been advocating, as negotiations for the USCFTA were under way. The
group’s argument is worth quoting, even if long, for it summarizes the position of
Mexico’s pro-export “lobby” -a loose amalgam of the country’s wealthiest
businessmen,

multinational

corporations,andassociations

representing

exporters and importers- regarding the issue of regional free trade, which theylinked with the issue of policy certainty:"Confidence attracts capital. Investor confidence is based on dependable, satisfactory
expectations about the business environment. In Mexico, legal uncertainty reduces thelevel of confidence and inhibits long-term investment.
The frequent amending of Mexican laws and regulations affecting trade and investment
causes a serious lack of confidence among private investors. In Mexico, the legal orderand the institutions that support it should be strengthened and given permanence andstability. Of paramount importance are (1) narrowing the discretionary authority of thegovernment as it pertains to private investment, commerce, and the operations of
productive enterprise, and (2) increasing the rights conferred by law on investors. The

7Excélsior (February 8, 1989). Other businessmen held the same view: a survey conducted during

the first half of 1989 revealed that 64 of 100 Mexican manufacturers favored negotiating a free
trade agreement with the United States (del Castillo, 1989).

10objective for the Mexican economy should be to reduce the scope of regulation of theprivate economy....The government's wide discretionary powers hamper sound economic
management in Mexico. The private economy will feel at risk until it is manifest that
there is a long-term commitment to free major parts of the economy from government
administration and detailed regulation...
…Adherence by Mexico and the Unites States to the principles of free trade willcontribute to create the indispensable trust for long-term private direct investment inmodern factories…[the MUSBC recommends] a careful study of the trade agreement
between the United States and Canada since it will, together with a bilateral agreement
between Mexico and the United States, constitute the basis for increasing the volume oftrade and investment between Canada, the United States, and Mexico. This futuretrilateral relationship will strengthen North America’s competitiveness in an era ofglobal markets.” 8

By March and June 1989, the MUSBC was also proposing specific options
for liberalizing U.S.-Mexico trade and investment, contemplating both limited
and wide-ranging trade and investment agreements.9
The link the MUSBC made between an FTA and a credible investment
regime, so that “the principles of free trade will contribute to create theindispensable trust for long-term private direct investment” derived from recent
Mexican experience. Attempts at economic restructuring in the 1970s and 80s
had shown Mexican institutions incapable of sustaining a lowering of trade
8Mexico-U.S. Business Committee (1987), p. 9, 11, and 13. Translated from Spanish, my emphasis

added. This is an extension of the concepts that other business associations, most notable theinfluential employers union, COPARMEX, and the peak business association, CCE, which
encompasses all other associations, had advanced in previous years.
9See Mexico-United States Business Council (1989a; 1989b).

11

barriers. As soon as the current account deteriorated, even if the proximate cause
was an overvalued exchange rate, itself caused by a burgeoning fiscal deficit,
Mexican authorities reversed course and increased tariffs. And as soon as fiscal
deficits reached crisis proportions, the government was quick to expropriate
wealth from private investors. Regionalism, from the perspective of this freetrade lobby, helped to avoid this outcome because it required the signing ofinternational contracts that fixed domestic policy and could be reneged only at avery high cost.10 Regionalism would work as an anchor for domestic policy
reforms, increasing trust in their long-term sustainability, while generating
incentives for attracting long-term investments.
But the Mexican president at the time, Carlos Salinas, was not yet
persuaded. As he told these business leaders upon learning of their proposal,
Mexico was not going join any international economic bloc; it would only search
to secure the access of Mexican goods in foreign markets through limited tariff
concessions. Economic stability and a similar level of development with a target
partner, from his perspective, were preconditions for even contemplating thenegotiation of an FTA.11
Salinas had another important reason to wait: during 1989 the mostpressing priority for his government was to renegotiate the terms of its foreign

10 A country that does not respect its international commitments faces the risk losing potential
partners. This represents a reputation cost. To avoid this outcome, the traditional practice is tomake international agreements the law of the land. This represents another cost, for thejustification for reneging on an international agreement is that germane constitutional provisions
have changed.

11 He had advanced this argument during his presidential campaign in 1988, and was the position

with which he took office (Flores Quiroga, 1998).

12

debt payments,12 not to enter into a controversial free-trade arrangement withthe country’s neighbors, or anyone else. To negotiate an FTA while renegotiating
one of the most ambitious debt-restructuring and discounting packages ever13
would only complicate matters and create unnecessary issue linkages between
both negotiation routes. This much he had in mind, at least, when as presidentelect he rejected a tentative proposal of George H.W. Bush, then also presidentelect, to begin negotiations for a US-Mexico FTA.14
The Mexican president opted instead for an international economic
strategy combining four components: in addition to foreign debt renegotiation,
attraction of foreign direct investment, expansion of preferential trade access to
Europe, and management of US-Mexico trade through sectoral agreements. The
first two were meant to improve the country’s foreign accounts, under severe
strain as an appreciating exchange rate, which was the basis of the antiinflationary policy, caused import growth to outstrip exports. The third aimed at
reducing the strong dependence of Mexican exports on the US market, not only
for its own sake, but because US trade sanctions had been increasing steadily.
And the fourth sought to continue the policy of facilitating access in the US for
sectors heavily involved in intra-industry trade (automobiles, autoparts), or withstrong export potential (steel, chemicals, textiles). Sectoral agreements were the
12 It was the renegotiation of the government’s debt payments, which had been suspended in

1982, when Mexico’s internacional reserves had been depleted. This episode was the beginning of
the internacional debt crisis and led to economic restructuring throughout Latin America. A
synthetic, yet in-depth account of this renegotiation can be found in SHCP ().

13 This negotiation led to the launch of the Brady Plan in late 1989, which for the first time

accepted two important principles: (1) the totality of the foreign debts of Latin Americancountries would not be repaid, therefore they had to be reduced or discounted, and (2) without
economic growth the prospects for debt repayment were nil.
14 Salinas (2002).

13

closest policy to bilateral free-trade, in light of the existing policy regime.15 The
approach to Europe had a similar objective, but it also sought to further politicallinks to counterbalance the strong influence of the United States.
Alas, it was a short-lived approach. Soon after the Berlin Wall fell in
November 1989 Salinas discovered it was going to become increasingly difficult
to attract investments from Western Europe, now focused on the opportunities
Eastern Europe could offer. When he floated his ideas for a closer trade andinvestment relationship with his European peers he found little enthusiasm. The
feedback he obtained in meetings with the Margaret Thatcher, Helmut Kohl, andJacques Delors, among others, echoed the same message: Europe is interested inbuilding its own union; its interest in Mexico as an investment destination would
increase only if it were part of a North American trade block. Further
confirmation of this position came at the 1990 World Energy Forum in Davos,
when Salinas noted in one conversation after another that it was harder topersuade governments and investors that Mexico was an attractive investment
destination.16
Salinas therefore decided to move forward with the proposal he hadalready heard from Mexican and US businessmen, European leaders, the US
president, to join the North American trade block. By jumping into the regional
bandwagon, he believed, Mexico would regain lost ground on the international

15 These agreements were negotiated in…
16 See president Carlos Salinas de Gortari’s own account of these events in his book Mexico: el

difícil paso a la modernidad.

14

competition for investments.17 Still at Davos, he instructed his Trade Secretary to
express to his US counterpart Mexico’s interest in negotiating an FTA. A few
weeks later key Mexican and US officials were meeting secretly to discuss how toproceed.
When the news broke out and Canada, fearful that it would lose some of
the advantages it had obtained through the USCFTA, requested trilateralnegotiations. By the fall of 1990 the three countries were ready to negotiate thecreation of the largest free trade area in the world.
Up to here the story of Mexico’s decision to negotiate an FTA involves
competition for foreign direct investment as a channel of policy diffusion, with
Mexico responding to the integration initiatives of its two main trading partners,
Western Europe and the US, by joining the North American regional block. Thereis also a suggestion that the decision involves more than top-down decisionmaking: while the Mexican president did choose in the end to propose an FTA (itcould not have been otherwise, since legally this decision was his to make),businessmen from Mexico and the US (an epistemic community of like-minded
entrepreneurs with access to the halls of power and the media), together with
Prime Ministers or presidents from other countries (yet another epistemic
community of sorts) took him there.
But the story is even more complex. Salinas was in a position to respond to
the factors reviewed above because domestic developments during the 1980s had

17 The initiative for a US-Mexico FTA became a North American initiative when Canada, worried

about investment-diversion effects (Mexico had cheaper labor costs) and its regional politicalinfluence, requested to join the negotiations.

15

lifted the political and economic constraints on a more aggressive trade stance.
Four again deserve mention: the arrival in government of technocrats well versedin neo-classical economics, the drive to secure access of Mexican exports to the
US market, the unilateral trade liberalization Mexico implemented between 1985
and 1988, and the pressure to stabilize trade rules.
Technocrats took charge of economic policymaking in late 1982, first as asmall group with president Miguel de la Madrid (1982-1988), then as the mostprominent Cabinet members with Salinas (1988-1994) and Ernesto Zedillo(1994-2000). They replaced the cadre of policymakers that had recommended
against Mexico’s entrance to the GATT and the adoption of export-led strategy inthe late 1970s.18 They also constituted an epistemic community on their own,
friendly to open markets, with connections to the international financial
community, able to push forward a new framework for economic policy. As
observers of the integration experiences of North America and Europe, inparticular the positive fate of Spain, and the export–oriented success of the AsianTigers, they sought to modernize Mexico by emulating their experiences.
Their initial efforts in the 1980s concentrated on eliminating the antiexport bias of Mexican trade policy, while securing better terms of access of thecountry’s exports to the US market. As their power consolidated in the 1990s, but
especially as their economic program gained roots, they pushed for a morecomprehensive approach: negotiate better terms of access with the US, yes, but
18 The Economic Cabinet of then president José López-Portillo (1976-1982) was dominated byeconomists closer to the tradition of ECLA and Cambridge, institutions which at the time
advocated more state involvement in the economy. For an exploration into the determinants ofLópez-Portillo’s decision to postpone Mexico’s GATT accession see Story (1983) and FlroesQuiroga (1998).

16

do the same with the rest of the country’s main trading partners in Latin
America, Europe and Asia (see below).
The removal of the anti-export bias started in the summer of 1985, withthe replacement import permits with tariffs, and their unilateral reduction overthe next three years, with the aim of establishing a “rational” structure ofprotection – higher tariffs for more elaborate goods.19 Almost at the same time,they negotiated Mexico’s accession to the GATT, reversing the controversial
decision not join in during the oil boom of the 1980s.20
In implementing this trade liberalization program they hardly had analterantive. Strapped for cash as a consequence of the debt crisis of 1982, thegovernment could not subsidize export programs in a significant way. Exporters
could only produce badly-needed dollar revenues if their competitiveness
improved through access to low-cost inputs. International financial institutions,such as the IMF and the World Bank, were hinting that a successful renegotiationof Mexico’s debt would be conditioned on credible trade liberalization, which bythen many understood to depend on the binding of Mexican tariffs under the
GATT regime.21 And the US government, upon requests from US producers, had

19 On the structure of Mexican protection at the time see De Mateo and Ten Kate (1989a, 1989b).
20 See below for determinants of this decision. Detailed acocunts of the process through which it
was reached can be found in De la Madrid (1985), Flores Quiroga (1998), SECOFI (1988), Ten
Kate (1992).
21Mexico signed with the IMF a Letter of Intent in April 1985 in which it committed to:(1)liberalize between 35% and 45% of imports before the end of 1985 -including reducing tariff
levels from 10 to 7 and setting most tariffs between 10% and 50%; (2)grant automatic importpermits of raw materials and machinery parts when the price of domestic substitutes exceed 50%;and (3)allow exporters to import up to 40% of the value of their export revenues without therequirement of any permit, while letting them to import free of duties any good used as input.

17

begun to impose countervailing duties (CVDs) on imports coming from countries
that subsidized their exports, such as Mexico.22
The controversy surrounding these CVDs is particularly relevant for ourstory, as its outcome opened the door to the adherence of Mexico to the GATT,and eventually, to the pursuit of FTAs. Mexican producers could have disputed
the imposition of CVDs, in principle, by resorting to the “injury test,” whichallowed exporters to show that they were not engaged in unfair trade. But the US
government argued that Mexican exports were not beneficiaries to such a test,
because Mexico failed to implement the provisions of the GATT Subsidies
Agreement, a prominent outcome of the Tokyo Round.23
Facing pressures from Mexican exporters hurt by this change in US trade
regulations, Mexican economic authorities sought some form of agreement toobtain the injury test. It came in the form of a Memorandum of Understanding
between the United States and Mexico Regarding Subsidies and Countervailing
Duties signed in the spring of 1985, in which Mexico explicitly renounced the useof subsidies programs to support exports.24 The only instruments left to promote
exports were the elimination of import permits and the lowering of tariffs (an22 Weintraub (1990) provides a discussion of this shift in US policy. The US was also objecting
Mexico’s industrial promotion programs, especially in the pharmaceutical industry (Flores
Quiroga, 1998).
23 The Subsidies Agreement, already incorporated into US trade legislation, established that directexport subsides constituted unfair trade, thus liable to face CVDs. An exporter from country that
was a GATT contracting party could resort to the “injury test” to show that it was not relying on
those subsides to gain an unfair competitive advantage, in which case the CVD would be
eliminated. But an exporter from a country suspect of using subsides that was not a GATT
contracting-party did not count with that line of defense.
24 The targets included credit, export, energy, and other production subsidies central to thegovernment’s industrial promotion policy. Lyman (1989) interprets this episode as an example ofa conscious and successful US foreign policy directed at pushing for a transformation in Mexico’s
trade regime.

18

import tariff is equivalent to an export tax), which decreased the costs ofimported inputs.
Adhesion to the GATT, as many inside and outside the government
realized, was all but inevitable at that point: in agreeing to remove export
subsidies and unilaterally lowering tariffs, Mexico was already operating under
the GATT regime, but without enjoying its benefits in the form of greater accessto foreign markets.25 While the case could be made that unilateral liberalization
was welfare-enhancing, it was even better to join the GATT and obtain reciprocal
tariff concessions from the country’s main export partners.
Mexico’s move to join the GATT was soon interpreted as a sign that it was
taking measures to avoid the reversal of trade reforms.26 In the 1970s the
Mexican government had attempted twice to lower trade barriers, but neverbound them to an international treaty. As such, its credibility in reducing tradebarriers successfully was in doubt. This time it was different: no one expected
Mexico to ignore its GATT commitments, as the costs in terms of reputation andfinancing would be very high. A more open trade regime had arrived for good.
By the time Salinas decided to propose the negotiation of a US-Mexico
FTA not only was the world moving in the direction of regional blocks, but
Mexican trade policy was recognizably different from that of only a few years
earlier. All significant import permits had been phased out. Instead of applying
an ad-hoc tariff schedule, tariffs levels were rationalized. The maximum tariff was

25 Testimony by Mexico’s Trade Secretary, Héctor Hernández, at the Mexican Senate. De Mateo(1986, 1988) discusses the terms of the debate and the technical issue behind accession to the
GATT at that time.
26 Ten Kate (1992a, 1992b).

19

bound to 50%, following GATT commitments, but in effect it declined from 100
to 20%. Tariff dispersion decreased notably, with only five tariff levels left. Export
subsidies had disappeared. Mexico was a GATT contracting party. And much of
Mexican trade was managed through sectoral agreements with the United States.
The jump from managed trade in specific sectors to freer trade in every sector27
was no longer unthinkable, even if it attempted to bring together very disparate
economies.
So the trigger for Mexico’s decision to negotiate NAFTA combines agovernmental response to integration initiatives abroad, driven by the pressure ofdomestic interests as much as by independent maneuvering from like-mindedeconomic authorities. But this response was possible because much work had
been done domestically to reform the core of Mexican trade policy and the
conduction of trade disputes with the United States.

Choosing additional trade partners

Negotiations for NAFTA, which began in 1990, immediately raised a newconcern in Mexican policymaking circles: while the agreement would secureaccess to the country’s exports in the US and Canadian markets, it created strong
incentives for exporting only to them. At that time the expectation was that theshare of Mexican exports concentrated in the US market would climb from 70%
more than 80%. Government officials estimated that negotiating FTAs elsewherewould help provide investors with a more geographically-neutral export
27 Except petroleum, whose control the Mexican Constitution retains for the State.

20

incentive, reduce the vulnerability associated with a high export concentration injust one market, and perhaps integrate productive chains between morecountries. Once free trade had been adopted as the new economic paradigm,
there was no reason to stop in just one country or region.
What other countries were ideal partners? From an economic viewpoint,
one would expect those with the largest share of bilateral trade and potential
investment flows, whose economic structure allowed for complementarities, andwith a similar level of development. For Mexico in the early 1990s, the best
candidates according this line of reasoning were the European Community (notyet a full-fledged Union), Japan, and to a lesser degree Latin America. Together
they represented more than 90% of Mexican trade.
But the choice was neither clear-cut nor preordained. Even though
Western Europe was Mexico’s second largest trade and investment partner, its
level of development was much higher than Mexico’s, and it was on the other sideof the Atlantic. Europe, moreover, was immersed in its own integration dynamic,
with an eye on investment opportunities in the recently opened Eastern Block.
Japan was a reliable and important trade and investment partner as well, but it
was far in the Pacific and preferred multilateral to bilateral trade negotiations.
For Japan an FTA was from the outset a non-starter. Brazil, Mexico’s main trade
partner in Latin America shared a comparable level of development, but its
economic structure did not allow for significant economic complementarities.
And it was focused on consolidating Mercosur, where it had a clear leadership.
An FTA with Mexico was not even an afterthought.

21

From a political viewpoint there were additional dilemmas. Should
ideological affinity or regional balancing take precedence? If ideology mattered,
the best route would be to approach Latin American countries implementing
market reforms, or even European countries, whose brand of market capitalism
was closer to the Mexican. If regional balancing was paramount, then it was best
to approach Europe or Latin American countries concerned about the
implications of Mercosur and the growing influence of Brazil. The former was aform of defensive balancing; the latter offensive.
Security also played a role, making neighboring countries particularly
relevant. Assuming FTAs promoted prosperity between its partners, they could
serve to reduce migration flows, illegal cross-border activities, and consolidate
economic and political reforms in neighboring countries. This was the logic
behind the interest of the US government in promoting an FTA with Mexico, andthe logic of Mexico in promoting an FTA with Central America.28
Competitive regionalism in the legal sense became important later in the
FTA strategy, to the extent that a larger number of FTAs started locking-in
incentives among a large number Mexican trade partners by the late 1990s.
Mexican FTAs in Latin America shared basically the same disciplines as NAFTA.
It was logical to attempt extending them to multilateral negotiations for a Free
Trade Agreement of the Americas (FTAA), or for the Doha Trade Round.

28 Most Central American countries had suffered protracted civil wars in the previous decades.

The origin of those wars was linked in part to the absence of economic opportunities. Freer tradewith Mexico, a much larger market than that provided by any Central American nation to any of
its neighbors, had the potencial of bringing greater wealth.

22

The drivers of Mexico’s of trade negotiations were eventually determinedthrough the combination of design –itself a result of domestic politicalarrangements-, circumstance, and a degree of path dependence. Not every target
country selected according to the aforementioned criteria was ready to begin an
FTA negotiation with Mexico, and available resources could only be committed toa limited set of negotiations.

International economic competition, domestic

policy concerns, and regional balancing became preponderant factors in the earlyphases of the country’s FTA strategy. Once a large share of trade began to takeplace under the framework of FTAs, international political and legal competition
took greater significance.
Bear in mind that the Mexican private sector sanctioned all the choices thegovernment made. During the NAFTA negotiations the government made sure tocount with the support of the country’s business associations, promoting thecreation of the private sector’s foreign trade steering committee (COECE, in
Spanish) and the “room next door” for consultations during the actual
negotiation process. Likewise, before the government launched a new tradenegotiation, it always sought to obtain the compliance of COECE, so that thepolicy was seen as consensual rather than as imposition. For most negotiations
compliance was not hard to get, since FTAs had become a standard of the newpolicy regime (an omnidirectional approach). Except for clear competitors, suchas Brazil or South Korea, the rest of the FTAs posed relatively minor threats.
Even then, the volume of trade involved outside Europe and Japan was relatively
minor to create major worries among domestic producers. The biggest hurdle –accepting to negotiate with the US- had already been overcome.
23

The first partner chosen, and ready, for this diversification strategy was
Chile, a small economy with a production structure that complemented Mexico’sown (it was more geared toward agriculture than manufacturing), run bypolicymakers with an ideological bent similar to that of their Mexican
counterparts, and less involved in the construction of a South American trade
bloc as its neighbors on the other side of the Andes. Mexico-Chile FTA
negotiations took place at basically the same time as the NAFTA negotiations,concluded earlier, and were ratified earlier.
Negotiating with Chile would also help to temper the reaction of other
Latin American governments to Mexico’s approach to the United States, whichfrom the outset was hardly welcoming. To some in the Southern Cone, Mexico
was siding with the United States, breaking the long cultural and political ties
with the region as it tried to secure better trade preferences from its neighbor to
the North.29 More seriously, Brazil demanded that Mexico automatically granted
to the rest of the Latin American region the same trade benefits it was giving theUS, in congruence with article 44 of ALADI, which requires that tradepreferences extended to nonmembers should be extended to members. Mexico’s
government was not ready to make such a concession, and even signaled that it
would leave ALADI if forced to do so. The tensions eased, but Mexico had toembark in FTA negotiations with the rest of the Latin American economies toshow that it still remained committed to the reigon.

29 For example, see the statement by the presidents of Argentina, Carlos Menem, when thisnegotiation was announced.

24

FTA negotiations were faster in those countries where, like Chile, greater
potential for economic complementation existed, bilateral trade volumes were
small, ideological affinity was more apparent, and domestic political conditions
made it easier to reach an agreement: Colombia and Venezuela (which together
with Mexico constituted the G-3), Bolivia, Costa Rica, and Nicaragua. Note that,at the time of the negotiations, conservative, or at least market-friendly
governments were ruling these countries.
Negotiations with the rest of the Latin American countries progressed at a
slower pace, or simply stalled, due to factors specific to each. In South America,
Ecuador entered a period of economic and political turbulence that resulted inpremature replacement of elected presidents. Peru found itself in a similar
dynamic. Argentina, Brazil, Paraguay and Uruguay were immersed in theconstruction of MERCOSUR. Only Uruguay, sandwiched between the two giantsof South America, was interested in diversifying its bets, probably concerned withcounterbalancing, by negotiating an FTA with Mexico. In Central America,
Panama had no urgent need for an FTA, as much world trade crossed its own
country, but more importantly, was not willing to enter negotiations that
required adjustments to its own tax laws, which were incompatible with theframework Mexico had adopted after it signed NAFTA.30 Guatemala, Honduras,
and El Salvador had already begun to negotiate a joint FTA with Mexico, but theirconcern with implementing the provisions of the peace accords they had recently
reached with domestic rebel groups after decades of domestic civil war, together
with their insufficient expertise in this type of agreements, slowed the process
30 Panama’s tax laws provide for confidentiality in terms similar to those of Switzerland.

25substantially. Negotiations nonetheless proceeded and culminated in the signingof an FTA by 2001.
By the time negotiations started with the European Union and Israel, thebasic objectives of securing stable access to the country’s main export market,
anchoring expectations about the course of trade policy, and signaling
commitment to market-friendly policies, had for all practical purposes beenaccomplished. NAFTA did that much. Europe could provide, as mentioned above,
investments, export diversification, hopefully a counterweight to growing US
influence.
The approach to Europe began in the mid-1990s. It involved a more
ambitious agenda than that of the preceding FTAs. Europe wanted to include a“democratic clause,” a provision that explicitly contemplated the suspension of
the agreement should the parties stopped being democratic. Since European
countries could not all agree to the same type of disciplines for foreign direct
investment NAFTA contained, bilateral investment treaties with each relevant EU
member had to be negotiated. Mexico and Europe wanted to include official
development assistance as part of the framework. It was absent from NAFTA andit had shown its power to increase the economic growth rate of countries in
Europe that had access to social cohesion funds. The agreement provided for the
inclusion of every new member that eventually became a part of the EU,
expanding automatically the number of countries with which Mexico would
exchange under free trade.
As all of these agreements moved forward, efforts in Asia, then focused on
Singapore and Japan, did not. The governments of Mexico and Singapore began26

to talk about the possibility of an FTA, only to find that Mexican businessmen
would have none of it. They saw Singapore much in the same light as Brazil -amanufacturing powerhouse that would compete with them directly. Talks for an
FTA had to be suspended.
With Japan ambivalence was the name of the game throughout 1990s. On
the one hand, the Japanese government had not made up its mind about thevalue of negotiating FTAs, maintaining its preference for multilateral tradenegotiations. The Mexican government, on the other, felt little urgency to move
forward with an agreement. It had NAFTA, a network of FTAs in Latin America,and ongoing negotiations for an FTA with the European Union.
Ambivalence was affordable for a while: Japanese firms exporting to
Mexico components for the in-bond industry, which in turn exported to the US,
obtained special tariff treatment by the Mexican government – a NAFTA parity ofsorts. As the full provisions of NAFTA were implemented, which in the end werediscriminatory to countries without an FTA, the real costs of this ad-hoc
accommodation became evident. Japanese firms had to deal with cumbersome
administrative procedures and red-tape in both Mexico and the United States
which their competitors could avoid. Pressure from Japanese investors and
Mexican businessmen increased for an FTA that provided full NAfta parity.
Private sector pressure, however, was insufficient. It was until Japan,
realizing that multilateral trade talks were going to proceed slowly, opted tonegotiate an FTA with Singapore, that the door for concluding a negotiation with
Mexico finally opened. After a long and tortuous process the two countries
reached an agreement in 2004.
27

By way of summary

Table 2 attempts a summary of the motives behind the selection andtiming of trade partners. It identifies competitive channels of policy diffusion
along three dimensions: economic, political, and legal. Economic factors prevail
where a large share of Mexican trade is involved. This puts North America, theEuropean Union, and Japan at the top of the list, since an FTA with them would
cover more than 90% of Mexico’s total international trade and the near totality of
its FDI. Political (security) and legal factors are coded where trade covered under
the prospective FTA is less than 5% of total trade and FDI. These FTAs involve
Central American, Caribbean, and Andean countries for the period 1994-1998
where Mexico has strategic interests. Legal objectives begin counting after basic
trade objectives are solved with the US and the European Union, and when it
made sense: with the stalling of WTO and FTAA negotiations.

Table 2. Mexico. The drivers of competitive regionalism
Year
Agreement
Competitive channels of policy
withdiffusion
Economic Political
Legal
1986
GATT
x
1992
Chile
x
x
1993
APEC
x
1994
UnitedxStates andCanada1995
Colombiax
andVenezuela
(G-3)
1995
Bolivia
x
28

1995
1998
1998
2000
2000
2001
2001
2005

Costa Rica
Nicaragua
Uruguay
IsraelEuropean
Union
EFTA
Guatemala,Honduras,
El Salvador
Japan

x
x
x
x

x

x

x
x
x

x
x

The coding, incidentally, is consistent with current Mexican FTA ventures.
Having negotiated with basically all of its most important trade partners, theMexican government has moved on to negotiate with countries whose
participation in Mexican trade has increased significantly. Negotiations with
South Korea as of this writing are still under way.
In sum, for Mexico the sequencing of FTA negotiations puts economic
considerations first, followed by political (security) and legal criteria.

3. Conclusions

Four conclusions stand out:

1. Mexico’s FTA strategy is undoubtedly driven by factors common tofunctional explanations, such as the degree or complexity of bilateral exchange,
but competitive regionalism is clearly at play as well.

Mexican economic

authorities proposed to join the North American trade block with the explicit
purpose of competing for the attraction of investments, among other reasons. In29

so doing they were strongly influenced by the domestic pro-export lobby and by
the drive of its technocratic elite to emulate successful economic transformation
programs elsewhere, in which strategies to integrate the domestic with theinternational market played a fundamental role.
2. Purely economic factors, however, did not drive Mexico’s choice of trade
partners, and cannot account completely for the sequence with which it
conducted its trade negotiations. Concern with regional balancing, politicalinfluence, legal relevance, prosperous neighbors, and security challenges played afundamental role. Yet these other concerns were subsidiary to economic ones:
the choice of the US as the first partner responded to economic considerations
more than anything else, as did the choice to negotiate with the European Union
before, say, the Middle East, or with Japan rather than Malaysia.
3. International factors were necessary, but not sufficient, for thedevelopment of a strategy of competitive regionalism. Without Mexico’s
unilateral trade liberalization and accession to the GATT, and without theconstant imposition of barriers to trade between Mexico and the US, it would
have been hard for the government to justify NAFTA. Domestic support, which
had to be consolidated, was crucial for the negotiations.
4. Emulation did influence the Mexican government’s decisions, but it isdifficult to disentangle it from the calculus of economic competition.

30

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