The Mexican economy has, for decades now, been strongly tied to the US’ economic activities and fluctuates according to its neighbor’s development. The US is Mexico’s most important export market as over 80% of the country’s exports go there yearly. Exports also represent a large part of the national GDP and their participation has increased to over 30% from 10% two decades ago. These two countries have close trade and investment relationships and both are affected by their social and political issues. NAFTA eliminated trade and investment barriers among the US, Mexico and Canada. After the implementation of the agreement, almost 70% of US imports from Mexico and 50% of US exports to Mexico became duty-free. During the next 15 years, the remaining duties were eliminated and it was predicted that NAFTA would have a positive overall effect on Mexico. However, studies have shown that despite the economic and social benefits that NAFTA brought to Mexico, the agreement was not successful at distributing them evenly across the country. There have been periods of positive and negative growth since the implementation of the agreement but it has not been able to reduce income disparities between Mexico, Canada and the US. On the brighter side, macroeconomic volatility and variations in the GDP growth, inflation and exchange rates have been considerably reduced since NAFTA went into effect. It is likely that NAFTA contributed to Mexico’s economic recovery after the crisis of 1995 by liberalizing trade with the US and Canada. As opposed to the past, Mexico can now boast one of the most open economies in the world, breaking from its previous model of import substitutions that aimed to protect the Mexican industry in the past. It is estimated that FDI in Mexico would have been 40% lower in the absence of NAFTA.
Trade between Mexico and the US has grown since 1994, changing the trade deficit experienced seen at the beginning into a trade surplus of US$84.8 billion in 2008. The global economic crisis rained on this parade, slowing down trade between Mexico and the US by 19%. Nonetheless, the most important exports endured, including oil and gas, vehicles, audio and video equipment, and communication equipment. With respect to oil, the US imported an approximate 1.3 billion b/d in 2008 as well as about 100,000 billion b/d of refined products.
However, a decline in the export was seen from 2008 onward, which is the result of PEMEX’s continuous decline in production since 2004, the US’ diversification in its sources of import, and the US’ shale boom. It is important to mention that the US continues to be Mexico’s most important trade partner in this sector, therefore their interdependence is vital: the US relies on Mexico’s crude exports while Mexico relies on natural gas coming from the US. This relationship may change throughout the coming years as a result of the recently approved Energy Reform, which may favor the entrance of foreign oil and gas companies into the Mexican market. As a result of the amendments made to the legal framework of the Mexican oil and gas industry, there is high probability that IOCs may generate an increase in Mexican crude production and thus exports. In this case, the US could be favored as Mexico is among its top three oil exporting countries. In addition, export surplus could help achieve the Energy Reform’s objective of trade diversification, by providing crude for other countries including China, Russia, and Japan. Recently signed agreements between companies in these countries will foster crude exports to Asia in an alternative way to earn additional money for the country.
Although the secondary laws of the Energy Reform are yet to be defined by the end of April of this year, the uncertainty of key national and international players in the oil and gas industry urges for clear contractual terms and bright opportunities in the Mexican market.