A MONTHLY NEWSLETTER ON NAFTA AND RELATED ISSUES

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1 March 2010 * Volume 15, Issue 3 NAFTA Works A MONTHLY NEWSLETTER ON NAFTA AND RELATED ISSUES INSIDE THIS ISSUE Mexico Improves Its Attractiveness for Investments 1 Mexico Improves Its Attractiveness for... 1 Trade Highlights 2 Agricultural Trade is Flourishing under... 3 NAFTA Related Events 3 Diario Oficial 4 Success Stories 4 Selected Readings 4 Infrastructure Projects in Mexico Mexico has notably risen to the top-ten most attractive nations in the world for foreign direct investment (FDI) and maintained its number one position as US low-cost outsourcing for the year of 2009, according to A.T. Kearney s 2010 Foreign Direct Investment Confidence Index and the AlixPartners 2010 US Manufacturing- Outsourcing Cost Index. In addition, the World Bank 2010 Logistics Performance Index (LPI) has Mexico improving six positions since The largest cause for the overall changes in rankings, according to A.T. Kearney, is that in today s depressed economy the market has moved towards safer markets, encouraging companies to invest closer to home. This approach along with NAFTA market access advantages has made Mexico a sound choice for US and Canadian investments. Mexico s geographic proximity, duty free trade and its comparatively lower labor costs are a draw for these nearby trading partners. One sector of improvement in Mexico was logistics performance. According to the latest World Bank s LPI, Mexico is ranked 50th out of the 155 countries measured in the index, scoring This is an improvement from its 2007 ranking of 56th, when scored Mexico has advanced in both international and domestic areas of the LPI, showing significant improvement in tracking and tracing, general logistics infrastructure, rate of physical inspection and logistics competence, among others. It also slightly improved in the areas of customs and timeliness. Mexico s attractiveness for investment ranks 8 th worldwide this year, up from 19 th in 2007, according to A.T. Kearney s FDI Confidence Index for Mexico has moved back into the world s top 10 most attractive countries as US companies seek low-cost production closer to their core activities. There is a global tendency to invest in nearby countries and also to 4 Mexico Economic Update 5 Profile of New Mexico 6 Profile of Michoacan USTR KIRK VISITED MEXICO TO FOSTER COMPETIVENESS IN NORTH AMERICA In a visit to Mexico on February 8 and 9, US Trade Representative, Ambassador Ron Kirk, met President Felipe Calderon and Economy Secretary Gerardo Ruiz. They highlighted the importance of promoting and strengthening North America s competitiveness as the way to speed up economic growth, and praised the strong conviction that the NAFTA partners have shown to work together. Delegations of both countries discussed topics of relevance for the good performance of the bilateral trade relationship. Mexican and U.S government representatives agreed to drive efforts in five important areas: 1. Intensify efforts in regulatory cooperation and intellectual property. 2. Increase custom facilitation in order to make trade more efficient and safer. 3. Increase export capacity of small and medium size companies. 4. Improve productivity along the supply chain to increase competiveness, and 5. Work diligently to solve existing trade disputes Continues on page 2 Page 1

2 consolidate and deepen the supply chain. One the principal reasons this happened is the high preference of US companies to invest in Mexico. Among North American investors, Mexico is ranked as the fifth most-favored destination for investment in the 2010 index. In the last two years, Mexico has received over 34 billion dollars of accumulated FDI with over 55 percent coming from US and Canadian companies. Industrial manufacturing has been the largest recipient economic sector, accounting for just over 35 percent of the total FDI. This sector attracts high levels of investments for Mexico largely due to foreign companies looking to manufacture for the US market with the benefits of the NAFTA free trade framework. Low-cost outsourcing is also a strong point for Mexico. In 2010, Mexico has taken the number-one position, surpassing India and China for the second year in a row, according to the newest AlixPartners Index. Reasons that account for Mexico gaining so much ground include an advantageous shift in the peso-dollar exchange rate and the fact that it was not vastly affected by increases in material and transportation costs. Again, the improvement is also due to Mexico s geographic position, which makes it a convenient location for North American companies looking for cost-effective outsourcing regions. In this year s AlixPartner s index, with more countries and highervalue added products, there is an improvement in the measuring of current and up-and-coming low-cost countries. Mexico held strong at number one in the index s lowest manufacturing cost rankings, with India and Vietnam retaining their 2nd and 3rd places respectively. China, which recovered slightly in numbers but fell in position from number 4 in 2008 to number 6 in 2009, has been facing an adverse turn in exchange rates, rising material and transportation costs, and increased taxes. With such improvements and growth, Mexico is quickly becoming a significant competitor in the world market. The close-to-home business model is bringing more investment to the country. Agricultural Trade is Flourishing under NAFTA The North American Free Trade Agreement (NAFTA) has had an enormous impact on the agricultural sector throughout the region. Agricultural trade between the US and Mexico has multiplied by four in the 16 years of NAFTA, reaching 24.3 billion dollars in The steady growth of the bilateral trade at an annual average rate of 8.8 percent has made Mexico the US second largest trading partner in agricultural products. For example, US consumers are purchasing fresh tomatoes and peppers produced by Mexican farmers during the winter, Mexican livestock producers feed their animals with US coarse grains, and many North American pastures and feedlots contain cattle that have lived in more than one NAFTA country. Difference in landscape and climate allows both US and Mexican consumers to have a broader selection of food throughout the year at better prices. Thus, Mexico is the US largest supplier of fresh fruits and vegetables with exports that exceeded $4.9 billion in 2009, an increase of almost 9% in the last two years and more than 4 times higher than those reached in Since NAFTA, Mexico s market share in fresh produce imported by the US has increased to 46 percent last year, up from 39 percent in Today, two out of three mangos or papayas, half of the avocados, two out of five lemons and limes, one out of every three asparagus, eggplants or bell peppers, and one out of every four cucumbers or squashes that U.S. consumers eat were raised in the Mexican countryside. The region has also seen a rapid integration of North American grain markets. During the NAFTA period, US grain exports to Mexico have quadrupled, reaching $4 billion last year. The catalyst for this trade has been a dramatic expansion of Mexico s hog and poultry industries, driven in turn by a rising domestic demand for meat. In order to complement domestic meat production, Mexico also buys more than $2 billion a year of red meat and poultry from US ranchers. The main drivers of integration in North American livestock markets have been harmonization of sanitary standards and industry restructuring. As a result, Mexico ships rising numbers of feeder calves to the US for finishing the last stage of production and slaughter. Integration is not limited to production agriculture. US and Mexican processed food industries are increasingly interwoven trough substantial direct investment in each other s industry, as well as large and growing flows of intra-industry trade in products such as bread, beer, dairy products, mixes, and confectionary products. Between 1999 and 2009, US firms have invested more than $9 billion in Mexico s processed food sector. With the completion of NAFTA s implementation, additional steps are necessary to promote more trade and further integration within the region such as better regulatory coordination, improvements to the cross-border transportation system and more investment in border infrastructure. Since the final NAFTA transition period ended on January 1 st, 2008, when remaining tariff and quantitative restrictions on exports of corn, dry beans, milk powder, sugar, and orange juice were fully phased out, US-Mexico agricultural trade have increased by 6.4 percent despite the adverse economic situation during that period. This dynamic trade performance is speeding up an important long -term development in which the agricultural sectors of both countries are increasingly behaving as if they form one market. Not only is US agricultural trade with Mexico on a clear upward trend, but also North American producers are reorganizing their economic activities more efficiently through the region for both inputs and outputs, taking advantage of the complementary nature of both economies. Page 2

3 NAFTA Related Events EXPO JOYA 2010 April Exhibition of jewelry, silverware, watches, imitation jewelry and supplies Location: Expo Guadalajara, Guadalajara, Jalisco. Phone: Website: EXPO LICENSING LANTINOAMERICA 2010 April The largest owners and operators of licenses and brands will come together to show their licenses, brands and services. Location: Centro Banamex, Mexico City. Phone: Website: EXPO MASCOTAS April Animal exhibition and sales; products, accessories and foods for pets. Location: Expo Guadalajara, Guadalajara, Jalisco. Phone: Website: MEXICO SAFETY EXPO 2010 April Exhibition of industrial safety, occupational health and hygiene in Mexico Location: Centro Banamex, Mexico City. Phone: Website: EXPO FARMA INTERPHEX 2010 April Exposition of products and services related to the pharmaceutical industry. Location: World Trade Center, Mexico City. Phone: Website: SAPICA, LA FERIA DE AMERICA April Fashion exhibition of the footwear industry for the 2010 fall/winter season Location: Poliforum Leon, Leon, Guanajuato. Phone: Website: EXPO OFICINAS April Commercial expo features stationary, services, supplies and related office products. Location: Cintermex, Monterrey Nuevo Leon. Phone: Website: MODAMA April Exhibition of women s footwear, leather products and accessories Location: Expo Guadalajara, Guadalajara, Jalisco. Phone: direccionmodama@gmail.com Website: 6to. EXPO FORO ELECTRICO. April Technical conferences related to technological developments of the Energy Sector and exhibition of products and services of the electrical industry. Location: Expo Tampico, Tampico Tamaulipas. Phone: caname@caname.org.mx Website: DIARIO OFICIAL NOTICES Amendments to the temporary transition measure on imports of several goods originating from China. Feb. 2 nd. Notice that formally declares the municipalities of Hidalgo, Irimbo, Parácuaro and Tangamandapio, Michoacán as large avocado seed weevil (Heilipus lauri), small avocado seed weevil (Conotrachelus aguacatae and C. persea), and avocado seed moth (Stenoma catenifer) free territories. Feb 8 th Notice announcing two tariff rate quotas and their allocation mechanism to import sugar in 2010, one from originating sugar of Nicaragua, and the other one from the rest of the world. Feb. 9 th Clarification to the Mutual Recognition Agreement for the acceptance of conformity assessment results in electrical and electronic products held between UL de Mexico, S.A. de C.V., and UL International Demko A/S and Underwriters Laboratories Inc., published on November 24, Feb. 9 th Amendments to the Mexican Tariff Schedule and to the Sectoral Promotion Programs. Feb. 9 th. Decree enacting the Protocol Amendment to the Free Trade Agreement between Mexico and Israel, signed on November 18, Feb. 11 th. Decree enacting the Strategic Partnership Agreement between Mexico and Uruguay, signed on August 14, Feb. 11 th. Decree enacting the Strategic Partnership Agreement between Mexico and Costa Rica, signed on July 30, Feb. 11 th. Notice announcing a tariff rate quota for 2010 to import duty free powdered milk originating from WTO members. Feb. 15 th. Notice announcing a tariff rate quota for 2010 to import under preferential treatment certain dairy products preparations containing over 50% by weight in milk solids. Feb. 15 th. Decree enacting the Agreement between Mexico and the United States for the promotion of safety in aviation, signed in Montreal on September 18 th, Feb. 23 rd. Resolution amending the General Rules and Criteria for Foreign Trade issued by the Ministry of the Economy. Feb. 25 th. Mexican Official Standards: Modifications to point of Normative Appendix A of the NOM-040- SSA1-1993, related to iodized salt and iodized fluoridated salt. Sanitary specifications, published on September 23, Feb. 2 nd. NOM-005-ENER-2010, related to Energy Efficiency for household laundry machines. Limits, test methods and labeling. Feb. 3 rd. Draft PROY-NOM-086-SCFI-2009, related to new radial tires of a kind used on vehicles with a gross weight not exceeding 4,536 kg (10,000 lb) - Safety specifications and testing methods. Feb 9 th. Extension of the NOM-EM-047-FITO-2009, related to phytosanitary measures to mitigate the risk of introduction and spreading of Huanglongbing (HLB) / Greening of citrus fruits (Candidatus Liberibacter spp.) in the national territory, published on July 08, Feb. 12 th. NOM-009-SCT2/2009, special and compatibility specifications for the storage and transportation of substances, materials and hazardous waste of class 1 explosives. Feb 12 th. NOM-032-SCT2/2009, specifications and characteristics on the design, construction, inspection and testing of portable tanks intended for the transport of substances, materials and hazardous waste of classes 1, 3 to 9. Feb. 16 th. NOM-027-SCT2/2009, special and additional specifications for containers, packaging, intermediate bulk containers, portable tanks and transportation of substances, materials and hazardous waste of division 5.2, organic peroxides. Feb 17 th. Draft PROY-NOM-053-SCT , Land transportation. Characteristics, technical and security specifications of towing equipment, tow and rescue. Feb 23 rd. NOM-030-SCT2/2009, specifications and characteristics on the design, construction, inspection and testing of refrigerated liquefied gas portable tanks. Feb. 25 th. Page 3

4 Success Stories Wal-Mart Mexico to Open 300 New Stores in 2010 Wal-Mart Mexico (Walmex), Latin America s largest retailer, plans to invest a record $970 million in The investment plan for new and remodeled stores and distribution improvements is a 28 percent increase from Walmex will open 300 stores and restaurants this year, adding to its current total of almost 1,500. We expect a gradual economic recovery for this year, CEO Scott Rank said, but our investment plan doesn t depend on a revived economy. Walmex also plans to open 168 branches of its bank, Banco Walmart, increasing its total by 88 percent. Praxair to Invest in Mexico US industrial gases producer Praxair, the largest industrial gases company in North and South America and one of the largest worldwide, will invest $150 million in Mexico in From this amount, $12 million will be spent in building an air separating plant in Monterrey. The largest amount, $70 million, will be invested in another air separating plant in Sahagun, Hidalgo. $20 million more will go to a hydrogen plant in Tepeji del Rio, Queretaro while $10 million will be used in facilities for gas fill-up in Altamira, Tamaulipas. The remaining $38 million will be allocated to several projects. The investments will generate around 150 direct jobs and 900 indirect jobs. Jafra Opens New Plant in Mexico Jafra Cosmetics International, an international manufacturer and marketer of personal care products, has opened a new $30 million manufacturing facility in Queretaro, Mexico to meet the demand for its products. The 254,000-square-foot plant will employ 800 workers and be the main supplier for Westlake Village, CA-based Jafra s global sales and operations. This significant capital project investment supports our planned course of expansion and it will accommodate our anticipated growth for decades, said Walter Muyres, a managing partner with the Vorwerk Group, Jafra s parent company. IBM Expands Investments in Jalisco In a project which required $20 million investment, IBM officially inaugurated the facilities where XIV Storage System is manufactured. Production started last summer in the plant located in El Salto, Jalisco and the equipment is already exported to the United States, Germany, United Kingdom, Malaysia, New Zealand, India, Korea, Canada and Colombia. 100 jobs were created for this new project, specialized in management, manufacturing engineering, tests, quality assurance and systems engineering, among other areas. "This campus is recognized for its operative excellence", said Eugenio Godard, IBM Campus Guadalajara Director, "and it is based on Mexican abilities and talent". Selected Readings NAFTA Implementation: The Future of Commercial Trucking across the Mexican Border Author: John Frittelli, Congressional Research Service. February, 2010 NAFTA set forth a schedule for implementing its trucking provisions what would have opened the border states to crossborder trucking competition in 1995 and all of North America in 2000, but full implementation has been stalled because of concern with the safety of Mexican trucks. One truck safety statistic, out-of-service rates, indicates that Mexican trucks operating in the United States are now safer than they were a decade ago. The data indicate that Mexican trucks and drivers have a comparable safety record to U.S. truckers. If Mexican carriers do eventually receive long-haul authority, the short-term impact is expected to be gradual. In the long run, use of drayage companies at the border is likely to decline as they lose part of their market share to Mexican long-haul carriers. Infrastructure Projects in Mexico Manzanillo Power Plant Sponsor: Electricity Federal Commission (CFE) Location: Manzanillo, Colima Project Value: $981 million CFE granted the consortium of companies formed by ACS, GE and Alstom the project for the conversion of units 1 and 2 of the Manzanillo power plant, which will become the largest generation plant in the country, with a capacity of 1,500 megawatts. The project consists of replacing the turbines that now generate electricity from fuel oil to natural gas and rehabilitate the steam turbines which will increase generation capacity. The natural gas for use by the project will be imported in liquid form by vessel from Peru and will be regasified at the LNG plant, which is currently under construction in the same place. The project also includes upgrades of the transmission network. Business opportunities: construction, civil engineering, engineering services, electrical equipment. Durango Solar Project Sponsor: Durango State Government Location: State of Durango Project Value: NA The Government of the State of Durango and the company OPDE, a Spanish solar photovoltaic developer, have signed a collaboration agreement under which the solar company has committed to study, plan, build and launch 45 megawatts (MW) of solar projects between now and The first 1 MW photovoltaic solar farms that OPDE will build in the state will be located in the Logistics and Industrial Park in Durango (CLIP) and will be fully operational in Business opportunities: construction, electrical equipment, solar equipment. Page 4

5 New Mexico In 2009, New Mexico's exports to Mexico reached $385 million, up $308 million from their level in 1993, and registered a flat performance in comparison with the previous year. Exports to Mexico (Millions of US Dollars) Among all U.S. states, New Mexico was ranked 35th as an exporter of goods to Mexico in 2009 In 16 years of NAFTA, New Mexico's exports to Mexico have increased by 401%, while those to the rest of the world rose 173%. This means that the export growth rate to Mexico is 2.3 times higher than its export growth rate for the rest of the world. Since NAFTA was implemented, New Mexico's sales to Mexico have grown at an annual average rate of 10.6%. Mexico is an important trade partner to New Mexico. It was ranked as the largest export market for goods from New Mexico in 2009, up from 2nd in 1993, illustrating the impact of NAFTA for New Mexico's growing businesses. Mexico accounted for 30.3% of New Mexico's exports worldwide in 2009 Source: US Census with adjustments made by the World Institute for Strategic Economic Research (Wiser), and SE-NAFTA by SIC AND by NAICS. Page 5

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