On July 25, 1986, Mexico signed the General Agreement on Tariffs and Trade (GATT), known today as the World Trade Organization (WTO), seeking greater trade liberalization to position the country in the international arena and enhance its competitiveness and economic growth.
To date, Mexico has signed 12 Free Trade Agreements with 46 countries, including the new USMCA trade agreement with the United States and Canada, 32 Agreements on Reciprocal Promotion and Protection of Investments (APPRIs) with 33 countries, and 9 agreements within the framework of the Latin American Association for Integration. As a result, the level of trade in relation to the Gross Domestic Product (GDP) has grown from 30% in 1986 to 78% in 2017.
Although liberalization generates greater levels of trade, it also increases the level of exposure to risks, through direct and indirect external factors, making the economy more vulnerable to international conditions.
Mexico’s proximity to the United States, with which it exports 80% and imports 50%, and the high dependency on imports from China, which represent 15%, make the economy vulnerable to the effects of the trade war between the United States and China and to the outcomes of the recent trade agreement, USMCA, reflected mainly in three aspects:
- Prices: Since China and the United States are the top suppliers of inputs worldwide, the consequences for production costs would generate a domino effect in international price increases, directly impacting consumer purchasing power in the economies that depend on inputs from these two nations.
- Production: A level of protectionism in the short term would generate a deceleration of the US and Canadian economies, which would directly impact export levels to these economies, affecting Mexico’s export companies by diminishing their trade possibilities.
- Diversification: In the event of the global escalation of the trade war, the search for new markets would be affected by the new levels of protectionism that would exist in other countries, thus diminishing the levels of global trade and growth.
The depth of the aforementioned effects depends on the duration of the trade war. Therefore, central banks remain alert to the possibility of a rise in inflation, since it would have direct repercussions on adjustments to the current monetary policy measures.
The trade war clearly generates uncertainty in Mexico, but we must also be on the lookout for a possible restructuring of China’s foreign direct investment (FDI) in Mexico, seeking better trade conditions and even the new benefits that would be offered by the recently agreed USMCA, which could to some extent offset the economy’s vulnerability to the trade conflict.