Mexico, EU Agree on Key Points of Free-Trade Pact

Mexico and the 15-nation European Union agreed Wednesday on the terms of a sweeping free-trade treaty that should help Mexico expand its already booming exports as well as reduce its near-total dependence on trade with the United States.

European and Mexican officials announced the agreement at EU headquarters in Brussels after their ninth round of negotiations since November 1998. After tying up technical points, both sides will submit the draft treaty to their governments for final approval, perhaps as soon as next July.

The broad outline of the pact calls for Europe to grant duty-free entry to most Mexican products between now and 2003, and for Mexico to gradually open its market to European goods by 2007.

Mexican Trade Secretary Herminio Blanco declared that the accord “will mean much more investment, and most important, many more jobs in Mexico.”

Mexico’s industrial economy has taken off since the North American Free Trade Agreement (NAFTA) took effect Jan. 1, 1994, fostering an explosion of trade with the United States and Canada. The European accord would further broaden Mexico’s export reach.

Like NAFTA, the Mexico-Europe pact calls for a gradual reduction of tariffs on products traded between the two regions. Currently, duties average 12% on European-Mexican trade, compared with an average of 2% for NAFTA trade.

“After Israel, we will be the only country with free-trade agreements with the two largest markets in the world--those of Europe and North America,” Blanco told a news conference broadcast simultaneously in Brussels and Mexico City.

As U.S.-Mexico trade has boomed under NAFTA, so has Mexico’s dependence on the U.S. economy, with the U.S. market absorbing 85% of Mexico’s exports in 1998. Europe’s share of Mexico’s exports, meanwhile, has declined steadily, from 21% in 1982 to just 3.2% last year.

Economists and business leaders have urged Mexico to balance its exports more evenly between the United States and other markets such as Europe, in part to reduce Mexico’s vulnerability in the event of a U.S. economic downturn.

Jorge Marin, president of the Business Coordinating Council, the national umbrella organization for Mexico’s private sector, said the treaty “has given us today a great opportunity to diversify our exports. This is not to say that we don’t value the NAFTA accord . . . but this gives Mexican businesses the security of being able to diversify further.”

Marin said more European firms will establish factories in Mexico to take advantage of the accord. That, he said, would allow Mexico to improve its meager 1% share of Europe’s $160 billion in foreign capital investment last year.

Details weren’t disclosed on specific tariff reduction schedules, so it wasn’t immediately clear what industries would benefit and which might get hurt. Mexico hopes to raise sales of auto parts, steel, agricultural and textile products while Europe hopes to gain better access to the growing Mexican market.

Business leaders saw little in the way of a downside.

Ramon Iriarte, president of the Mexican Agricultural Council, said: “We now have such an extensive panorama of commercial relations with Europe as well as the United States and Latin America that few other countries can claim to have such a mosaic of opportunities.”

Iriarte, one of more than 100 Mexican business executives who took part in consultations with Mexican government negotiators during the talks, added that the deal with Europe gives it a trade buffer as China ramps up for the U.S. market. “When we see the recent opening of opportunities for China in the United States, where China will compete fiercely with us in the U.S. market, this agreement gives us a new export option at a very opportune moment,” he said.

Asked whether the Mexico-Europe accord might prejudice U.S. trade interests, independent Mexico City economist Jonathan Heath said, “I don’t really think so. It’s to the U.S.’ advantage to have Mexico stronger, more diversified and more locked into these trade agreements. . . . That’s in everyone’s interest.”

Moreover, the well-established Mexican operations of U.S. manufacturers could benefit from the lower EU tariffs by exporting directly from Mexico to Europe, analysts noted.

In addition to its North American and European trade pacts, Mexico has aggressively pursued accords with individual Latin American countries in the last five years, striking deals with six nations including Chile and Colombia. Eight more such treaties are being negotiated.

Its emphasis on foreign trade has made Mexico the world’s eighth-largest trading country, with combined imports and exports reaching $242.7 billion in 1998. Of that total, $195 billion was with the U.S., more than double the 1993 figure. Mexico’s trade was Europe last year was worth just $15.6 billion.

Trade has played a critical role in helping Mexico emerge from the vicious recession of the mid-1990s that followed the peso devaluation of December 1994. That recession cost hundreds of thousands of jobs and provoked a sharp contraction of the domestic economy.

Export-oriented manufacturing businesses, meanwhile, grew quickly, especially in the north of the country. The maquiladoras, or assembly firms, now employ more than 1.1 million people. Export-driven manufacturing has been the backbone of economic growth that will exceed 4% this year even while much of Latin America is stagnant.

Perhaps because of the broadly positive attitude toward the export-related jobs created by NAFTA, the European trade talks generated little public opposition here, and the accord is expected to clear the Mexican Senate with little opposition.

However, some Mexican critics of NAFTA contend that while large industrial companies flourished, many small and medium-size Mexican firms were devastated by U.S. competitors.

Gabriel Szekely, a researcher at the Colegio de Mexico, said the generally pro-labor EU might prove more sensitive than the United States to Mexico’s emerging-nation status, and cushion the impact of open competition.

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The euro’s value fell Wednesday to $1.019 against the dollar, near its record low. C1