Report presented to Mexican and European authorities

BBVA Research says, "The EU and Mexico would benefit from a wider free trade agreement"
  • Revision: both economies could gain from the advantages of a revised agreement that, among other things, would eliminate import quotas on agricultural products by Europe
  • Trade: both Mexico and the European Union have increased exports under the free trade agreement signed in 2000
  • Investment flows: the original agreement fostered a more favorable climate for direct foreign investment, mainly from the EU to Mexico



In Brussels this morning BBVA Research presented a working document on the impact the free trade agreement has had on trade between Mexico and the European Union and the benefits that would result from its expansion. The study was presented in a debate forum of European and Mexican authorities led by EU Trade commissioner Cecilia Malmström and Mexico's secretary of Economy, Ildefonso Guajardo.


BBVA Research presented a report entitled "Evaluation of the effects of the Free Trade Agreement between the European Union and Mexico on bilateral trade and investment" at an event organized by CEPS in Brussels. Those present included prominent Mexican and European authorities such as Mexico's secretary of Economy, Ildefonso Guajardo, and EU Trade commissioner Cecilia Malmström. BBVA was represented by BBVA Bancomer chairman, Luis Robles; BBVA chief economist Jorge Sicilia; BBVA chief economist for Mexico Carlos Serrano; and Javier Arias, BBVA Head representative to the EU.


The working document analyzes the trade and investment advantages that have benefited the Mexican and European economies since the free trade agreement was signed in 2000. It concludes that a wider agreement would benefit both parties.


When the present agreement came into force in July 2000 Mexico and the EU started gradual and reciprocal trade liberalization of goods and services. The initial agreement immediately eliminated customs duties on an important group of goods and started a process of gradual reduction for the rest. Apart from a trade opening for goods it also established the steps required for progressive and reciprocal liberalization of services -except for the audiovisual and aviation sectors- and for investment.

According to the report the free trade agreement "helped both economies increase their exports of those products in which they enjoyed a comparative advantage. For both groups the positive effects of the trade agreement were actually materialized some years after the complete elimination of tariffs. This is to be expected given that the companies concerned needed time to adjust in order to take advantage of the new markets", says the report. BBBVA Research also says the benefits for Mexico were in the machinery and electrical groups, and in transport equipment. In the case of the European Union there were notable increases in Mexican imports of chemical and related products, and transport equipment. The agreement also contributed to greater diversification of Mexican exports.

Investments

Direct foreign investment (DFI) from Europe became the second most important source of this type in Mexico, after the United States. The report notes that in recent years, especially after 2000, Latin American countries have become attractive destinations for investment. Mexico, with $342 billion, was the second biggest destination in this period after Brazil. In 2013 DFI flows to Mexico jumped 117%, a notable increase. "Mexico excels in producing goods with greater added value, which is very attractive for DFI, and its geographic advantage is due to the proximity of the U.S. market," says BBVA Research.

The study found that an increase of $1 million in FDI from the European Union increased the total exports of Mexico's manufactured goods by about $0.68 million.

The total flow from the EU to Mexico in 2000-2014 was $145.3 billion of which 81% came from four sectors: nearly half (47.3%) went to manufacturing (food & beverage, chemicals, cars and aerospace). In services 18.5% went to financial services, 8% to mass media and 6.3% to construction.

Although foreign investment from Europe is to be found in all sectors of the Mexican economy, it makes a majority contribution in at least six: generation, transmission and distribution of wind power and natural gas (82.6%); mass media (76%); construction (73%); leisure services (64%); health services (52.8%) and professional and scientific services (50.8%). "DFI from the EU to Mexico has taken the form of mergers, acquisitions and, to a lesser degree, in the creation of new assets and consequently new jobs. In Mexico DFI helped companies to modernize and access global markets". Furthermore Mexican companies have increased their commercial footprint in the EU, particularly in Spain and Germany.

Advantages of expanding the agreement

Nonetheless BBVA's economists believe that a wider agreement in the agricultural, fishing and agro-industrial sectors offers possibilities of improvement for both economies because some subsidized products were temporarily excluded from the agreement, principally because of the EU's subsidies on the production and export of certain farm products (Common Agricultural Policy). In summary it considers that "the EU and Mexico would benefit from an extension of the agreement that includes the removal of import quotas on farm products."

The report also affirms that a revision of the agreement would lift Mexico's potential as a destination for investment. It adds that "Mexico has relative advantages compared to its competitors in terms of corporate taxes, labor costs, access to consumer markets and free trade treaties". In addition it offers important advantages in labor costs compared to other investment areas such as China.


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