Policy Brief

For the Unit for Economic Relations and International Cooperation in Mexico

Policy Recommendations for the Advancement of International Trade in Mexico

EXECUTIVE SUMMARY Mexico is a free market economy with both modern industry and agricultural sectors that have heavy foreign direct investment along with dominance in private sectors. Recent governmental administration has attempted to expand growing industries in railroads, telecommunications, electricity generation, natural gas distribution and manufacturing. Mexico is currently on the rebound from the profound impacts of the 2008 global financial crisis where its economy shrank by 6.1% in 2009 alone. Mexicos GDP (PPP) had a 5.25% negative growth in 2009 and dropped from 1.553 trillion in 2008 to 1.471 trillion in 2009 (in US dollars). Unemployment skyrocketed as inflation soared, and 700,000 people were out of jobs by 2009; 260,000 of which were in the manufacturing industry, Mexico's main industry for trade18. All of Mexicos production has slowed and its economy, which was the strongest among Latin American countries in the early 2000s, is now faced with the challenge of re-growth. In addition, impediments to growth exist internally with problems concerning education, infrastructure, labor laws, unemployment, energy private sectors, and the omnipresent drug cartels, to name a few. The potential for improvement are in Mexicos future, however, as evidenced by its increasing GDP, freetrade agreements such as NAFTA, and the fact that in the past year its economy has rebounded and grew 5.4%, according to The Economist. Trade is an important factor in its future growth, as last years exports accounted for almost a third of Mexicos trillion dollar GDP. It is projected that Mexico will continue to grow as it builds its free-trade agreements, continues to exports, and implements our suggested policies to enhance international trade. Poverty is also one of the foremost issues facing Mexico. Extreme poverty is classified as living on less that $1.25 a day, or at the level where basic necessities for living such as food and water is not always available. According to The World Hunger Education Service, over 8% of the people in Latin America are living under extreme poverty. For a developing country such as Mexico this is a dire concern. Through our recommendations we believe we can stimulate the Mexican economy and promote economic growth, creating jobs, which can help end the cycle of poverty that is gripping our nation, ultimately allowing Mexico to look more attractive for international trade in the global arena. CURRENT MAJOR TRADE ISSUES The prevalence of Transnational Criminal Organizations (TCOs) as the result of the Mexican Drug War is currently one of the most pressing trade issues in Mexico. Since President Felipe Calderon took office in 2006, our government has been actively seeking methods to fight such illicit organizations. Since the beginning of Calderons term it is estimated that there have been approximately 34,612 deaths as a direct result of the war on

drugs1. Internal conflict only continues to escalate as evidenced by a recent TSO expansion beyond narcotics into kidnapping, hi-jacking, migrant smuggling, and extortion. Violence along Mexican roads and highways is of particular concern as the majority of trade between the United States (Mexicos main exporting partner) and Mexico takes place through ground transportation. This past summer heavy-duty truck manufacturers in particular have experienced first-hand the surge in drug cartel power. Multinational corporations such as Daimler Trucks North America, Navistar, GM and Ford have witnessed the necessity of increasing security for ground-transported shipments. A number of cars and trucks were hi-jacked by drug cartels in order to turn them into heavy-duty tanks or other versions of weaponry. Looking at Daimler specifically, not only do they export the vast majority of their trucks to Mexico, but they also use Mexico as a thoroughfare for vehicles heading to Latin American countries. Daimler was ultimately forced to find an alternate mode of transportation for their trucks either through shipments via water or alternate ground routes. If the drug cartels continue to escalate the level of violence in Mexico, the negative implications on Mexicos international trade market will be severe. In addition to the pervasive presence of the drug cartels, there is also widespread corruption among the police and judiciary in Mexico. State and local police forces suffer from lack of training and funding, and are a weak deterrent to criminals acting on behalf of organized crime and armed with an impressive array of weapons2. It is also suspected that many local police forces receive money from organized crime to look the other way, oftentimes only given the choice between accepting money and losing their life. Circumstances are similar with the judiciary; they are overworked, underpaid, and lack sufficient training. It is also not uncommon for Mexicos judges to be intimidated or bribed when dealing with drug cases. As a result of its corruption and inefficiency, few Mexicans have confidence in the police or the judicial system, which leads them to fail to report many criminal activities. This leads to low rates of convicted criminals, which in turn contributes to Mexicos high crime rate, which ranges from everything from street crimes to organized crime. There also continues to exist structural inefficiencies within Mexico, which limits improvements in productivity and living standards. Especially through looking at the agriculture industry, these inefficiencies include a lack of infrastructure, inadequate supplies of credit, a communal land structure for many producers, and a large subsistence rural population that is not part of the formal economy3. Included in such structural inefficiencies is the ever-present gap between the rich and the poor and the opportunities or 1
1

"Travel Warning U.S. Department of State Bureau of Consular Affairs - Mexico." Travel.State.Gov. U.S. Department of State, 22 Apr 2011. Web. 09 Oct 2011. <http://travel.state.gov/travel/cis_pa_tw/tw/tw_5440.html>.

2
2

"Mexico Country Specific Information." Travel.State.Gov. U.S. Department of State, n.d. Web. 09 Oct 2011. <http://travel.state.gov/travel/cis_pa_tw/cis/cis_970.html

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"Background Note: Mexico." U.S. Department of State. Bureau of Western Hemisphere Affairs, 14 Dec 2010. Web. 09 Oct 2011. <http://www.state.gov/r/pa/ei/bgn/35749.htm>.

lack of opportunities available to each. Another concern is the increase in power the drug cartels have recently obtained. They have succeeded in instilling their own individual zones of impunity in which they dictate their own laws and levy their own taxes. There are estimated to be about 233 such zones across the country, where crime runs rampant and is largely uncontrolled. As civilian death tolls continue to rise, Mexican residents continue to lose faith in their government, only spurred by the recent trend of cartels targeting newscasters, bloggers, and journalists as a way to eliminate drug war coverage. The Calderon administration has been actively pursuing new methods to curb drug related violence. In March 2010, in conjunction with the United States, they decided to refocus their efforts on strengthening civilian law enforcement institutions and rebuilding communities crippled by poverty and crime4. Through strengthening local Mexican communities, the government hopes to help deter youths from getting involved with the cartels due to socioeconomic hardships. Another method for absolving crime is taking the focus away from military assistance and focusing on the development of civilian police training, not necessarily equipment. Despite this new method to combat TSOs, there have since been little improvements, and outrage over the rising death tolls have caused massive demonstrations and street protests in Mexico City. According to a recent poll, Mexicans now rate public safety above the economy as Mexicos worst problem5. While the Mexican government has focused on eradicating the drug cartels, it has placed the responsibility of drug trafficking prevention in the hands of the United States. The Obama administration has donated billions of dollars towards anti-drug efforts. The funds specifically went towards U.S. contractors who were paid to train local prosecutors and police, help eradicate fields of coca, and operate surveillance equipment. There has also been mass criticism in response to this funding because as of now the death tolls only seem to be rising as the political and economic turmoil of Mexico intensifies, especially in the face of the upcoming Mexican presidential election in 2012. EXPORT/IMPORT PARTNERS Mexicos geo-strategic position allows it to benefit greatly due to the trilateral trade agreement between the North American states: Canada and the United States (US). The North American Trade Agreement (NAFTA) has been extremely advantageous for Mexico allowing it to trade freely with the US, thus making them its top export and import partner. Over the recent years Mexicos trading partners have remained relatively the same, however percentages of trade has varied tremendously. According to the CIA World Factbook, Mexicos top exporting partners are unsurprisingly, the United States of America 4
4

Hidalgo, Oscar. "Mexican Drug Trafficking." The New York Times. The New York Times, 03 Aug 2011. Web. 12 Oct 2011. <http://topics.nytimes.com/top/news/international/countriesandterritories/mexico/drug_trafficking/index.ht ml>.

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Ellingwood, Ken. "Criticism of Calderon mounts over Mexico drug violence." Los Angeles Times. Los Angeles Times, 06 May 2011. Web. 09 Oct 2011. <http://articles.latimes.com/2011/may/06/world/lafg-mexico-blame-20110507>.

with 73.5% of trade and Canada, a far off second with 7.5% of trade, followed by Germany with 1.7% trade (2010). In 2006, the United States held 90.9% of trade, Canada only 2.2% and Spain, Germany and Colombia all with trade sub-two percent. Mexicos top importing partners include the United States again with 60.6%, China with 6.6%, South Korea with 5.2%, and Japan with 4.1% of trade (2010). In 2005, estimates put the United States with 53.4% trade, China with 8%, and Japan with 5.9%24. Overall, Mexico has a great variety of trading partners due to its participation in 12 different free-trade agreements among 44 countries. The US and Canada will remain Mexicos top trading partners because they share borders, allowing transportation costs to remain low due to distance. In accordance with the Gravity Model due to close borders and cultural affinity, Mexican trade is fully incorporated with its North American partners: close to 90% of Mexican exports and 50% of its imports are traded with the US and Canada. Since Mexico, the US, and Canada engage in many trade operations, cooperation is imperative, especially due to the implications of NAFTA. Overall trade has increased in Mexico over the recent years due to various trade agreements and its large labor market. In 2005, Mexico was the world's fifteenth largest merchandise exporter and twelfth largest merchandise importer with a 12% annual percentage increase in overall trade. Mexico is the biggest exporter and importer in Latin America; in 2005, Mexico alone exported US $213.7 billion, roughly equivalent to the sum of the exports of Brazil, Argentina, Venezuela, Uruguay, and Paraguay. While trade with the US increased 183% from 19932002, and trade with Canada increased by 165%, other trade agreements have shown even more impressive results: trade with Chile increased 285%, with Costa Rica 528% and Honduras 420%. Trade with the European Union increased 105% over the same time period23. COMMODITIES AND TRADE Mexico produces and trades a majority of agricultural and industrial products. Its agriculture products include: corn, wheat, soybeans, rice, beans, cotton, coffee, fruit, tomatoes, beef, poultry, dairy products, and wood products. Its industrial production includes: processed foods and beverages, tobacco, chemicals, iron and steel, petroleum and oil, mining and silver, textiles, clothing, motor vehicles, consumer durables, and personal electronics, parts and computers. With all these products its export commodities include almost all production products from the manufactured goods, oil and oil products, electricity, silver, fruits and vegetables, coffee, and cotton24. Mexicos large land resources and labor force propels its exports to be related to agricultural harvesting and production of manufactured goods. Manufactured goods are a large industry all in itself and products range across the board from computers and electronics to motor vehicles and aircrafts, to clothing textiles, tobacco, food and more. This is directly correlated to Mexicos laborintensive industry, which allows Mexico to produce these goods for other wealthy nations, using Multinational Corporations (MNCs) to its advantage. The technology and training is provided, and because Mexico is not a capital rich country, production of such laborintensive goods seems to fit its mold and allows for greater manufactured exports. MNCs have really made an impact coming in to take advantage of Mexicos large labor supply, low wages, and lesser governmental regulations. Mexicos imports seem to reflect upon its exports, because they happen to be commodities that accelerate its production of export goods. This makes sense because

Mexico lacks the capital for research and development and technology to allow it to keep up with the leading advances in productions from agricultural harvesting to motor vehicle and aircraft manufacturing to oil and energy refineries. Therefore Mexicos main import commodities include: metalworking machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft and aircraft parts. All these imports are directly related to its production of its export commodities. Mexicos most interesting numbers are in its production, consumption, and trade of electricity, oil and natural gas. Mexico produces 239.1 billion kilowatt-hours (kWh) of electricity where its consumption is only 181.5 billion kWh. It exports only 1.32 billion kWh and still imports 699.2 million kWh. The reason for its limited exports of kWh is the cost and difficulty of transporting the kWh electricity. Mexicos oil production is 2.983 million bbl/daybbl is a unit measuring the rate at which petroleum is produced at the refinery and represents a barrelwhile its consumption is 2.073 million bbl/day. Mexico exports 1.511 million bbl/day and imports 496,000 bbl/day. Mexicos natural gas production is 59.07 billion cu ma measure of natural gas in cubic meterswhile its consumption is greater at 62.42 billion cu m. It exports 200 million cu m, and imports 14.59 billion cu m per year24. The access oil, electricity and gas are held in reserves and can be used for trading or unexpected increase in demand of any resource. The reason Mexico still imports some electricity, and oil, while it has excess in reserves and exports multiple amounts more of those products is because those imports are signed to contracts of trade and they receive these goods even though they may not have a direct need for them. These imports can be done through companies or MNCs within Mexico that have trade agreements with other companies and therefore receive oil, or electricity simply at different rates and included in trade deals. Natural gas on the other hand has a national consumption higher than its national production, so therefore there are very minimal exports and greater imports of that commodity. Mexicos significance for tradable and non-tradable commodities lies is its barriers to trade. Since Mexico has established so many free-trade agreements, barriers to trade have been drastically reduced thus allowing Mexico to benefit a great deal, opening its options for trade. However transport costs always plays an important role, therefore products such as electricity cannot be traded as efficiently. Mexicos imports are input factors of production for their exports and therefore its imports aid to its economy and trade. The country continues to be relatively poor and is still in the process of developing, therefore a large portion of our exports in agriculture, clothing and manufactured goods are consumed by our population rather than entirely exported. Because Mexico has low wages and therefore production and manufacturing of such items are cheaper, we produce and export labor-intensive goods with free trade, and also have no need to import such cheap goods where prices normally rise due to production and transportation costs. TARIFF AND NON-TARIFF BARRIERS TO TRADE Probably the most important trade agreement in the history of Mexican trade is the North American Free Trade Agreement (NAFTA). NAFTA was put into place starting the calendar year in 2004. It was to immediately eliminate all quota and tariff barriers between the US, Mexico, and Canada in efforts to promote more localized trade and help stimulate economic growth within the three countries. In Mexico especially the hope was for

significant economic growth to help large areas of our country where unemployment and poverty are out of control. Poverty is one of the largest problems Mexico faces, and through economic growth perhaps it can be helped. One of the prevailing beliefs behind NAFTA is that each country in the agreement has a substantial competitive advantage in various aspects of production. Through these differences all countries involved can mutually benefit from the increase in trade. Mexico has a distinct competitive advantage when it comes to unskilled labor. Due to the union system in the United States, the cost per hour has risen exponentially in the past fifty years. A worker in Mexico can perform the same task equally well and costs a company a fraction of the cost it would have in the United States. This alone has been a leading cause behind the dramatic increase in FDI into Mexico in the years following NAFTAs implementation. Numerous companies are choosing to build factories and production facilities in Mexico, as the cost is so much lower. This will hopefully even help steer some of the FDI that has been going to countries such as China back to the North American shores. There has been some opposition to the elements of NAFTA. The leading cause of concern is the previously mentioned outsourcing of jobs. Both the US and Canada have received tremendous amounts of backlash for the current problems with unemployment during the hard economic times. Many citizens are frustrated with the current policies that they feel is driving away jobs that could otherwise be given to natives. While this is a valid concern, it is a loaded argument. The workers who are unemployed are frequently those who are part of the unions, or are otherwise used to a much higher salary than the company can afford to pay them. The cost of living for this portion of the workforce is significantly higher than for that of their Mexican counterparts. While the US worker is looking for an American Dream lifestyle, workers here in Mexico may be only hoping to be able to feed a family each night. The question of whether much of this is ethical is an interesting subject. While it can be said that the jobs being created in these factories, often within miles of the US, are jobs that people would otherwise not have, the conditions and compensation are not ideal. This is evident from the large number of Mexicans who immigrate to the United States, often illegally. Thus while the companies are doing what they see as fiscally responsible to their shareholders, they are not necessarily doing what is socially responsible with respect to their host countries. FACTOR ENDOWMENTS AND COMPARATIVE ADVANTAGES Mexico's greatest factor endowment is its labor. Some may argue that Mexico's most useful factor endowment is their land as Mexico occupies a large space, especially in Latin America. This will be addressed in the Policy Recommendation section, as Mexico does not sufficiently utilize this advantage. Mexico is a labor-intensive country, and as a labor-intensive country, Mexico's economy operates best when it utilizes this comparative advantage. Mexico can produce goods much cheaper than developed countries, such as the US, Canada, and EU countries because of a large labor force that is willing to work for less. In addition, because Mexico's labor abundance is unskilled, and there is a lack of unions, it costs less to pay Mexican workers. Let us consider a hypothetical production possibility frontier between the United States (a capital rich country) and Mexico (a labor rich country), where the both economy are based on the production of computers and textiles. Let's assume autarky and the price of

one computer is the same for the price of one T-shirt. United States' Economy 5 10 Mexico's Economy 3 1

T-Shirts (output/hour) Computers (output/hour)

Absolute Advantage United States in both Computers and T-Shirts Comparative Advantage United States in Computers Mexico in T-Shirts Relative Price The relative price of T-Shirts under trade is (, 3)

The US can produce T-Shirts more effectively by producing Computers and trading them for T-Shirts. In direct production, 1 hour of U.S. labor produces 5 T-Shirts. However, with trade, 1 hour of U.S labor produces 10 units of Computers, which can be traded for 30 TShirts. That being said, Mexico is better off trading t-shirts for computers, than directly producing computers. One hour of Mexico's labor produces 1 computer. With trade, 1 hour of Mexico's labor produces 3 T-shirts, which can be traded for 1.5 units of computers. Under NAFTA, Mexico's trade mentality becomes very simple; Mexico simply needs to focus on its comparative advantage. With non-free trade agreement countries, Mexican barriers to trade, such as transportation costs, have to be accounted for. However, when transportation costs are minimized, Mexico trades based on their factor of endowments. There is empirical evidence that defends the Heckscher-Ohlin (H-O) theory of Mexico's trading scheme. Among Mexico's primary exports are manufactured goods, coffee, and cotton. These goods are labor-intensive commodities.6 Furthermore, the H-O also states that countries should export the resources that they are abundant in. Mexico is abundant with oil, especially compared to the US. As of 2008, Mexico's exported 22 billions dollars of crude oil to the U.S.7 Aside from land, Mexico's other major factor endowment is oil. Mexico's largest export to the US is crude oil. In 2009, crude oil exports comprised 12.5% of Mexico's export to the United States.8 Mexico's petroleum industry is the sixth largest producer of oil in the world, and second in the Western Hemisphere after the US.

6 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch." Mexico Export, Import & Trade. Web. 12 Oct. 2011. <http://www.economywatch.com/world_economy/mexico/exportimport.html>. 7 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-Billion Dollar Trade Advantage | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexico-imports-and-exports-2009-a205951>. 8 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-Billion Dollar Trade Advantage | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexico-imports-and-exports-2009-a205951>.

PROJECTIONS OF FUTURE IMPORT, EXPORT, AND TRADE COMPOSITION PATTERNS For IMF chart, see the end of the section. Mexico's current economic outlook is promising, according to IMF projections. In 2010, Mexico's GDP grew 5.4%. Between 2011-2015, Mexico's GDP is estimated to have grown between 3%-4% each year. Mexico's predicted inflation and unemployment is a strong indication that the country will be stable. Between 2011-2015, inflation is estimated to remain at approximately 3%, while unemployment is projected to decrease, bottoming out at 3.5%. This is a great indication because low unemployment, low inflation, and relative steady projected PPP (8.5-9.2) are indicators of increased foreign investment. These metrics coupled with projected stable debt reduces sovereign risk, which discourages FDI. Lastly, the estimated stability of Mexico's economy reduces the risk of capital flight, which can cripple the economy. Mexico's projection of future imports, exports, and trade composition is cloudy at this point in time because Mexico's exports relies heavily on the US economy, as Mexico sends 80.5% of its total exports to US.9 If the US economy rebounds from the recession driven by consumption and investment, then Mexico's projected exports will increase across the board. The IMF projections do not account for the current volatility in the world economy. In 2009, six of Mexico's ten top exports to the US showed double digit losses from 2008: crude oil fell 40.7%, auto parts and accessories fell 23.1%, video equipment fell
9 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch." Mexico Export, Import & Trade. Web. 12 Oct. 2011. <http://www.economywatch.com/world_economy/mexico/exportimport.html>.

18.1%, passenger cars fell 27.9%, telecommunications equipment fell 11.4%, and electric apparatuses fell 24.5%. Much of these losses can be contributed to low consumption and investment.10 If consumption increases in the US, then passenger cars exports would increase. Investment has a greater link to Mexico's exports. If investment would increase, specifically with business investment and production, then oil, auto parts and accessories, electric apparatus, telecommunications, and video equipment would increase dramatically. Mexico's furniture industry and computer industry have been growing rapidly. In 2009, Mexico exported over 900 million dollars worth of furniture and 6.3 billion dollars worth of computers to the US.11 These two exports are projected to increase, especially the furniture industry. Mexico holds a clear competitive advantage over furniture. Because the furniture industry is labor-intensive, the US is not able to produce the same good as costefficiently as Mexico is able to do so. In 2009, Mexico has a 593.1 million net export of furniture with the US.12 This will increase over time, especially when American consumption increases. Lastly, in regards to exporting, it is likely that there will be an increase in exports of watermelon and shrimp from Mexico. Mexico holds competitive advantages in both these industries. Mexico holds a 553 million dollar trade surplus over the US for watermelons. This is because Mexico is exempt from US watermelon tariffs.13 For shrimp, the US lifted Mexico's shrimp import ban in October of 2010. In 2009, exporting was estimated at 250 million dollars.14 With this ban lifted, Mexico will once again start exporting shrimp to the US. Lastly, the Mexican industrial sector has been growing rapidly since its trade liberation. Mexico will be exports in automobiles will increase. Mexico's automobile sector is internationally recognized as reliable. Automobile manufacturing plants in Mexico are used to install complex systems, not just simple assembly as in developing countries. The main imports that are growing are in the developing industries. First, Mexico has been working diligently in creating an aerospace industry. Among Mexico's ten fastest growing imports from the US, three are related to aerospace: weapons, completed military aircrafts, military aircraft engines and turbines.15 As Mexico further develops their aerospace industry, they will import more of these goods. Furthermore, Mexico is also developing their automotive industry and their computer industry. Vehicle parts and
10 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-Billion Dollar Trade Advantage | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexico-imports-and-exports-2009-a205951>. 11 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-Billion Dollar Trade Advantage | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexico-imports-and-exports-2009-a205951>. 12 Workman, Daniel. "Mexico Imports and Exports 2009: Mexican Furniture Gives Mexico a Half-Billion Dollar Trade Advantage | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexico-imports-and-exports-2009-a205951>. 13 Workman, Daniel. "Mexico's Fresh Watermelon Exports | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/mexicos-fresh-watermelonexports-a301567>. 14 Workman, Daniel. "U.S. Certifies Mexico's Use of TEDs, Ending Shrimp Import Ban | Suite101.com." Suite101.com: Online Magazine and Writers' Network. Web. 12 Oct. 2011. <http://www.suite101.com/news/us-certifies-mexicos-use-of-teds-ending-shrimp-import-ban-a297903>. 15 Workman, Daniel. "Mexico's Top Exports & Imports: Most Popular Products Traded Between Mexico & America | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://danielworkman.suite101.com/mexicos-top-exports-imports-a25194>.

computer accessories will also grow. Mexico's trade composition will change slightly. As mentioned in an earlier section, with NAFTA, Mexico trades mostly with the US and Canada. Mexico's trade composition follows the H-O model, as Mexico primarily trades with developed countries. However, currently Mexico's trade with Canada is slight compared to with the United States. Canada only trades 3.6% of its exports with Canada in comparison to 80.5% with the United States.16 In the first quarter of 2010, Mexico's export to Canada has increased 69.5%, while Canada's export to Mexico has increased 34.4%.17 When considering NAFTA and the decreased transportation costs, trade between these countries will increase dramatically in the upcoming years. Currently Mexico does not trade with other emerging markets; however, we supply a potential industry that Mexico can utilize to start doing this in Policy Recommendations.

16 Economy Watch Content. "Mexico Export, Import & Trade | Economy Watch." Mexico Export, Import & Trade. Web. 12 Oct. 2011. <http://www.economywatch.com/world_economy/mexico/exportimport.html>. 17 Workman, Daniel. "Canada's Exports and Imports with Mexico | Suite101.com." Daniel Workman | Suite101.com. Web. 12 Oct. 2011. <http://daniel-workman.suite101.com/canadas-exports-and-importswith-mexico-a244826>.

POLICY RECOMMENDATIONS There are numerous policy recommendations that Mexico should consider to help develop their economy: Mexico needs to export to a diverse range of countries. Mexico should start exporting more to Canada and create relationships with fellow developing countries. NAFTA provides the opportunity for Mexico to trade with Canada at low costs. Currently it trades at 3.6%. Increasing trade with Canada would be beneficial for both parties, and the increased aggregate revenue for Mexico would offset the slightly higher transportation costs. It is important for Mexico to diversify their main export country, the US, because our economy is too interwoven in the United States' economy. Canada is currently in a stronger financial position than the US, and Mexico should take advantage of Canada's economic strength and hedge our economy's exposure to the United States' economy. This would help in case of a future US recession or depression. In 2009, Mexico's economy shrank by 6.1%. Between late 2008 and early 2009, 700,000 jobs were lost. 260,000 of those jobs were in manufacturing.18 This occurred because of the financial crisis in 2008 that started in the United States. In 2009, Mexico sent only 3% of exported goods to Brazil, Russia, India, or China. However, Brazil sent 16% to its fellow developing countries. Mexico needs to hedge against the United States; it is the responsible action to take for our middle-income country. To do this best, increasing trade with Canada and other emerging markets is necessary. Mexico needs to devalue our currency with respect to the U.S. dollar. The Peso has dropped 4.8% in the past two weeks. As an export-oriented country, Mexico needs its exchange rate to remain weak relative to the dollar. Furthermore, Mexico needs its currency to remain competitive with the USs other major importing countries, such as China and Japan. China and Japan have both exercised efforts to devalue their respective currencies,19 and Mexico needs to ensure that as US demand for imported goods increase (as their economy recovers), the demand is directed towards Mexican goods. The best recommendation to achieve this is by buying US currency, similar to what China has done. By no means does Mexico have to achieve this to the same extent as China, but in order to remain competitive in trade some devaluation needs to occur. In accordance to the Gravity Model of Trade, Mexico and the US will trade regardless of the currency; however, a weaker currency will help us utilize our geographic location and minimize transportation costs with the US.

18 "Mexicos Economy: Making the Desert Bloom | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Web. 12 Oct. 2011. <http://www.economist.com/node/21526899>. 19 "News Headlines." CNBC Mobile Home. Web. 12 Oct. 2011. <http://www.cnbc.com/id/44404785/Aggressive_Swiss_National_Bank_Move_Shakes_Up_Markets>.

 Mexico needs to increase furniture exports. Noted in the previous section, Mexico owns a considerable comparative advantage in furniture manufacturing with the US. Mexico's trade surplus of almost 600 million needs to reach at least 800 million in the next three years. This is especially plausible because as the US economy grows, consumer consumption will increase. Furthermore, as a labor-intensive industry, Mexico will have the cost advantage in production. The Mexican government should subsidize domestic companies in the creation of computer parts. After achieving economies of scale, Mexico should then export domestic made computers to the rest of Latin America. Currently, Mexico enjoys a 4.9 billion dollar trade advantage in completed computers. However, the US enjoys a 4.5 billion dollar trade advantage in computer accessories. In terms of computer related goods, Mexico has a 400 million dollar advantage. If the Mexican government subsidizes the creation of computer parts, Mexico can create a new market. This would create significant revenue. Under the New Theory of Trade, first strike is a significant advantage. With subsidies, Mexico can decrease the US trade advantage considerably within five years. While Mexico's primary labor is unskilled, they still have a large resource of skilled labor, illustrated by car manufacturers utilizing Mexican labor to install complex system in their cars. Additionally, after Mexican firms can effectively make this product, they can sell it to Latin American countries as the middle-class computer. Consider Tata Motors in India. Tata created a 2,500 dollar car for the emerging middle class in India. While these cars do not compare to imported cars, these cars do serve a market that can't afford imported cars. Likewise, Mexican computers would be the affordable computer for Latin American countries. Furthermore, we previously mentioned that Mexico needs to diversify their trading partners, and Mexico can use an affordable computer to do this. Most Latin American countries and the BRICs have weak currencies relative to the dollar and the middle classes in those countries do not

have the excess income for high-end computers such as Dells, IBM, Samsung, HP, etc. This would be effective simply for the fact that Mexico's currency relative to developed countries is weak. While subsidizing a domestic industry is expensive for governments, the opportunity to create a new market in a plethora of countries is worth the initial cost. Note: First strike advantage is more likely to be achieved in fellow Latin American countries; however, in the BRICs, there already exists domestic competition. This is by no means to dissuade exporting to the BRICs; however, this recommendation will be more profitable in Latin America. Reform bureaucracy, paying special attention to corruption, legal agencies, and market institutions For Mexico to ever become a developed country, we need to minimize bureaucratic risk. This can occur through increased transparency of the government. Globally, corruption occurs at lowers levels of bureaucracy because of unlivable salaries. If Mexico increased checks on its workers, increased transparency, and increased salaries to livable standards, then corruption would decrease. Bureaucratic risk hinders foreign direct investment. Firms are not willing to invest abroad if the target country is high-risk. The high levels of corruption and red tape create unneeded hassles for multinational corporations. Due to Mexico's trade agreements with Canada and the US, Mexico's FDI stock would increase with less bureaucratic risk because of the ability to produce manufactured goods cheaply, and then export said goods easily. Increased FDI would be beneficial for several reasons. It would increase employment, increase trade, and help knowledge dissipation. All of these would lead to sustainable economic growth. Mexico's legal system limits hinders business activity. The lack of an institution to enforce commitments makes business transactions more difficult. Often business is done in cash and between trusted family members.20 Furthermore, the lack of market institutions increases the risk and transaction costs of entrepreneurship. Without available credit and trustworthy institutions, it is harder to foster small business development. Increase investment in infrastructure, specifically in transportation and utilities. Mexico is a very mountainous country and much of the country is accessible only by narrow, winding two-lane highways that are slow and dangerous. Continued expansion of the modern highway system will help improve the efficiency of truck transportation of products...21 Improved efficiency of transportation will lead to increased FDI as corporations would be able to transport their goods quickly and safely throughout the country. Furthermore, investment in utilities will lead to higher levels of service based FDI. A reason why India lags behind other countries in their FDI is because their utilities are unreliable. Mexico is in the same boat. If Mexican utilities were reliable, then not only would service based companies be more willing to come to Mexico, but Mexico may be able to attract more foreigners
20 Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in Mexico and the U.S." Web. 12 Oct. 2011. <http://naamic.tamu.edu/austin/peel.pdf>. (pg. 9) 21 Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in Mexico and the U.S." Web. 12 Oct. 2011. <http://naamic.tamu.edu/austin/peel.pdf>. (pg. 9)

as well. Foreigners contribute to increased consumption, which is a determinant of economic growth. Increase Livestock and Poultry production. This is a key reform. While some may consider Mexico's land as a strong factor endowment, it is not. The fact that only 11 percent of Mexico is arable means that a large amount of land is available for grazing.22 Because Mexico doesn't have the proper land available for intensive crop cultivation, it should focus on livestock and poultry production because it is labor intensive. In 2009, one of Mexico's fastest growing exports was meat and poultry, valued at 555.6 million dollars. This represented a 25.1% growth from 2008. This growth can increase dramatically if the government provides this industry with the proper reforms. As mentioned above, Mexico needs to improve its transportation infrastructure and reform their bureaucracy. Should this occur, then the livestock and poultry industry will grow. Furthermore, this industry, along with Mexico's furniture industry can play a vital role in Mexico's future growth. If Mexico continues developing capital intensive sectors concurrently with labor intensive sectors, then growth will occur in all of Mexico's working populations, reducing the inequality gap that occurs as countries develop. CONCLUSION The potential for economic growth and development in Mexico is vast, especially through increased international trade. Our policy recommendations outline steps to be taken at both the international and domestic levels in order to continue fostering this expansion, ultimately elevating Mexico to the status of a developed country. However, Mexico faces many internal structural issues that will need to be confronted before moving forward. In addition to our aforementioned recommendations, with a focus on stabilizing its economy after the negative effects of the 2008 global financial crisis, eliminating poverty, and implementing regulations to curb drug cartel expansion, Mexican expansion becomes more viable. All in all, our hope is to assist in the development of our country in the hopes that Mexico will eventually evolve to be more attractive to foreign investors and export industries, creating more jobs and increasing the flow of capital into our country.

22 Peel, Derell S. "Comparative Advantage and Labor Issues in the Livestock and Meat Industry in Mexico and the U.S." Web. 12 Oct. 2011. <http://naamic.tamu.edu/austin/peel.pdf>. (pg. 5) 23
Gereffi, G; Martnez, M (September 30, 2004). "Mexico's Economic Transformation under NAFTA". In

Crandall, R; Paz, G; Roett, R. Mexico's Democracy at Work: Political and Economic Dynamics. Lynne Reiner Publishers. 24 "CIA - The World Factbook." Cia.gov. Central Intelligence Agency, 27 Sept. 2011. Web. 8 Oct. 2011. <https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html>.