Saturday, April 14, 2007

Mexico's Commerce Czar on the Trade Deal with Europe

In a Q&A, Herminio Blanco Mendoza talks about why it will send "a good message to the world" about free trade

Herminio Blanco Mendoza, Mexico's Commerce & Industrial Development Secretary, came to Brussels last week to put the final touches on a pathbreaking free-trade accord with the European Union. The deal could take effect as early as July 1. European negotiators say it's the most ambitious free-trade effort they have ever signed with another country.

This isn't Blanco's first trade coup. He was Mexico's chief negotiator of the North American Free Trade Agreement, which in six years has helped his country more than double its exports, to $132 billion. The 49-year old Blanco met on Feb. 3 with Business Week's William Echikson at the Mexican embassy in Brussels. Here are edited excerpts from their conversation:

Q: How important is this agreement?
It's the same scope as NAFTA. Many European corporations faced a disadvantageous position vis-a-vis U.S. companies in Mexico. We solve this problem. And we solve it fast, with an ambitious schedule to reduce tariffs. The timing is also ambitious. By the first day of 2003, all European industrial goods will have a maximum tariff of 5% in Mexico. By the first day of 2006, it will be nothing.

Q: How much will the deal help Mexican exports?
In six years with NAFTA, we have had a good experience increasing our manufacturing exports, automobiles, electronics, and textiles. We can now do the same with Europe. We exported $100 billion to the U.S. last year and only $4.5 billion to Europe. I'm not saying we will reach $100 billion to Europe, but we could get up to $10 billion or $15 billion.

Q: How did this deal compare with negotiating NAFTA?
During the NAFTA negotiations, public opinion was right here [he points to his neck]. There was less political weight on this deal. European negotiators had an advantage because NAFTA was already in force and they could see all the chips on the table. But at the same time, we were confident because we realized that our workers and private sector are able to compete.

Q: But the Europeans have kept their agricultural markets closed...
About 90% of our exports are manufacturing goods. But we will get a nice opening even on the great majority of vegetables and fruits. Yes, some products were hard. Bananas were put on a waiting list. But in another difficult subject, orange juice, we got permission to export 30,000 tons a year. It's true that the markets for dairy, grain, and meat products were put on a waiting list. We will wait and see what happens with internal European farm reform and rediscuss in three years.

Q: Let's discuss some specific industries. What will happen in autos? A: We now export 1 million vehicles a year, but only 50,000 to Europe. The Volkswagen Beetle, produced in Mexico, is a great success. So it could sell a lot more in Europe. There are other products, too, such as the DaimlerChrysler PT Cruiser, which is being produced in Mexico and could find a good market in Europe.

Q: Televisions?
For televisions, it will take some time. The rules of origin require substantial investments in Mexico before we can export [to Europe]. Essentially, the glass must be produced in Mexico. We export 14 million TVs per year. So it would not be unthinkable that somebody puts in a glass factory in Mexico and starts sending TVs to Europe. The Europeans already import TVs from Malaysia. Why not from us, too?

Q: And other consumer goods?
We have good chances with textiles and appliances. We are already the No. 1 exporter to the U.S. of appliances.

Q: What about the oil industry?
The Europeans now will have the same rights as the Americans. While only the Mexican state can invest in Pemex, this agreement does open up Pemex' procurement of goods and services.

Q: What else do the Europeans get out of this deal?
The Europeans have suffered from competition with the U.S. and Canada. Their machinery faces tariffs, while the U.S. doesn't. So if you buy a $300,000 textile machine and have to pay 20% tariff for the European product and zero for the American one, you will choose the American one. This agreement let's Europe recapture a chunk of the market.

Q: Do you fear a backlash from Washington, wary of losing its privileged position in Mexico?
A very good American friend of mine, a very important figure whose name will remain unsaid, told me that what is good for Mexico is good for U.S. He is right. This agreement will lift Mexico into higher rates of growth. And if we grow, we will import more from the U.S. We already are the U.S.'s second-largest customer.

Q: There have been reports of skilled-labor shortages in maquiladora factories on the U.S. border. Won't this agreement aggravate that problem?
We have the lowest rate of unemployment in our history. It's true there is a high turnover in some regions in the north. But this is a welcome problem. Training is only a partial answer. The real solution is that companies are beginning to move to the south, where there are no labor shortages. We will keep high salary corporations in the north. But low-skilled jobs will go south. Look at Yucatan. During the Zedillo Administration, about 140 new plants have set up there.

Q: Are you worried that most of your growth comes from foreign investment, not from domestic entrepreneurs?
It is true that until now exports and foreign direct investment have been the main engine of growth. But this will change. Look at our fiscal policy. This year, our budget deficit will be 1%, and our goal is to get below 10% inflation. We have a flexible exchange rate, and we have a small current-account deficit, 80% financed by foreign direct investment. So we have solved the root causes of the periodic economic crises that have gripped our country for the past 25 years.

Q: After your meetings here with European Union officials, what is the outlook for the agreement to be ratified by July 1? A: The European Commission has presented the pact to its 15 member countries, which now have to approve it. I don't expect problems. There could be some countries that say "I want this to be better." But the agreement should be evaluated as a whole. In Mexico, my party has majority in the senate, so I don't foresee any problems. It should be approved by the middle of March. Hopefully, the Europeans will also get agreement by then, so the July 1 goal is realistic.

Q: How will this agreement fit into World Trade Organization?
This goes much deeper than any negotiation in the WTO. Even with all the problems the organization is facing after the Seattle talks, Mexico and the EU have shown that is possible to move ahead with free trade. That is a good message for the world.

Q: So is the way forward on free trade through bilateral agreements like this or multilateral agreements under the WTO?
Bilateral vs. multilateral deals complement each other. Remember NAFTA. At the time, the GATT [General Agreement on Tariffs & Trade] negotiations were stuck. NAFTA gave them a push forward. When people see this agreement moving forward, I think it will send a similarly good message.

Q: So do you expect a new WTO round to open soon? A: I don't believe the chances are large of a new round opening this year. So we have to find other ways of keeping the ball moving. We have a built-in agenda for agriculture and services, and we should keep negotiating in these areas. I also believe we must work to help developing countries build up their trade infrastructure, for example, by allocating money so they can open embassies at the WTO. Many countries don't have a permanent representative in Geneva. We also need reforms. You can't decide things by putting 150 countries in a room. You need to elect rotating representatives from regions and keep the meetings to a maximum of 30.

Q: What do you think of the President Clinton's position that poor labor rights could eventually be punished with sanctions?
It won't fly. A good number of countries find it unacceptable. We have an agreement on labor within NAFTA and one on environment, too. But no sanctions ever have been applied. And that's normal. Our experience during these six years shows that NAFTA has been good at generating jobs, that the plants NAFTA brings to Mexico take better care of the environment than the ones they replace, and that wages and benefits are moving up. NAFTA and free trade have worked. That's the message we must explain to the demonstrators who were on the streets of Seattle.