Free-Trade Treaty Sought by Mexico, EU

MEXICO CITY — Moving to reduce its overwhelming dependence on the United States, Mexico agreed with the 15-nation European Union on Monday to negotiate a trade pact that could eventually prove as far-reaching as the North American Free Trade Agreement.

Analysts said a Mexico-Europe trade agreement would allow Mexico to diversify its economic base away from its heavy reliance on the United States, which now absorbs nearly 80% of Mexico’s exports. Furthermore, the agreement could give European firms an attractive channel for exports through Mexico to the growing markets throughout Latin America.

“This agreement will mean more opportunities for Mexican firms to grow, so Mexico as such will grow more, and U.S. exporters will then benefit as the Mexican economy grows. So everybody wins,” said Isaac Katz, chief economist at the Autonomous Technical Institute of Mexico.

Mexican and EU officials, meeting in Brussels, signed three agreements establishing a framework to start negotiations for a free-trade treaty early in 1998, following approval by the European Parliament and Mexican Congress. The talks are expected to take about two years--similar to the time it took to negotiate the North American Free Trade Agreement, or NAFTA.

As occurred with NAFTA, discussions on trade in agricultural products are expected to be especially sensitive. In negotiations on other trade accords, southern European countries in particular have pressed for protective tariffs for their food producers. Mexico would surely bargain for advantages for its growing agricultural export sector.

Mexico’s biggest exports to Europe include oil, auto engines and computer parts. Europeans chiefly ship auto and electronic components and dairy and pharmaceutical products to Mexico.

Mexico’s recovery from the 1994 peso crisis has been heavily driven by exports, and Mexican Undersecretary for Commerce Jaime Zabludovsky said recently that Mexico’s total international trade should reach $220 billion this year, making Mexico the world’s 10th-largest commercial nation.

Mexican two-way trade with Europe has risen 30% in the 1990s, from a total of $9.7 billion to $11.3 billion. But Mexico’s trade with the United States has increased so much faster during the same period--up 151% to $148 billion in 1996--that Europe’s share of Mexican international trade has fallen from 11% to just 6%. In contrast to its current trade surplus with the U.S., Mexico has consistently run a trade deficit with Europe.

Mexico Commerce Secretary Herminio Blanco said in remarks at the signing ceremony that Mexico’s trade pacts with the United States, Canada and five other Latin American countries had left European firms at a disadvantage in recent years.

The treaty negotiations will cover such issues as the level and timing of reductions in tariffs and import taxes and decisions on which goods would be subject to longer phase-in periods, possibly stretching up to 15 years in some categories.

The German government has pushed hard for an EU-level trade accord with Mexico, which would complement bilateral investment agreements between Mexico and several European countries.

About 80 German auto-parts firms have already set up shop here to supply Volkswagen’s assembly plant, which will soon be exporting a new version of the Beetle to the United States under the advantageous NAFTA rules.

Johannes Hauser of the German-Mexican Chamber of Commerce here said an EU-Mexico free-trade treaty would foster much greater European fixed investment in Mexico since “the treaty opens the door to the whole continent for European investors.”

The European trade negotiations reflect Mexico’s growing confidence as a world economic player. In the Mexican capital on Monday, Energy Minister Luis Tellez met with Russian First Deputy Prime Minister Boris Y. Nemtsov to discuss oil-production issues. Nemtsov and Tellez said afterward they wished to study the idea of forming an organization of oil-producing nations that are not members of the Organization of Petroleum Exporting Countries.

Raul Hinojosa, a professor at UCLA who is regarded as an expert on NAFTA, said an EU-Mexico trade treaty “would not threaten what is the United States’ second-largest trading relationship--that between the U.S. and Mexico.”

He said the Europeans wanted better access to Mexico’s own market, which is projected to grow 7% this year. Furthermore, he said, the Europeans want to pursue “potential triangulation of investments in the United States and Mexico. For example, you have Germany’s BMW investing in both the United States and Mexico. This mirrors the triangulation of trade by Japanese car manufacturers in both the U.S. and Mexico.”

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Mexico Trade

Mexico’s trade with the United States dwarfs that with Europe, but that could change under a trade pact with the European Union.

1996 (In billions)

With U.S.: 148

With EU: 11.2

Source: Mexico Trade and Industrial Development Ministry