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Foreign Economic Relations

The Mexican economy has undergone profound structural change since 1980. Trade and capital accounts were liberalised and several trade agreements were signed, notably the General Agreement on Tariffs and Trade (GATT) in 1986, the North American Free-Trade Agreement (NAFTA) in 1994 and several others with countries in Latin America, Asia as well as the European Union. Mexico was admitted as a full member of the Asia-Pacific Economic Co-operation forum (APEC) in 1993. Mexico signed a Free Trade Agreement (FTA) with the European Union in 2000.

Mexico's extensive trade linkages to the United States dominate its foreign economic relations. In 2006 the leading markets for Mexican products in terms of percentage of total exports were the United States, 84.7 percent; Canada, 2.1 percent; Germany, 1.3 percent; and Spain, 1.2 percent. Mexico's leading suppliers in terms of percentage of total imports were the United States, 50.9 percent; China, 9.5 percent; Japan, 5.9 percent; and South Korea, 4.2 percent. Since the early 1990s, Mexico's foreign economic relations have emphasized active participation in the World Trade Organization (WTO) and the negotiation of free-trade agreements (FTAs)-most notably the North American Free Trade Agreement (NAFTA) with Canada and the United States. Mexico has entered into regional and bilateral FTAs involving more than 40 countries.

Imports accounted for approximately USD 170 billion in 2002 (30% of GDP). The majority of Mexico's imports benefit from preferential rules, with NAFTA accounting for the greatest share. In particular, the United States supplied over 70% of Mexico's imports and Canada about 2%. Germany and Japan are other important partners. Imported commodities include metalworking machines, steel mill products, agricultural machinery, and electric equipment, car parts for assembly, repair parts for motor vehicles, aircraft, and aircraft parts.

Since the late 1990s, the overall merchandise trade balance has been slightly negative, largely as a result of growing deficits with the European Union and Asia (mainly China). During 2007 Mexico's total merchandise imports were valued at US$280.1 billion versus US$269.1 billion in exports. Mexico's trade deficit with the rest of the world is largely offset by a trade surplus with the United States. This surplus has grown steadily since the late 1990s, driven initially by the boom in manufacturing exports and, more recently, by high world oil prices. In 2006 Mexico's trade surplus with the United States stood at US$81.4 billion.

In recent years, Mexico has overcome a historical pattern of unsustainable high current account deficits. Since the late 1990s, the current account deficit has shrunk to sustainable levels of generally less than 3 percent of gross domestic product (GDP). Current transfers-made up largely of wage remittances from Mexicans living in the United States-have become an important contributor to Mexico's external accounts, providing capital inflows estimated to be as much as 2.5 percent of GDP. In 2006 Mexico's current account deficit was estimated at US$1.7 billion.

Total external debt was US$165 billion in 2006. At 19 percent of gross domestic product (GDP), Mexico's external debt-to-GDP ratio is one of the lowest in Latin America. The debt-service ratio (the ratio of debt service to export earnings) has declined from 25.5 percent in 2001 to an estimated 15.8 percent in 2005.

The Mexican economy not only opened up to trade, it also promoted Foreign Direct Investment (FDI). Mexico is the largets or the second largest recipient of FDI in Latin America. During 2006 the stock of FDI in Mexico was US$236.2 billion.FDI flows accounted for USD 13 billion in 2002 (down from an exceptional high of USD 26 billion in 2001 resulting from the over USD 12 billion acquisition of Banamex by Citicorp). Over the last decade, FDI stock as a percentage of GDP almost doubled to 22.5% in 2002. The tertiary sector, particularly financial services, has attracted most FDI since the late 1990s.5 Developed market economies are major investors. The USA and Canada account for more than 70% of these investments followed by the EU which accounts for over 15%. Outward investment flows represent an annual average of USD 907 million between 1999 and 2001. Outward investment stocks as a percentage of GDP accounted for almost 2% in 2002. Latin American countries are the main recipients.

During the 10-year period following the ratification of the North American Free Trade Agreement (1994-2004), Mexico attracted a cumulative US$148 billion in FDI, about 50 percent of which was invested in manufacturing and another 25 percent directed toward the financial services sector. Net portfolio investment has been rising since 2002; by mid-2005, foreign holdings of government bonds totaled approximately US$10 billion, while foreign investment in the Mexican stock market exceeded US$85 billion.

The World Bank is the leading provider of foreign expertise and financial support to Mexico. Presently, the bank is financing 32 projects in the country, with an average annual commitment of up to US$1.7 billion. The World Bank's 2005-2008 Country Assistance Strategy (CAS) for Mexico projects loans totaling about US$4.8 billion during the strategy's four-year timeline and is designed to support the government's commitment to fighting poverty and inequality.



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