Recent figures from the World Bank listed Mexico as the ninth-biggest economy in the world. Courtesy State of Colima

Less than two decades after opening up its economy, Mexico is preaching the gospel of free trade with all the zeal of a convert. The country of 100 million people, which protected its economy behind a vast array of trade barriers for decades, now claims to be among the top 10 trading nations in the globe, if the European Union is viewed as a single participant.

“We have become active participants of the global economy and promoters of the openness of markets and free trade,” Mexican President Vicente Fox declared at the meeting of APEC trade ministers in May in the resort town of Puerto Vallarta.

“Mexico is at the center of the debate about world trade and what it can do for people,” Michael Moore, director of the World Trade Organization, told one conference during a recent visit to the country.

Twenty years ago, when Mexico and many other Latin American countries plunged into a debt crisis, the economy was a closed one. In the wake of the debt crisis, in 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT), the global trade regime that later became the World Trade Organization.

Then in 1994, the North American Free Trade Agreement (NAFTA) came into effect, calling for implementation of free trade between Canada, Mexico and the United States in phases. In the meantime, Mexico has negotiated over 10 free trade agreements, including a wide-ranging accord with the European Union that went into effect last year.

A Case Study
“Mexico is a case study,” says Jose Luis Romero Hicks, head of the foreign trade bank, Banco Nacional de Comercio Exterior, known as Bancomext. “We have shown the importance of trade for internal development.”

It has not been an easy road. The collapse of the peso just as NAFTA went into effect led to an economic meltdown, forcing the government to take over the banks and prop up the financial system as it devalued the peso against other currencies.

In July 2000, Mexican voters ended the 70-year reign of the PRI, the Institutional Revolutionary Party, electing Vicente Fox as president. It marked the end of a rigid and authoritarian regime that had as much in common with the Communist governments of the Soviet Union and Eastern Europe as it did with western democracies.

The debt and peso debacles have left scars, while opening up the economy to foreign products and competitors has created challenges and turmoil.

Economic Growth
In spite of these obstacles, though, Mexico recorded economic growth of nearly seven percent in 2000 before the downswing in the U.S. brought the economy to a standstill last year. This year, economists are looking for growth of about 1.5 percent. Recent figures from the World Bank listed Mexico as the ninth-biggest economy in the world, though it was only 29th in per capita income. Per capita income of some $6,000 is a fraction of its NAFTA partners—only about one-fourth of Canada’s and one-sixth of that in the U.S.

An early victim of this difficult transition has been the erstwhile economic success story in Mexico, the free trade zones known as maquiladoras, which permit duty-free imports of goods for use in manufacture of products destined for export. Economic growth has led to higher wages, while the central bank’s determination to limit inflation with a tight money policy has kept the peso strong against other currencies. Then last year the combination of the economic downturn in the U.S. and the loss of some tax benefits as the NAFTA rules were phased in forced many maquiladoras to shut down factories and lay off workers.

“Mexico does not want to become a maquiladora economy,” says Roxana Nunez Siller, director of the binational office of the Mexican-U.S. Chamber of Commerce. The benefit that maquiladoras can contribute to the economy is limited, she says, and the country needs to foster growth with deeper roots.

“We are moving to a more sophisticated production in our country,” concurs Eugenio Salinas, director of the Mexican Council for Foreign Trade, or COMCE. Salinas points out that Mexico is no longer a low-wage country.

Mexican Companies
Some of Mexico’s biggest companies are leading the way in making this transition. Cemex S.A. has become the world’s third-biggest maker of cement with operations in the U.S. and Europe as well as a dominant position in its home market. Vitro S.A. has similar ambitions in global glass manufacture. Carrying a heavy debt from the turbulence of the past two decades, the company has been divesting operations outside its core business of making glass, including a lucrative joint venture with Whirlpool to manufacture household appliances.

“We are in a highly competitive global industry,” says Juan Manuel de Nigris, director of the Executive Office at Vitro. “There will be just a few survivors, and we intend to be one of them.”

While companies like Vitro, which have access to international financial markets, can fund their expansion, smaller companies have trouble getting capital because of the still fragile state of domestic financial institutions.

“Domestic finance is still a big problem,” De Nigris says. The executive, who was executive director of COMCE for several years, also lists fiscal reform as an urgent necessity for Mexico to remain competitive.

The General Director of Alianza Estrategica Portuaria of Manzanillo, Colima, Arturo Villasenor Sanchez, also notes some of the advantages and disadvantages of the Mexican market.

“We find that some of the advantages of being close to the U.S. market are low freight rates, rules and regulations and of course the NAFTA agreement. The disadvantages are that Mexican exporters have focused on the U.S. market and have not developed other world markets, thus we need to develop markets in other countries.”

So Mexico is certainly not resting on its laurels. As far as the country has come in the past decade, political and business leaders know that it faces sizable challenges in the years ahead. But, having opened up its economy in a decisive way, Mexico will move into the future as a leader in free trade and a potential model for other developing economies.