Is North America Coming of Age as NAFTA

Turns 21?

A Mexican Perspective

Pedro Noyola

April, 2015

Index

2

A. Openness

B. Integration and Competitiveness

C. Competition and Transparency

D. The Future: A Dual Agenda

3

A. Openness

4 Source: SAI Law & Economics with data from INEGI.

Trade liberalization in Mexico

Degree of trade openness

(X+M/GDP, 1981 - 2012)

Yt= α1 DGATT/PSE + α2 DNAFTA + α3 DEUFTA + AR(1) + MA(1)+MA(4) + ut

Dependent variable: Annual variation of trade openness

Variable Coefficient Std. Error t-Statistic P value

Dummy 1986-1987*GATT/PSE 0.04734 0.02707 1.74853 0.09260

Dummy 1994-1995**NAFTA 0.11561 0.01980 5.83892 0.00000

Dummy 2000-2001EUFTA -0.01480 0.01558 -0.95014 0.35110

AR(1) 0.83738 0.14219 5.88911 0.00000

MA(1) -1.08588 0.02497 -43.48797 0.00000

MA(4) 0.37436 0.01526 24.52906 0.00000

GA

TT

NA

FT

A

OE

CD

FT

A B

OL

IVIA

FT

A C

OS

TA

RIC

A -

-FT

A, F

TA

G3

FT

A U

RU

GU

AY

FT

A J

AP

AN

PS

E

FT

A P

ER

U -

- F

TA

CE

NT

RA

L A

ME

RIC

A

FT

A C

HIL

E

EU

FT

A --

F

TA

IS

RA

EL

FT

A A

EL

C

0%

10%

20%

30%

40%

50%

60%

70%

80%

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Closed Economy

5

B. Integration and Competitiveness

6

1/ Trade sub index: Weighted average of trade index (imports + exports) between Canada, Mexico and the United States.

2/ Investment sub index: Weighted average of foreign direct investment within NAFTA.

Integration index: Investment and trade sub indexes average

Source: SAI Law & Economics with data from INEGI, Bank of Mexico, Secretaria de Economía, US Census Bureau, US BEA & Statistics of

Canada.

Trade subindex1

(NAFTA, 1988=100)

FDI subindex2

(NAFTA, 1988=100)

Trade & investment integration index

(NAFTA, 1988=100)

North America’s economic integration

0

400

800

1200

1600

2000

2400

2800

3200

198

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

12

01

2

China's entry to WTO9/11 Terrorist attack

NAFTA LehmanBrothers Crisis

0

200

400

600

800

1000

1200

1400

1600

1800

198

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

1

China's entry to WTO9/11 Terrorist attack

NAFTA

LehmanBrothers Crisis

0

50

100

150

200

250

300

350

400

450

500

550

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

China's entry toWTO

9/11 Terroristattack

NAFTA

LehmanBrothers Crisis

7 Source: Koopman et. al. (2011) “Give credit where credit is due: tracing value added in global production chains”, U.S. Department of

Commerce andAlix Partners, “Costs and Complexity - Will China Remain the Low-Cost Country of Choice?”.

Shared production

40%

25%

32%

4%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Mexico Canada Weighted average

(Mex-Can)

China

“Pure”

outsourcing

U.S. Content in U.S. imports

(percentage)

Production sharing

(intra-industry trade: 40%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Aug

-93

Apr-

94

Dec-9

4

Aug

-95

Apr-

96

Dec-9

6

Aug

-97

Apr-

98

Dec-9

8

Aug

-99

Apr-

00

Dec-0

0

Aug

-01

Apr-

02

Dec-0

2

Aug

-03

Apr-

04

Dec-0

4

Aug

-05

Apr-

06

Dec-0

6

Aug

-07

Apr-

08

Dec-0

8

Aug

-09

Apr-

10

Dec-1

0

Aug

-11

Apr-

12

Dec-1

2

Aug

-13

Mexico

US

Canada

Johansen cointegration since Jan-96

8 Source: SAI Law & Economics with data from INEGI.

Cointegration test

(January 1996 – December 2013)

Short-term Interest Rates

(percentage, 1993-2013)

Macroeconomic convergence

Series: Interest rates in Mexico, Canada & United States

EigenvalueLikelihood

ratio

Critical value

5%

Critical value

1%

Cointegrating

Equations

0.117007 37.05229 29.79707 35.45817 None **

0.034787 10.17363 15.49471 19.93711 At most 1

0.011626 2.525861 3.841466 6.634897 At most 2

* denotes rejection of the null hypothesis at a significance level of 5%

** denota el rechazo de la hipótesis nula con un nivel de significancia del 1%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Aug

-93

Sep

-94

Oct-

95

Dec-9

6

Jan-9

8

Fe

b-9

9

Apr-

00

Ma

y-01

Jun-0

2

Aug

-03

Sep

-04

Oct-

05

Dec-0

6

Jan-0

8

Fe

b-0

9

Apr-

10

Ma

y-11

Jun-1

2

Aug

-13

Mexico

US

Canada

9 Source: SAI Law & Economics with data from INEGI.

Cointegration test

(January 2000 – October 2013)

Inflation

(annual variation, August 1999 – November 2013)

Macroeconomic convergence

Series: Inflation in Mexico, Canada & United States

EigenvalueLikelihood

ratio

Critical value

5%

Critical value

1%

Cointegrating

Equations

0.120606 46.55095 29.79707 35.45817 None **

0.080837 25.85882 15.49471 19.93711 At most 1

0.073482 12.28778 3.841466 6.634897 At most 2

*denotes rejection of the null hypothesis at a significance level of 5%

** denotes rejection of the null hypothesis at a significance level of 1%

10

* Rejects the null hypothesis with a confidence level of 95%. **Rejects the null hypothesis with a confidence level of 99%.

1/ The test supposes a deterministic lineal trend in the data.

Source: Analysis by SAI Law & Economics with data from INEGI and the US Federal Reserve.

Manufacturing production from Mexico and the Unites States

(annual growth,1981:T1-2013:T1)

Johansen Cointegration test1 1994:T1 – 2012:T2 1980:T1 –1993:T4

-20%

-15%

-10%

-5%

0%

5%

10%

15%

19

81

/01

19

82

/01

19

83

/01

19

84

/01

19

85

/01

19

86

/01

19

87

/01

19

88

/01

19

89

/01

19

90

/01

19

91

/01

19

92

/01

19

93

/01

19

94

/01

19

95

/01

19

96

/01

19

97

/01

19

98

/01

19

99

/01

20

00

/01

20

01

/01

20

02

/01

20

03

/01

20

04

/01

20

05

/01

20

06

/01

20

07

/01

20

08

/01

20

09

/01

20

10

/01

20

11

/01

20

12

/01

20

13

/01

US Mexico

Corr: 0.21 Corr: 0.76

Johansen cointegration since Jan-94

Cycle coordination

Critical Value Critical Value

5% 1%

0.115693 8.516043 15.41 20.04 None

0.034156 1.876684 3.76 6.65 At most 1

Series: LOG(Man.Prod.MEX) LOG(Ind.ProdUSA)

Likelihood

ratio

Cointegrating

EquationsEigenvalue

Critical Value Critical Value

5% 1%

0.174543 16.594320 15.41 20.04 None *

0.031910 2.399811 3.76 6.65 At most 1

Eigenvalue

Series: LOG(Man.Prod.MEX) LOG(Ind.ProdUSA)

Likelihood

ratio

Cointegrating

Equations

Labor force, from 15 to 64 years

(accumulated annual change)

60 40 20 0 20 40 60

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-8990-9495-99100+

Millions

NAFTA population

(2012) China population

(2012)

-5%

0%

5%

10%

15%

20%

25%

30%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

20

20

30

20

40

NAFTA China

Source: SAI Law & Economics with data from U.S. Census Bureau and National Bureau of Statistics of China. 11

Demographic competitiveness

20 10 0 10 20

0-45-9

10-1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 7980 - 8485 - 8990 - 9495 - 99

100+

Millones

12 Source: SAI Law & Economics with data from FMI.

Price of gas

(USD/MMBTU)

Cost competitiveness

0

2

4

6

8

10

12

14

16

18

May-1

996

Sep-1

997

Jan-1

999

May-2

000

Sep-2

001

Jan-2

003

May-2

004

Sep-2

005

Jan-2

007

May-2

008

Sep-2

009

Jan-2

011

May-2

012

Sep-2

013

Ene-2

015

Henry Hub Russia Indonesia-Japan

Russia - Henry Hub - Japan Price Evolution (USD/ MMBTU)

Ja

n-2

01

5

13 Source: SAI Law & Economics with data from Rubin, Jeff and Benjamin Tal, “Will Soaring Transport Costs Reverse Globalization?”.

Equivalent tariff

(percentage)

Cost of transporting a 40’ container to the

U.S. east coast

(U.S. dollars)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

WTI @ $40 WTI @ $70 WTI @ $100 WTI @ $150 WTI @ $200

From China From Mexico

0

2

4

6

8

10

12

14

16

18

20

WTI @ $40 WTI @ $70 WTI @ $100 WTI @ $150 WTI @ $200

Equivalent rate Equivalent rate + U.S. MFN tariff

Cost competitiveness

14 Source: SAI Law & Economics with data from The International Energy Agency.

Additional investment to reach 450 Scenario

(% of GDP)

The 450 Scenario analyzes different measures to bring energy related CO2 emissions down to a trajectory that would be consistent with ultimately stabilizing the concentration of all greenhouse gases in the atmosphere at 450 particles per million.

0.3

%

0.5

% 0.8

%

1.2

%

0.4

%

0.8

%

1.5

%

2.0

%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

2015 2020 2025 2030

NORTH AMERICA CHINA

Green competitiveness

15

C. Competition and Transparency

16

Concentration

1,641

1,502

1,157

1,659

1,623

3,189

753

2,347

1,666

1,983

2,172

4,152

5,559

7,998

8,032

10,000

- 2,000 4,000 6,000 8,000 10,000

Banking

Construction

Airline

Transportation

Media

Telecom

Electric

Oil

Sectoral Herfindahl Index

Mexico

United Sates

17

Concentration

7,130

2,060

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Mexico United States

Aggregate Herfindahl Index

18

Dutch

Partial Lots

Vickrey

Ranking

Reverse English

Auction theory at work

19

Auction theory at work

Dutch

Partial Lots

Vickrey

Ranking

Reverse English

20

Dutch

Partial Lots

Vickrey

Ranking

Reverse English

Auction theory at work

21

Dutch

Partial Lots

Vickrey

Ranking

Reverse English

Auction theory at work

22

Dutch

Partial Lots

Vickrey

Ranking

Reverse English

1°

Ranking:

2°

Ranking:

Auction theory at work

23

Government procurement auctions

Through February 2015 Total CFE IMSS PEMEX SEP

Processes 64 6 49 6 3

Line Items 673 25 523 110 15

Auctions 995 25 876* 79 15

Spend (Million USD) 8,412 4,306 3,515 339 252

Benefits (Million USD) 879 453 271 155 76

Average Savings (%) 10% 11% 7% 46% 23%

Adjudication Rate (%) 94% 96% 91% 99% 100%

Average Number of Bidders 5 7 3 7 8

ROI 271 453 54 298 139

24

Government procurement auctions

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

1 2 3 4 5 6 7 8 9 10

Tran

sact

ion

al V

alu

e (

Mill

ion

s o

f P

eso

s)

Competition Index

Benefits (Millions of Pesos)

IMSS - 3,546

CFE - 5,918

PEMEX - 2,610

SEP - 743

25

D. The Future: A Dual Agenda

1/ Interagency Trade Enforcement Center.

2/ 64+ age population/ labor force population (15-64 age).

e/ Estimated.

Source: SAI Law & Economics with data from U.S. Census Bureau and National Bureau of Statistics of China..

Intra-regional affairs

Intra-regional

Market access

Dumping + ITEC1 vs. common

competition policy (Chapter 15)

Seamless borders and transportation

North America Logistics Program

Energy synergies

North American Energy Program

Labor mobility vs. migration

North American Labor Agreement

26

Country Ratio2

Mexico 10.06

US 19.76

Canada 23.17

NAFTA 17.66

2012 Dependency

ratio

Country Ratio2

Mexico 17.45

US 32.10

Canada 41.40

NAFTA 28.85

2030e/ Dependency

ratio

Dependency ratios

• 2012: NAFTA 11% smaller than that of the

United States

• 2030e: NAFTA 10% smaller than that of the

United States

Extra-regional affairs

Extra-regional

TPP

Preservation of NAFTA for trade and investment flows from

North America

TTIP

Regional negotiation v.s. convergence

27