Is North America Coming of Age as NAFTA Turns 21?

A Mexican Perspective

Pedro NoyolaApril, 2015

Index

2

A. Openness

B. Integration and Competitiveness

C. Competition and Transparency

D. The Future: A Dual Agenda

3

A. Openness

4Source: 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 opennessVariable Coefficient Std. Error t-Statistic P value

Dummy 1986-1987*GATT/PSE 0.04734 0.02707 1.74853 0.09260Dummy 1994-1995**NAFTA 0.11561 0.01980 5.83892 0.00000Dummy 2000-2001EUFTA -0.01480 0.01558 -0.95014 0.35110AR(1) 0.83738 0.14219 5.88911 0.00000MA(1) -1.08588 0.02497 -43.48797 0.00000MA(4) 0.37436 0.01526 24.52906 0.00000

GA

TT

NA

FT

AO

EC

DF

TA

BO

LIV

IAF

TA

CO

ST

A R

ICA

--F

TA

, FT

A G

3

FT

A U

RU

GU

AY

F

TA

JA

PA

N

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

ISR

AE

L

FT

A A

EL

C

0%

10%

20%

30%

40%

50%

60%

70%

80%

19

801

981

19

821

983

19

841

985

19

861

987

19

881

989

19

901

991

19

921

993

19

941

995

19

961

997

19

981

999

20

002

001

20

022

003

20

042

005

20

062

007

20

082

009

20

102

011

20

122

013

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

819

89

199

019

91

199

219

93

199

419

95

199

619

97

199

819

99

200

020

01

200

220

03

200

420

05

200

620

07

200

820

09

201

020

11

201

2

China's entry to WTO9/11 Terrorist attack

NAFTA LehmanBrothers Crisis

0

200

400

600

800

1000

1200

1400

1600

1800

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 to WTO9/11 Terrorist attack

NAFTA

LehmanBrothers Crisis

050

100150200250300350400450500550

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 toWTO9/11 Terroristattack

NAFTA

LehmanBrothers Crisis

7Source: 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

-94

Aug

-95

Apr

-96

Dec

-96

Aug

-97

Apr

-98

Dec

-98

Aug

-99

Apr

-00

Dec

-00

Aug

-01

Apr

-02

Dec

-02

Aug

-03

Apr

-04

Dec

-04

Aug

-05

Apr

-06

Dec

-06

Aug

-07

Apr

-08

Dec

-08

Aug

-09

Apr

-10

Dec

-10

Aug

-11

Apr

-12

Dec

-12

Aug

-13

Mexico

US

Canada

Johansen cointegration since Jan-96

8Source: 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

ratioCritical 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

-96

Jan-

98

Fe

b-9

9

Apr

-00

Ma

y-01

Jun-

02

Aug

-03

Sep

-04

Oct

-05

Dec

-06

Jan-

08

Fe

b-0

9

Apr

-10

Ma

y-11

Jun-

12

Aug

-13

Mexico

US

Canada

9Source: 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

ratioCritical 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:T21980:T1 –1993:T4

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1981

/01

1982

/01

1983

/01

1984

/01

1985

/01

1986

/01

1987

/01

1988

/01

1989

/01

1990

/01

1991

/01

1992

/01

1993

/01

1994

/01

1995

/01

1996

/01

1997

/01

1998

/01

1999

/01

2000

/01

2001

/01

2002

/01

2003

/01

2004

/01

2005

/01

2006

/01

2007

/01

2008

/01

2009

/01

2010

/01

2011

/01

2012

/01

2013

/01

US Mexico

Corr: 0.21 Corr: 0.76Johansen cointegration since Jan-94

Cycle coordination

Critical Value Critical Value5% 1%

0.115693 8.516043 15.41 20.04 None0.034156 1.876684 3.76 6.65 At most 1

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

Likelihood ratio

Cointegrating Equations

EigenvalueCritical 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 ChinaSource: 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

12Source: 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

-199

6

Sep

-199

7

Jan-

1999

May

-200

0

Sep

-200

1

Jan-

2003

May

-200

4

Sep

-200

5

Jan-

2007

May

-200

8

Sep

-200

9

Jan-

2011

May

-201

2

Sep

-201

3

Ene

-201

5

Henry Hub Russia Indonesia-Japan

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

Jan-

2015

13Source: 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

14Source: 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

Banking

Construction

Airline

Transportation

Media

Telecom

Electric

Oil

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

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

Sectoral Herfindahl Index

Mexico

United Sates

17

Concentration

Mexico United States -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

7,130

2,060

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

1 2 3 4 5 6 7 8 9 10

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Benefits (Millions of Pesos)

IMSS - 3,546

CFE - 5,918

PEMEX - 2,610

SEP - 743

Competition Index

Tran

sacti

onal

Val

ue (

Mill

ions

of P

esos

)

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 accessDumping + ITEC1 vs. common competition policy (Chapter 15)

Seamless borders and transportation North America Logistics Program

Energy synergiesNorth American Energy Program

Labor mobility vs. migrationNorth 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

TPPPreservation of NAFTA for trade and investment flows from North America

TTIPRegional negotiation v.s. convergence

27