Chairman : The Honourable Peter Stollery
Deputy Chair : The Honourable Consiglio Di Nino

Third Report

March 2004

The first two volumes of this study by the Standing Senate Committee on Foreign Affairs  

Uncertain Access: The Consequences of U.S. Security and Trade Actions for Canadian Trade Policy
(Volume 1) 

The Rising Dollar: Explanation and Economic Impacts
(Volume 2) 

can be downloaded at

http://www.senate-senat.ca/foraffetrang.asp 

For more information, please contact us

by e-mail: foraffetrang@sen.parl.gc.ca

by phone: (613) 990-0088
toll free: 1 800 267-7362

by mail: Standing Senate Committee on Foreign Affairs, The Senate, Ottawa, Ontario, Canada, K1A 0A4

MEMBERS

The Honourable Peter Stollery, Chair
The Honourable Consiglio Di Nino, Deputy Chair

and 

The Honourable Senators:

Raynell Andreychuk
*Jack Austin, P.C. (or William Rompkey, P.C.)
Pat Carney, P.C.
Eymard G. Corbin
Pierre De Bané, P.C.
John Trevor Eyton
Jerahmiel Grafstein
Alasdair Graham, P.C.
*John Lynch-Staunton (or Noël Kinsella)
Frank W. Mahovlich
Vivienne Poy
Herbert Sparrow

* Ex officio members

In addition to the Senators indicated above, the Honourable Senators Gérald A. Beaudoin, Roch Bolduc, Maria Chaput, Joseph Day, Edward M. Lawson, Rose-Marie Losier-Cool, Paul J. Massicotte, Pana Merchant, Gerard A. Phalen, Raymond Setlakwe, David P. Smith, P.C., and Terry Stratton were members of the Committee or participated at different stages of this study during the Second and Third Sessions of the Thirty-Seventh Parliament. 

Staff from the Parliamentary Research Branch of the Library of Parliament:

Peter Berg, Analyst
Michael Holden, Analyst

  François Michaud
Clerk of the Committee

ORDER OF REFERENCE

Extract from the Journals of the Senate of Tuesday, February 10, 2004:

The Honourable Senator Stollery moved, seconded by the Honourable Senator Maheu:

THAT the Standing Senate Committee on Foreign Affairs be authorized to examine and report on the Canada — United States of America trade relationship and on the Canada — Mexico trade relationship, with special attention to: (a) the Free Trade Agreement of 1988; (b) the North American Free Trade Agreement of 1992; (c) secure access for Canadian goods and services to the United States and to Mexico, and (d) the development of effective dispute settlement mechanisms, all in the context of Canada's economic links with the countries of the Americas and the Doha Round of World Trade Organisation trade negotiations;

THAT the papers and evidence received and taken during the Second Session of the Thirty-seventh Parliament be referred to the committee; and

THAT the Committee shall present its final report no later than June 30, 2004 and that the Committee shall retain all powers necessary to publicize the findings of the Committee as set forth in its final report until July 31, 2004.

After debate,

The question being put on the motion, it was adopted.

Paul Bélisle

Clerk of the Senate

TABLE OF CONTENTS

FOREWORD

RECOMMENDATIONS

INTRODUCTION

MEXICO TEN YEARS AFTER NAFTA

    A. THE BENEFITS OF FREE TRADE
        1. Mexico's Trade With its NAFTA Partners has Grown
        2. Foreign Direct Investment in Mexico has Soared
        3. NAFTA has Contributed to Overall Mexican Economic Performance
        4. Not all of Mexico's Economic Performance Since 1994 can be Attributed to NAFTA

    B. CRITICISMS OF NAFTA AND MEXICO'S OUTSTANDING CHALLENGES
        1. Economic Growth has Decreased
        2. Concerns Regarding Employment, Wages and Poverty
        3. Regional Disparities Continue to Exist
        4. Agriculture has been Deeply Affected
        5. Migration Flows Remain a Problem
        6. Why NAFTA cannot be Blamed for all of Mexico's Woes

BOOSTING CANADA-MEXICO TRADE AND INVESTMENT

    A. CANADA-MEXICO TRADE AND INVESTMENT LINKS

    B. CHALLENGES TO A CLOSER ECONOMIC RELATIONSHIP
        1. Weakness in the Mexican Economy
        2. Mexican Structural Reforms Have Stalled
        3. Canadian Business Continues to be Largely Fixated on the U.S. Economy
        4. Challenges in the Farm Sector

    C. WHERE DO WE GO FROM HERE?

PROSPECTS FOR CLOSER COOPERATION ON NORTH AMERICAN ECONOMIC ISSUES

FOREWORD

While NAFTA has undoubtedly bestowed economic benefits on Mexico, it is the perfect cautionary tale about the difficulty with free trade agreements between developing countries and developed countries, especially as they relate to agriculture.  

Simply put, in Mexico, an estimated 30 percent of the people work in agriculture.  In Canada and the United States 2 percent of the people work in agriculture.  In Mexico, where proper statistics are difficult to come by, we can estimate that 4 percent of the people work in commercial agriculture.  The remaining 26 percent work in subsistence agriculture: they farm small plots where they feed the family and sell at local markets.  

Somehow the owners of the commercial farms – a much smaller number of people than the 4 percent that work on commercial farms – persuaded the Mexican government to sign a free trade agreement on agriculture which would open Canadian and U.S. markets to Mexican agricultural exports.  The agreement also opened the Mexican market to Canadian and especially U.S. agricultural exports, with this result wreaking havoc on the 26 percent of the Mexican workforce who farm at local and subsistence levels.  

As someone who speaks Spanish, and has traveled extensively through what is called Latin America, I am familiar with the varied political and social situations in this region.  On the Committee’s recent visit to Mexico, I was told by Mexican Congressmen of all three main parties that many, many villages have no men in them and perfectly good land is left untended.  They told me that disaster has overtaken many rural areas.

So where are the men?  

The answer to this question may be found in the testimony the Committee heard as well as in what an observant visitor to Mexico City can see by walking its’ streets.  I noticed an enormous increase in the number of peddlers in Mexico City, where I have not been for more than ten years.  In my view, the most extraordinary evidence that the Committee received, is that contrary to what the promoters of NAFTA promised – a reduction of illegal immigration to the United States – 500,000 poor Mexicans, often taking their lives in their hands, now make the illegal crossing into the United States every year.  Every witness said that this was a huge increase from ten years ago.  We were also told that these people do not stay in California or other traditional areas, but now move all over the country.  Imagine: 500,000 undocumented people without any rights, every year, wandering around the U.S. looking for jobs.  

To conclude, this report on Mexico makes up volume three of our Committee’s comprehensive review of the Free Trade Agreement between Canada and the U.S.; the effect of the exchange rate on trade between Canada and the U.S.; and NAFTA.  I certainly have learned a great deal which I didn’t know and I was a member of the committee when it dealt with both the FTA and NAFTA.  At that time there was no World Trade Organization.  In my opinion, the arrangements to resolve trade disputes between Canada and the U.S. – agreed to in 1988, have failed.  Take a look at softwood lumber or the Wheat Board.  Also many of our witnesses observed that the increase in exports to the U.S. from 76 percent to 86 percent was largely the result of the exchange rate and the robust U.S. economy drawing in our exports.  And 25 percent of our exports are automobiles and auto parts under the Auto Pact of 1965, which has nothing to do with the Canada – U.S. Free Trade Agreement.  

That said, I am perplexed by people who say that we should get out of the Free Trade Agreement.  Should we put the tariffs, which ended in 1998, back on?  They were not high anyway.  The fact is that the world has moved on.  Any benefits stemming from the FTA have ended.  It is clear to me that we should focus on the multilateral trade negotiations that are taking place under the authority of the World Trade Organization.  

Subsistence farms are not going to be protected by regional free trade agreements: powerful agricultural interests will see to that.  But there is a chance at the multilateral level, and Mexico sends a clear signal.  There must be enforceable rules for commercial agriculture so that shiploads of highly subsidized U.S. corn are not sold to Mexico, depriving outraged Mexicans of their traditional livelihood.  At the same time, ways must be found to protect the hundreds of millions of poor farmers.  After all, in Canada we protect the dairy and chicken farmers.  It’s a challenge.  Trade experts say that the current Doha Round, which deals with agriculture, may take ten years.  But it must be done.  

On behalf of the members of the Foreign Affairs Committee, I would like to express my appreciation to the Clerk of the Committee, François Michaud; Peter Berg and Michael Holden from the Research Branch of the Library of Parliament; as well as all the reporters, interpreters, translators, editors and other support staff for their important work on this study.  I would also like to thank the staff of the Canadian Embassy in Mexico City, in particular Ambassador Gaëtan Lavertu, Heidi Kutz, Christophe Leroy, Adriana Caudillo and all those who helped make our trip and our study a success.  

Peter Stollery  
Chair  

RECOMMENDATIONS  

Recommendation 1:  

That, so as to diversify its own external trade, the Government of Canada closely examine the success that Mexico has had in negotiating free trade agreements outside of NAFTA and use the Mexican experience to develop a comprehensive Canadian network of free trade arrangements.

Recommendation 2:  

That the Government of Canada increase its efforts to significantly advance all aspects of the bilateral relationship between Canada and Mexico, including educational exchanges, culture and sports.  Consideration should be given to: 

• Enhancing the knowledge and understanding about Mexico in Canada, and Canada in Mexico; and  

• Promoting improved ties between Canadian and Mexican business, public sector agencies and non-governmental organizations.

Recommendation 3:  

That, recognizing the increased significance of the Canada-Mexico economic relationship, an official Canada-Mexico Parliamentary Association be established with full funding.  

Recommendation 4:  

That, recognizing the benefits that could arise from the structural reforms under consideration in Mexico, the Government of Canada offer to engage with its Mexican counterpart in an exchange of information and best practices towards the implementation of these reforms.  

Recommendation 5:  

That senior Government of Canada officials enter into discussions with their Mexican counterparts to explore the potential for common approaches to dealing cooperatively with the North American economic and trade-related security issues that this report has identified.  Should common ground be found, practical joint proposals could then be made to the relevant United States authorities.  

Recommendation 6:  

That to more effectively present issues, concerns and proposals (including those referred to in Recommendation 4 above) to key U.S. decision-makers, the Government of Canada immediately implement Recommendation 10 of this Committee’s June 2003 report on the Canada-U.S. trade relationship (Uncertain Access: The Consequences Of U.S. Security And Trade Actions For Canadian Trade Policy), which called for a Parliamentary Office to be established in Washington, D.C. to aid Canadian Parliamentarians in their interaction with U.S. legislators and officials.

MEXICO:  CANADA’S OTHER NAFTA PARTNER 

INTRODUCTION  

The North American Free Trade Agreement (NAFTA) is often seen as two bilateral relationships centred by the United States.  It is easy to understand why:  trade between Canada and the U.S. – valued at $531 billion in 2003 – accounts for 60.6% of all intra-NAFTA trade, while Mexico-U.S. trade was worth 37.7% ($330 billion) of total trade within the NAFTA region.  

By comparison, Canada-Mexico is the often forgotten relationship within NAFTA.  Sixty years have passed since Canada and Mexico first established diplomatic relations, yet only 1.6% of intra-NAFTA trade – about $14.4 billion in 2003 – takes place between those two countries.  

Despite the above data, Mexico is deemed to be important for Canada.  For one thing, Mexico is a useful country for assessing the successes and failures of NAFTA, the first agreement of its kind that combines developed and developing nations.  Owing to its relatively high tariffs prior to NAFTA, Mexico has been by far the most affected by the trade agreement.  

Much of this report, based on the Committee’s hearings in Ottawa and Mexico City, is devoted to assessing the impacts of NAFTA on Mexico ten years after the trade agreement’s launch.  The report identifies the benefits of the agreement for that country and discusses important NAFTA-related concerns that have been raised during the Committee’s deliberations.  The testimony revealed that not all of Mexico’s economic performance since NAFTA’s implementation, both positive and negative, can be attributed entirely to that trade treaty.  

Mexico is also important because economic relations between Canada and Mexico have grown significantly since NAFTA came into being in January 1994.  As the Committee heard in Mexico, NAFTA had the desired psychological effect of putting each country on the other’s map.[1]  Bilateral trade has increased by 156% while Canadian investment in Mexico has tripled since 1994.  

The rise in bilateral trade and investment since NAFTA’s beginning has been of such magnitude that Mexico is now one of only eleven countries deemed by the Government of Canada to be of priority status for international business development.  The other ten include the members of the G-8 (other than Canada),([2]) China, India, and Brazil.  Mexico is considered to be a highly strategic country for Canada in its pursuit of trade opportunities throughout the world.  The report presents a snapshot of the Canada-Mexico trade and investment relationship and discusses the challenges that this relationship faces.   

The final point to note regarding Mexico’s significance is that, as several of the Committee’s witnesses observed, Mexico represents a useful “counterweight” to the U.S.  Canada and Mexico share similar concerns about sovereignty and many of their foreign policy perspectives also match up well.  In essence, witnesses said, a strong and dynamic relationship with Mexico would enable the two countries to coordinate approaches to North American issues before entering into discussions with their U.S. counterparts.  This would allow the two countries to advance common North American strategies more effectively.  The final chapter of this report assesses future prospects for closer cooperative efforts on North American economic issues, especially from a Mexican vantage point.  

MEXICO TEN YEARS AFTER NAFTA

Since the mid-1980s, Mexico has made a dramatic transition from a relatively closed market to one of the world’s most open economies.  That country’s 1986 entry into the General Agreement on Tariffs and Trade (GATT) signalled a change in Mexican economic strategy, in that foreign trade became a key element in the quest for durable economic growth.  Embracing international free trade agreements was viewed as a way to promote industrial competitiveness and job creation, thereby complementing domestic measures to deregulate commercial activity and encourage investment.

When NAFTA was implemented in 1994, it effectively locked Mexico in to pursuing a policy of economic liberalization.  Indeed, on its fact-finding mission to Mexico, the Committee heard that NAFTA was a key part of a comprehensive economic and political reform package in Mexico that included significant structural and institutional reforms.  Areas where progress has been more difficult to obtain include energy, tax, labour-market, and judicial reforms.

Even ten years ago, few would have predicted that Mexico would become one of the top trading nations in the world and the first in Latin America.  That result can be largely attributed to NAFTA.  The U.S. and Canada account for the vast majority of Mexico’s trade growth since the early 1990s.  As Carlos Piñera (Chief Representative, NAFTA Office of Mexico in Canada) informed the Committee, NAFTA represented the most comprehensive free trade agreement in the world at the time of its introduction.^([3])  For example, the agreement was the first of its kind to cover investment, services, government procurement and intellectual property rights.

Mr. Piñera noted that NAFTA has been the “cornerstone” of Mexico’s trade liberalization process ever since.  It has stimulated growth in trade and, through its attraction of foreign direct investment (FDI) into North America, has made the region’s economies more competitive and promoted regional strengths in key economic sectors such as automotive, electronics and textiles.  

A. The Benefits of Free Trade 

1. Mexico’s Trade With its NAFTA Partners has Grown 

At the most basic level, the goal of trade liberalization agreements is to increase the level of trade and economic interaction between signatory countries.  As Andrea Lyon (Director General, Department of Foreign Affairs and International Trade) stated, from this perspective NAFTA has been an unqualified success for Mexico.  The Committee heard that Mexico’s imports and exports have both risen by approximately 300% from 1990-2003.  Primarily because of the increase in its trade with Canada and the U.S., but also because of its trading arrangements with thirty other countries around the world, Mexico has become the largest trading nation in Latin America as well as the eighth-largest exporter and the seventh-largest importer in the world.

Although not all witnesses were willing to give NAFTA sole credit for this growth, no one suggested that NAFTA did not play a significant role.  Even if Mexico’s trade with North America had been growing strongly even prior to NAFTA’s ratification, it accelerated after 1994.  Canadian and U.S. import data show that, in Canadian-dollar terms, Mexico’s exports into the NAFTA market have more than quadrupled since the agreement was implemented, rising from $55.2 billion in 1993 to $205.7 billion in 2003.  As a result, Mexico has become increasingly linked with the North American economy.

2. Foreign Direct Investment in Mexico has Soared  

There is no question that NAFTA has led to a surge in much-needed foreign direct investment in Mexico.  Not only did the novel incorporation of a comprehensive investment chapter in a trade agreement succeed in removing barriers to investment, but NAFTA also sent a positive signal about Mexico’s investment prospects to other countries around the world.  As Marvin Hough (Regional Vice-President – Latin America, Export Development Canada) stated, Mexico is now considered to be an investment-grade country, thanks in no small part to the economic stability and implicit vote of confidence that NAFTA has given the Mexican economy.  

Mexico is now the third largest recipient of foreign direct investment among emerging economies.  While investment had been rising even in the late 1980s and into the early 1990s, it accelerated following NAFTA’s implementation.  In terms of concrete numbers, FDI in Mexico totalled US$40.6 billion in 1993.  By 2002, the FDI stock had risen by 279%, reaching US$154.0 billion.([4])  The average annual inflow of capital since 1994 was nearly $14 billion U.S. per year, more than three times the annual amount received in the seven years preceding implementation of the regional trade accord.  

While Canada and the United States account for the majority of FDI in Mexico, the rapid growth in investment is not due solely to increased flows from those countries.  As fast as investment from its NAFTA partners has grown, investment in Mexico from outside North America has expanded even more quickly.  In particular, Mexico has witnessed rapid growth in FDI inflows from the European Union (EU).  Preliminary estimates from 2003 indicate that the EU accounted for 37.3% of investment in Mexico that year, up from 17.8% in 2002.  

Moreover, the Committee heard that not only has the volume of capital inflows increased, the quality of those investments has also improved.  Carlos Piñera remarked that foreign investment in Mexico has facilitated the transfer of knowledge and technology on a large scale, enabling firms to modernize their production processes and upgrade their workers’ skills.  Witnesses in Mexico agreed, stating that foreign investors introduced machinery and equipment, provided training to workers and applied international standards to the manufacturing sector in that country.  FDI also helped open Mexico’s commercial/financial sector.  

3. NAFTA has Contributed to Overall Mexican Economic Performance  

NAFTA can be considered a success for Mexico inasmuch as it has contributed to trade and investment growth in that country.  However, as the Committee heard, the exchange of goods, services and investment is not the ultimate goal of trade liberalization agreements.  Sandra Polaski (Senior Associate and Project Director, Trade Equity and Development Project, Carnegie Endowment for International Peace) observed that “… increase[s] in trade and investment are not ends in themselves, only means to allow the trade partners to become more efficient and thus to grow faster and become more wealthy.”  

In other words, it is not the increase in trade and investment that makes agreements like NAFTA valuable, but the resulting economic benefits.  Ms. Polaski pointed out that to assess the impact of NAFTA on Mexico, one needs to look beyond mere trade and investment figures and focus instead on what real outcomes trade and investment growth have had on the Mexican economy.  Specifically, what has happened to productivity, employment, incomes, poverty and economic growth in Mexico since 1994?  

Many witnesses felt that NAFTA had, for the most part, a positive experience on the Mexican economy.  For example, Andrea Lyon stated, “Generally speaking, the economic activity and production has increased in Mexico, contributing to the creation of more and better paying jobs.”  This view was particularly common amongst government officials, from both Canada and Mexico.  For example, Her Excellency Maria Teresa Garcia Segovia de Madero (Mexico’s Ambassador to Canada) stated that NAFTA has served as an engine of growth for the Mexican economy.  Marc Lortie (Assistant Deputy Minister, Americas, Department of Foreign Affairs and International Trade), a witness who appeared before the Committee on two separate occasions, called the Committee’s attention to the position of the Mexican government:  “[President Fox’s] government is saying that if they have grown in the last few years it is because of NAFTA.  If they have prospered,…[it] was because they opened up the economy.  That important sentiment emerged from the country that took a big risk 10 years ago.”  

Other witnesses, particularly those we met in Mexico, were less effusive about the overall benefits of NAFTA.  Many believed that the results of the agreement ten years later were mixed at best.  Even so, all thought that NAFTA had had some positive effects on Mexico, although there was some question about whether or not these benefits exceeded the costs.  

In particular, it was widely agreed that Mexico’s manufacturing sector was the clear winner.  Thanks in large part to the surge in FDI into Mexico, the manufacturing sector has been modernized, and output and employment have both increased.  A study by the Carnegie Endowment (NAFTA’s Promise and Reality:  Lessons from Mexico for the Hemisphere) suggests that NAFTA tariff cuts likely accounted for about 250,000 new manufacturing jobs.  Her Excellency Maria Teresa Garcia Segovia de Madero also highlighted job gains in manufacturing, stating that that sector’s export component had become the leading source of employment in Mexico, creating over half of all manufacturing jobs between 1994 and 2002.([5])  

Furthermore, the importance of manufacturing exports has increased while reliance on exports of oil and other raw materials has fallen dramatically.  In the 1980s, roughly 70% of exports were minerals and oils, while manufactured goods accounted for less than 25% of the total export figure.  By 2002, 89% of Mexican exports consisted of manufactured goods, and only 8% were minerals and oils.  The Committee heard that this move away from energy exports, aided undoubtedly by the ageing of Mexican energy supply equipment, has helped shelter the Mexican economy from the effects of fluctuations in world energy prices.  

Second, NAFTA has contributed to considerable productivity gains in Mexico.  In Mexico, the Committee heard that productivity in the manufacturing sector has risen by 60% since 1993 as NAFTA helped spur Mexico to correct inefficiencies in production.  Donald MacKay (Executive Director, Canadian Foundation for the Americas) informed Committee members that the Ford motor company plant in Mexico was found to be the most efficient automotive assembly operation anywhere in the world.  He was of the view that this achievement spoke to the productivity gains that have been accumulated in Mexico to date.  In addition, William Maloney (Lead Economist, World Bank, Office of the Chief Economist of the Latin American and Caribbean Region) referred to productivity gains in the agriculture sector where, despite falling employment, output and exports continue to rise.  

Productivity is key to improving the long-run competitiveness of the Mexican economy, and enhancing wages and the country’s standard of living.  The more productive Mexican workers are, the more valuable they become.  As Ms. Polaski explained to the Committee, productivity growth “could allow Mexican workers to be more competitive in the global economy, and…over the long run can translate into wage growth and lift incomes and relieve poverty.”  Indeed, witnesses in Mexico testified that NAFTA has contributed to the creation of relatively well-paying jobs in that country.  The Committee heard that wages in export-related employment in Mexico are almost 40% greater than those in other sectors of the economy.  

Third, NAFTA has locked Mexico economically into North America.  As in the case of Canada, our southernmost NAFTA partner has increasingly become reliant on the U.S. market as a destination for its exports.  In 2002, over 89% of Mexico’s exports were destined for the U.S. market, an increase from 83.1% in 1993.   

The attainment of closer economic ties to the U.S. has brought important benefits to Mexico.  In particular, a number of witnesses were of the opinion that NAFTA had cushioned the impact of the 1994-1995 Mexican peso devaluation crisis, commonly referred to as the Tequila Crisis.^([6])  As several witnesses suggested, had NAFTA not existed at the time, the impacts of the currency crisis on Mexico would have been considerably worse.  

At the same time, closer economic links to the U.S. imply that the Mexican economy will be more in synch with the rest of North America.  Indeed, NAFTA has helped Mexico converge to the U.S. and Canada in terms of macroeconomic stability.  We heard in Mexico that inflation and interest rates are relatively low, fiscal balances have improved, foreign reserves are high and the peso has remained stable since it recovered from the crisis.  These were all attributed, at least in part, to closer economic ties with the rest of North America.

The disadvantage of closer economic ties is that when the U.S. economy stumbles, it is nearly impossible for Mexico to avoid a similar slowdown.  The Committee heard that Mexico was only now beginning to emerge from a 3-year long recession that was caused by the stagnation of the U.S. economy over the same period.  This dependence on the American market has raised concerns that Mexico needs to diversify its exports and was a motivating factor behind Mexico’s decision to pursue a free trade agreement with the EU.

Although one of the longest on record, witnesses in Mexico pointed out that the recession was unique by Mexican standards; it was a recession with stability.  No economic or political crisis precipitated the downturn and investors did not lose confidence in the Mexican economy.  In other words, the recession was more like that of a developed country.  Furthermore, because of closer economic ties, the economic recovery currently underway in the U.S. will increase demand for imports and help jump-start the Mexican economy as well.

A final point to consider is that although NAFTA is a trade agreement, some witnesses felt that its benefits extended well beyond the economic realm.  Marc Lortie, for example, stated that NAFTA should be seen as a political instrument as well as a trade one.  He was of the view that NAFTA, on top of providing Mexico with a new strategic partner in Canada, strengthened Mexico’s political transformation.  Mr. Lortie pointed to a number of positive developments in Mexico that could be attributed, at least in part, to the influence of NAFTA:   

“In Mexico, we are witnessing the results of a democratic reform opening up and transforming political institutions…  NAFTA was an incentive for them to carry on with their transformation…  What NAFTA has done on the political side is to promote a greater transformation for a transparent business climate in Mexico.  They opened up their economy; they are changing the political way of doing things, and they are moving at a very impressive pace.”  

This view that NAFTA transcends economic relations was also shared by some witnesses in Mexico.  Several argued that NAFTA was much more than just a trade agreement for Mexico in that it has helped Mexico fight corruption, has spurred domestic economic reforms and has cemented the transition to democracy.

However, not all agreed with this viewpoint.  In Mexico, we heard from one witness who believed that NAFTA helped perpetuate the regime of the Institutional Revolutionary Party (PRI).  This witness argued that Mexico might have had its first free election in 1994, but because Canada and the U.S. bowed to Mexican pressure not to include democracy and human rights in NAFTA, the regime was allowed to stand for six more years.

We also heard in Mexico that NAFTA has played a significant role in the evolution of Mexico’s foreign policy.  Although NAFTA itself was the result of a decision in Mexico to move to greater openness and transparency, some witnesses felt that the agreement has changed the way Mexico relates to the U.S. and Canada.  Specifically, we heard that Mexico now has a much more active presence in Washington and that NAFTA helped create order in North America by institutionalizing inter-governmental affairs such as co-operation on issues like migration, drugs, and border security.  

4. Not all of Mexico’s Economic Performance Since 1994 can be Attributed to NAFTA  

Witnesses in our hearings, both in Canada and in Mexico, were widely agreed that the increased trade and investment flows sparked by NAFTA have had a positive effect on the Mexican economy.  However, many also cautioned that it would be misleading to attribute all growth in Mexico since 1994 to the effects of NAFTA.  One cannot link all of the increase in trade and investment in Mexico to NAFTA, nor can Mexico’s broader socio-economic performance since 1993 be exclusively pinned on the agreement.  Indeed, as mentioned above, from Mexico’s perspective NAFTA represented only one part – albeit a significant one – of a broader series of economic and political reforms.  As one witness in Mexico stated, it is difficult to separate out the effect of NAFTA from the underlying economic reforms of which it was a part.

NAFTA has undoubtedly played an important role in Mexico’s trade and investment growth since the early 1990s:  witnesses were unanimous on that point.  At the same time, however, the Committee was cautioned that it would be misleading to suggest that NAFTA alone was responsible for the increase.  Luis Servén (Lead Specialist, Regional Studies, World Bank, office of the Chief Economist of the Latin America and Caribbean Region) pointed to a number of other factors that have influenced Mexico’s trade and investment record over the past decade.  These include:  

·         the rapid growth in the U.S. economy in the late 1990s, fuelling that country’s demand for imported goods;  

·         the overall growth in foreign investment to Mexico and many other emerging market economies experienced in the previous decade;  

·         the depreciation in the Mexican peso following the Tequila Crisis in 1994-1995; and  

·         the lagged effect of Mexico’s unilateral economic reforms of the 1980s.  

Mr. Servén directed the Committee to a recent study he co-authored at the World Bank, which attempted to account for the effects of each of these factors in order to pinpoint the amount of the increase in trade that could be directly attributed to NAFTA.  The conclusion was that NAFTA accounted for 25-30% of Mexico’s increase in exports since 1993.  According to the same study, had NAFTA not been in place FDI into Mexico would be about 40% below present levels and there would have been a moderate decline in Mexican per capita income from $5,920 to $5,624 (U.S. dollars).  

The Committee also heard that Mexico’s record in attracting FDI is not as impressive as it initially seems, when compared to the performance of other Latin American countries.  Despite the advantages of preferential access to the North American market, FDI inflows into Mexico since 1993, when measured as a percentage of Gross Domestic Product (GDP), were essentially no different from inflows into South America, Central America or the Caribbean.  The reality is that while investment in Mexico did rise faster than elsewhere in Latin America (on average) in the first few years following NAFTA’s launch, investment growth in Mexico has slowed since then, while accelerating elsewhere in the region.   

Unquestionably, NAFTA has contributed to the increase in FDI into Mexico by reducing barriers to investment and raising investor confidence in that country.  However, for Mexico not to outperform its neighbours suggests that NAFTA cannot be exclusively credited for the increase in FDI into Mexico since 1993.  Some witnesses felt that Mexico’s failure to accompany NAFTA with the necessary legal and policy reforms have prevented FDI growth into Mexico from growing more quickly.  Marvin Hough, for example, observed “if you talk to international investors… they will say there are two significant challenges yet in Mexico that differentiate it from other developed countries as an investment location.  One of those is the legal system, and the other is labour relations.”  

In the same way as one cannot link all of the increase in trade and investment in Mexico to NAFTA, neither can Mexico’s broader socio-economic performance since 1993 be exclusively pinned on the agreement. As Mr. Servén stated, “… we cannot attribute everything that happened after NAFTA to the treaty itself.  We have to disentangle the other factors from the treaty.”  He explained to Committee members that NAFTA made a modest contribution toward helping to close the standard of living gap between Mexico and its northern free-trade partners:  “However, if we were to take the longer perspective, Mexico has suffered major set backs in terms of its standard of living at the time of the debt crisis of the early 1980s, the tequila crisis of early 1990s.  Compared with that, the effect of the treaty has been modest.  We estimate that had the treaty not been present, per capita income in Mexico today would be about 4% to 5% lower than it is.  There is a contribution but it is not so great.”  Andrea Lyon agreed with this assessment, noting that “It is very difficult to isolate impacts of the North American Free Trade Agreement on the economy and divorce it from various other effects that may be happening at the same time, particularly given the peso crisis that occurred as the agreement was being implemented.”  

Indeed, the 1994-1995 Mexican peso crisis is perhaps the single most complicating factor in assessing the effect of NAFTA on the Mexican economy.  Owing to a combination of factors, investors lost confidence in Mexican financial markets and began to flee the currency.  Within ten days of the Bank of Mexico abandoning the peso-U.S. dollar peg, the peso had already depreciated by a staggering 55%.  This serious monetary crisis plunged the Mexican economy into recession, caused the cost of imported goods to rise rapidly, raised inflation and resulted in a plummeting of real wages in Mexico. 

B. Criticisms of NAFTA and Mexico’s Outstanding Challenges 

Although the Committee heard solid evidence that certain elements of the Mexican economy have benefited as a result of NAFTA, a large number of witnesses, particularly in Mexico, felt that the overall effect of NAFTA on that country was mixed at best.  While certain industries, workers and regions have prospered, others have seen their economic prospects decline.  Views varied on whether or not NAFTA bore any responsibility for worsening, or at the very least failing to remedy, these conditions.   

Some witnesses felt that NAFTA had failed to deliver on its promises.  Others believed that the benefits of NAFTA had not been effectively distributed and, in the words of Laura Macdonald (Associate Professor, Carleton University), “have tended to exacerbate already existing class, regional, ethnic, gender and other disparities within the country.”  

As the Committee heard in Mexico, patience with the agreement – at the popular level – is wearing thin.  People do not agree on the facts of NAFTA and whether or not it is to blame for certain economic conditions is a moot point.  There is a growing backlash against the perceived neo-liberal economic agenda responsible for globalization and trade liberalization.  We were presented in Mexico with recent survey data which shows that a full 60% of those canvassed felt that they would “not at all” or “not really” benefit from NAFTA.([7])  While the central government does not agree with this public opinion, President Fox does acknowledge that the agreement has caused some pain in the transition to a liberalized trading regime and that not all sectors have benefited from free trade.  

This section examines some of the concerns witnesses raised about where they felt NAFTA had either failed to deliver on its promises, or had negatively impacted on the Mexican economy. 

1. Economic Growth has Decreased  

The Committee heard that despite the increase in trade and investment in Mexico, there has not been any noticeable improvement in economic growth in that country.  Sandra Polaski observed that from 1994 to 2003, GDP growth in Mexico was nearly identical to the ten-year period immediately preceding NAFTA.  Witnesses from the World Bank came to a similar conclusion.

This view was corroborated in Mexico.  In the words of one witness, Mexico’s recent economic performance since 1994 has been “terribly disappointing.”  We heard that not only was there no acceleration in growth post-NAFTA compared to the period prior to implementation, but GDP growth was in fact significantly slower than historic rates.  Economic growth since NAFTA was implemented was only one-third the average rate of growth from 1946-1970.  Furthermore, we heard that the advantages of NAFTA did not help Mexico grow faster than some other Latin American countries.  For example, Mexico’s GDP growth rate in the past ten years is half the rate of growth in Chile over the same period.  

Most witnesses did not blame NAFTA directly for the slow economic growth in Mexico since 1994.  They acknowledged that the recession caused by the peso crisis in
1994-1995 played a major role.  As well, most also pointed to the slowdown in the U.S. economy over the past three years as the primary reason for Mexico’s recent economic stagnation.  Some witnesses, however, felt that NAFTA failed to overcome those obstacles and deliver strong growth.

2. Concerns Regarding Employment, Wages and Poverty 

The report has already discussed the gains in employment and productivity that have occurred in the Mexican manufacturing sector, the sector that has been most positively affected by NAFTA.  However, some critics maintain that the overall effect of the trade agreement on employment, wages and poverty reduction in Mexico has not been as positive.   

Sandra Polaski, for one, expressed surprise that the trade liberalization under NAFTA, together with the increase in foreign investment that was experienced in Mexico, did not lead to sizeable job growth in that country.  Instead, such growth was “surprisingly weak and certainly disappointing in light of Mexico’s needs to create employment for its growing population.”  The above-mentioned Carnegie report that she co-authored concluded that the surge in Mexican manufacturing employment experienced after NAFTA’s launch had been more than offset by a large-scale (i.e., 1.3 million) loss of jobs in the agricultural sector.  

Not all agreed with this view, however.  A study by the World Bank found no evidence that free trade had caused a decline in employment or in job quality.  Some witnesses in Mexico also maintained that, on the whole, employment in Mexico has benefited from NAFTA.  To some extent, the difficulty in assessing the results lies in the fact that most statistics in Mexico do not cover activities in the informal economy.  

As for wages, the Committee heard that Mexico’s strong productivity growth since the early 1990s has not yet translated into wage gains.  In fact, both the World Bank and Carnegie Endowment reports show that real wages in manufacturing in Mexico are below pre-NAFTA levels.  As mentioned above, however, the Committee did hear evidence that wages in export-dependent industries in Mexico were 40% higher than the average wage.  We found it difficult to reconcile how, if exporting firms had created half of all manufacturing jobs in Mexico, and wages in those areas were 40% above average, how overall manufacturing wages could be below 1994 levels.  Again, this may be an issue of the use of different or incomplete statistical series.   

Regardless, the general lack of wage growth and loss of rural employment has meant that poverty rates in Mexico remain high and consumer demand had not increased appreciably.  The Committee heard that not only did Mexico not realize the economic benefits that it hoped from NAFTA, the lack of significant growth in Mexican consumer demand had restrained Canadian and U.S. exports into Mexico and had made the Mexican economy even that much more dependent on the large U.S. market.

The poverty situation in Mexico is particularly worrisome.  Laura Macdonald pointed out to the Committee that over half the population is below the poverty line and that the situation has actually deteriorated since NAFTA’s implementation.  According to her, Mexicans’ expectations in the areas of employment and higher wages have not been met.  Ms. Polaski pointed to a high and rising incidence of income inequality in Mexico, arguing that this development was “a cause for concern because it undermines social stability and political cohesion, and because highly unequal economies have been shown to reduce poverty less effectively than more equal societies.”

3. Regional Disparities Continue to Exist  

The Committee was informed that regional development continues to be a serious issue within Mexico.  Laura Macdonald told Committee members that GDP in the south-southeast of the country stood at a mere 40% of the national average.  Moreover, a key initiative of the Fox Administration to address the regional development challenge, the Plan Puebla Panama, has not been accorded adequate financing.  

On the effects of NAFTA on regional disparities, World Bank analysis reveals that the benefits from the trade treaty were not evenly distributed within Mexico.  Luis Servén, commenting on his employer’s analysis, indicated that “the southern border states of Mexico benefited very little from the passage of NAFTA, whereas the northern states actually experienced an increase in the rate of growth of the per capita income.  In the southern states, basically nothing happened.  The NAFTA train passed them by.”  However, he also maintained that the gap in regional development had been widening well before NAFTA.  There continues to be a need to expand the benefits of free trade to all regions of the country.   

Mr. Servén identified a number of factors explaining why some of the southern Mexican states managed to benefit less from NAFTA than others have.  These included low education levels, poor endowments of infrastructure, weak institutions, and political instability.   

The Committee also heard a great deal on the issue of regional disparities while in Mexico.  One witness stated that addressing these disparities did not require a large cash infusion, but only political will.  For example, limits on FDI in Mexico’s energy sector affect the development of the southern states, which is the source of the country’s rich energy deposits.  Infrastructure improvements are also needed in the south, as is the availability of financing.  We heard that since 1994, Mexican banks have been reluctant to lend, particularly in poor areas.  

In all cases, however, witnesses agreed that the presence, or even the exacerbation, of regional disparities was not the result of NAFTA, but rather that Mexico had failed to distribute the benefits of the agreement.  For example, we heard that 90% of all FDI into Mexico goes to four states – none of which are in the south.   

4. Agriculture has been Deeply Affected 

The impact of NAFTA on agriculture was easily the most contentious issue the Committee encountered over the course of its hearings.  While some witnesses pointed to some positive developments in the agriculture sector, NAFTA is widely blamed by the public for the agriculture problems in Mexico.  There is strong opposition from agricultural unions, farmers and opposition parties to large-scale farm imports.  Corn imports from the U.S. mid-west are, as a recent analysis of NAFTA put it, “the most hated aspect of NAFTA for Mexicans.”([8])   

Broadly speaking, at issue is the fact that Mexican farmers, particularly those involved in grain production, are unable to compete, in the absence of tariff protection, with U.S. goods.  As a result, Mexico’s trade deficit with the U.S. in agricultural products has soared, and unprecedented numbers of Mexicans are no longer able to make a living on the farm.  This stands in sharp contrast to the promised benefits of NAFTA.  Mexicans were told that developing countries have a comparative advantage in agriculture because of the abundance of labour.  Specifically, NAFTA was sold as a boon to Mexican farmers who would gain access to U.S. markets for their products.  

Regrettably, as tariffs on imported agricultural goods came down, Mexico was forced to compete with U.S. farmers who were not only considerably more efficient, but heavily subsidized as well.  As Sandra Polaski stated, “U.S. agricultural exports often benefit from significant U.S. government subsidies.  In addition to any efficiency advantages that U.S. crops have, they may also be sold in Mexico below their cost of production in many cases.  This has been an important factor with corn, which has pushed down prices in Mexico.  In some crops, production has declined significantly, which we can relate to the falloff in employment.  That would be true in wheat and in soybeans.  Maize production has not fallen off, but that is primarily because maize production has been maintained for so-called auto‑consumption or for household consumption by poor households.  However, because of the fall in prices, rural incomes fell broadly, and many households have been forced to send members to work in non‑farm occupations.”

The Committee is deeply concerned that these U.S. subsidies are exerting a devastating impact on poor Mexican peasants.  Her Excellency Maria Teresa Garcia Segovia de Madero was right to point out that the Mexican treasury “cannot compete with the U.S. on these subsidies but Mexico is attempting to help raise the efficiency of its farms and aid its farmers adjust to the new situation.”  

As a result, employment in agriculture in Mexico has fallen dramatically.  According to Ms. Polaski, a full 1.3 million jobs were lost in the agriculture sector over the 1993-2002 period.  “Mexican agriculture has been a net loser in trade with the U.S., and employment in the sector has sharply declined.  It is not possible to say how much of that decline was directly attributable to NAFTA, but NAFTA involved very significant tariff reductions on agricultural products by Mexico, and so the pact was clearly one important factor, among others, that accounts for the job losses.”   

However, not all witnesses felt that this was an accurate assessment of the job losses in agriculture.  While in Mexico, we heard that agriculture is frequently confused with rural development.  Some rural areas have little agricultural potential, but because the people living there are so poor, they have little else in the way of economic opportunities.  As such, most subsistence farmers might not be accurately described as agriculture producers.  Even so, it is these farmers that have been deeply affected by the trade liberalization that Mexico has agreed to.  

Given the inability of many farmers in Mexico to earn a living off the land, it is hardly surprising that the Fox Administration has encountered resistance and opposition to NAFTA, particularly from agricultural producers.  According to Andrea Lyon, however, the administration “has nonetheless remained committed to the full implementation of the North American Free Trade Agreement and has committed to honour all of its NAFTA obligations.”   

To help make agricultural production more productive and competitive, the administration agreed to a “National Agreement on the Countryside” with farm leaders in April 2003.  This accord committed the Mexican government to attempt to protect its bean and corn production, tariffs on which expire in 2008.  More specifically, it committed the government to begin NAFTA consultations on the construction of side accords designed to create a new permanent mechanism to govern import rules for dried beans and white corn; to impose interim additional quotas and tariffs on white corn and dry beans; to initiate trade remedy investigations on imports of dry beans; and to establish new programs that would boost domestic production.   

The Committee also heard that from a production standpoint the industry had benefited considerably from NAFTA.  Specifically, William Maloney showed that although Mexico’s imports of agricultural products from the U.S. (and Canada) are higher, domestic agricultural production in Mexico has also increased dramatically since NAFTA came into effect.  Similarly, Mexican exports of agricultural goods have gone up, with horticultural activity in Mexico particularly strong.  Production and export of fruits, vegetables and flowers have increased significantly, as has employment on commercial farms in that sector.    

Mr. Maloney also observed that rain-fed agricultural production in Mexico is increasing, while output on irrigated lands is falling.  This could be seen as evidence of a move towards a more efficient allocation of resources in the agriculture sector as the output shifts towards land better suited for crop production.   

5. Migration Flows Remain a Problem  

A final concern worth mentioning is the incidence of migration out of Mexico and into particularly the United States.  Laura Macdonald informed the Committee that hundreds of thousands of poor Mexican peasants were attempting to gain entry into the U.S., largely owing to their inability to support themselves financially in the traditional agricultural manner.  

Again, this stands in contrast to the expectations of NAFTA.  The trade agreement was sold as the solution to the problem of illegal migration to the U.S.  As the Mexican economy grew, it was argued that more jobs and opportunities would be created domestically, reducing the need for Mexicans to enter the U.S. looking for work.  

Instead of decreasing, however, the number of illegal migrants from Mexico to the U.S. has accelerated sharply.  Even despite the economic slowdown in the U.S. and the additional border security imposed after September 11^th, migration to the U.S. increased by about 250% from 1996 to 2003.  In Mexico, the Committee heard that some 500,000 individuals leave the country each year.  Some witnesses felt that this was evidence of the fact that NAFTA was not providing Mexico with the strong economic growth it so badly needs.  

Although the sharp rise in migration to the U.S. is undoubtedly an excellent example of an area where NAFTA did not deliver on the benefits that were promised, the Committee heard alternate explanations for why migration rates might be increasing.  One explanation is that although U.S. employment growth has been stagnant recently, demand for inexpensive Mexican labour remains strong.  As well, the combination of displaced subsistence farmers looking for alternate employment, Mexico’s very young population([9]) and a lack of robust employment growth in recent years, has created a major labour surplus in Mexico.  This is likely an important factor behind the rise in migration, although it does not speak to the fact that NAFTA was sold as a solution to the migration problem.  

The news is not all bad, however, for the remittances that Mexican workers in the U.S. send back to their relatives is an important factor in sustaining the Mexican economy.  In fact, remittances from abroad are Mexico’s second-largest source of revenues, behind only the energy sector.  Remittances serve as an especially important injection of funds into the southern Mexico region.  According to Marc Lortie, there are some 22 million Mexicans residing in the U.S., of which 5 million are considered illegal migrants.  All told, these individuals remit an impressive $11 billion per year back into the Mexican economy. 

6.Why NAFTA cannot be Blamed for all of Mexico’s Woes 

It is easy to blame NAFTA for all of Mexico’s economic troubles, such as income inequality, poverty, regional disparities and the problems facing subsistence farmers.  Indeed, we heard in Mexico that NAFTA has become a “lightning rod.”  It tends to be assigned the blame for any negative economic development in Mexico, regardless of whether or not the agreement played a role.

A number of witnesses observed that critics of the agreement were trying to condemn the regional trade deal on the basis of its failure to meet objectives it was never designed to address.  The truth is, that most of the keys to economic success lie at home.  Trade matters but it is only one element in a broader development framework.   

As we were told, economic progress in Mexico has suffered because of the failure of the country’s political leaders to take advantage of the economic gains from NAFTA to invest in innovation, education, telecommunications and infrastructure; to undertake key structural reforms (e.g., energy privatization, tax reform, labour-market reform), to make progress in establishing adequate institutions to control corruption and establish law and order throughout the country, and to prepare vulnerable sectors of the Mexican economy in the transition to NAFTA.  The trade deal should be viewed primarily as a useful tool in the quest for greater economic development, but not as the solution of all of a country’s difficulties. 

To take full advantage of the potential benefits of free trade, a treaty such as NAFTA needs to operate in a hospitable environment.  Virtually all witnesses were agreed on this point.  As Luis Servén argued, “A treaty of this kind needs to be accompanied by complementary domestic reforms.  In the case of Mexico, it is most importantly in the institutional domain, education, technology and infrastructure.  To a large extent, the magnitude of benefits that can be received from this kind of trade agreement are largely dependent on how far those reforms go.”  

The Committee heard considerable evidence to support this line of thought, in Canada and in Mexico.  Marc Lortie perhaps captured the essence of the argument best during his testimony before the Committee:  “NAFTA is an instrument to create growth and not an instrument to reduce inequality.  What would reduce inequality in an economy?  Fiscal policies, investing more in education and ensuring that the social programming is taking place.  NAFTA does not do that; rather it is the responsibility of the government to do that…  NAFTA is an instrument to give confidence to the private sector to embark on trade, to open up the economy and to move it forward.”  

Certainly, a key problem lies in the difficulty that the Fox Administration is experiencing in passing its desired structural reforms through Congress.  Some Mexican witnesses described the political situation in their country as ripe for paralysis.  President Fox’s National Action Party (PAN) does not have a majority in Congress, making it extremely difficult to proceed with political and economic reforms.  As Mr. Lortie suggested, “Fiscal reform, energy reform, labour reform and federalism reform all became more challenging because they could not reach proper compromises between the opposition that dominates Congress and the presidency.”  Yet progress in each of these areas needs to be made.  

In the specific areas of employment and wages, NAFTA is often used as a scapegoat for insufficient job creation and real wage declines.  Again, this is an area where NAFTA was sold on benefits it was not designed to produce.  Economic theory suggests that free trade is not about creating new jobs but rather it is about enabling resources to find their most efficient use and therefore about redeploying workers to higher-paying employment.  On wages, the Committee heard that two additional factors were at play, namely the currency crisis of 1994-1995 and the Mexican government’s policies on minimum wages and trade unions.  

As mentioned above, part of the wage picture can be attributed, of course, to an oversupply of labour, but some part of it is also attributable to Mexican government policies, which have included repression of the minimum wage and independent trade unions.  There is some indication that the Fox Administration has relaxed the policy of repressing minimum wage over the last few years, and minimum wages are again beginning to recover.  However, there has been no progress yet on reforming freedom of association in Mexico.  We received considerable testimony that many labour unions in Mexico had indirect ties to the PRI – the former governing party.  Witnesses suggested that union leaders do not always act in the best interests of workers.  

On migration, the Committee was informed that NAFTA should not have been billed as the solution to such a long-standing problem.  Nor, for that matter, is it accurate to pin the jump in migration solely on the trade agreement.  As this report has already indicated, the recent rise in migration can be at least partly explained by strong demand for workers in the U.S. market.  Another factor to note is the inability of Mexico’s weak economic growth to absorb the one million young individuals that enter the labour force each year.    

Finally, if the Mexican agricultural sector is losing jobs and farms under free trade, it is not only because of NAFTA.  Witnesses offered a number of alternative explanations.  For one thing, small farmers have been hard hit by massive corn exports from heavily subsidized U.S. producers – a factor quite independent of the trade agreement.  Moreover, we also heard that most of the country is not suited for efficient farming and tariff removal exposes the uneconomic nature of the country’s large subsistent farm culture.  It is true, however, that agricultural adjustment policies in Mexico were not strong enough to look after an agricultural sector suddenly faced with new imports from the country’s northern neighbour.  It is the domestic government’s role to aid agricultural producers, particularly subsistence farmers, adversely affected by trade liberalization.  

BOOSTING CANADA-MEXICO TRADE AND INVESTMENT  

Within North America, Canada’s relationship with the United States will always be of paramount importance.  While Canada-Mexico trade remains a very small part of total NAFTA trade, Mexico’s importance as a trading partner has grown during the past decade.  Andrea Lyon told Committee members that Mexico is now Canada’s 6^th largest export market in the world and by far our leading Latin American trading partner.  It is also our 4th largest source of imports.   

However, while commercial opportunities exist for Canadian businesses in Mexico, several obstacles continue to stand in the way of an even stronger bilateral economic bond.  These include, among others, the less-than-vibrant Mexican economy; the lack of progress on structural reforms within Mexico that would lead to greater Canadian investment and subsequent trade; the continued fixation of Canadian business on the U.S. market; and a number of trade concerns in the farm sector.  This section of the report presents both a snapshot of the current economic relationship and a discussion of the challenges that would have to be overcome to stimulate additional trade and investment links between the two countries.

A.Canada-Mexico Trade and Investment Links 

Two-way trade between 1993 and 2003 has grown by an impressive annual average of 12.2%.  This is about three times the rate of growth of our bilateral trade with non-NAFTA countries; Mexico is the only major non-U.S. Canadian export market having seen a rise in market share since 1990.([10])  However, many of the trade gains were made in the initial honeymoon period following the signing of the trade agreement.    

In terms of actual numbers, bilateral merchandise trade reached the $14.4 billion mark in 2003.  Canada shipped $2.2 billion in goods southward and imported $12.2 billion from Mexico.  However, these export figures tend to ignore the sizeable transhipment of Canadian products through the U.S.  For 2002, for instance, there was a $4.6 billion gap between what the Mexican statistical agency INEGI reported as Mexican imports from Canada and the value of Canadian exports reported by Statistics Canada.  The statistics have yet to be officially reconciled.