Looking east: Mexico's Asian trade relationships.

Mexico has more free trade agreements than any other country in the world. Although the government repeatedly said it would not sign any more after sealing a deal with the European Union in 2000, last year it put pen to paper to close yet another major free trade accord.

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In September 2004, Mexico and Japan formed a free trade alliance, after 16 rounds of tough negotiations lasting more than a year. Japan is the world's second-largest economy with a GDP of US$4.3 billion and a population of 127 million. And the Asian powerhouse imports some 60 percent of its foodstuffs.

Asia is the most dynamic commerce zone in the world, led by countries such as Japan, South Korea, China and Singapore. The continent represents 48 percent of global GDP and two-thirds of all international trade. It is home to some 3 billion inhabitants with high levels of savings and spending, and many countries in the region are proficient in developing technology as well as having a high turnover of imports and exports.

According to data from The Economist, Japan's economy now has just 4.5 percent unemployment, its lowest level in five years, and its ratio of job openings to applicants is the highest since 1992. Consistently lower bankruptcy rates, plus a predicted reduction in bad loans to only 4 percent of portfolios by the end of March, suggest Japan has a healthy economy that will not slow down in the short term.

Defending the government's decision to sign the agreement with Japan, Foreign Relations Secretary Luis Ernesto Derbez said earlier this year that Mexico needed to accept its integration with North America (a result of the Nafta free trade accord), but expansion could only be achieved through a strong relationship with Asia.

Rafael Delgado, partner and general director at Delgado Izquierdo y Asociados, told the AMCHAM Trade Policy Committee that the new agreement provided both Mexico and Japan with a market that spends some US$50 billion a year on agricultural and fish products. He added that the accord would promote trade and investment, as well boosting education and training through bilateral organizations.

The trade agreement takes effect in April and experts forecast 10.6 percent annual growth in exports to Japan over the next 10 years. The Mexican government also expects the agreement will create 41,000 new jobs directly and some 40,000 indirectly every year.

The accord stipulates a zero tariff on 95 percent of goods exported to Japan from Mexico, including cars, computers, minerals and agricultural products. Likewise, Mexico will remove 44 percent of taxes on goods imported from Japan, including electronic components, specialized steel, auto parts and machinery. It will also reduce tariffs on imported cars to 23 percent from the current 50 percent.

Chinese Burn

But elsewhere in Asia, competition is hotting up. China--Mexico's main competitor in international trade--is outrunning its Latin American rival in many markets, including North America. The Chinese economy is 12 times larger than it was 25 years ago and is now equivalent to the Mexican, Brazilian and Russian economies combined.

The U.S. National Bureau of Statistics reported that China saw economic growth of 9.5 percent in 2004.

According to data from the Mexican Economy Secretariat, in 2004 Mexico imported goods worth US$14.5 billion from China, whereas exports to that Asian country only amounted to US$987 million.

But the Economy Secretariat has also said 74 percent of Chinese imports to Mexico are intermediate goods. This means Mexico could benefit by importing parts or supplies from China to produce finished goods that can then be sold to a third country at higher prices.

However, what does seem clear is that as the Chinese economy grows, the less competitive Mexican companies become, primarily because of a lack of structural economic reforms. In other words, changes in the energy sector and stricter adherence to the rule of law (among other reforms) will be needed if the country is to keep pace with the global trade scene.

Edgar Del Castillo is an AMCHAM/MEXICO business research analyst.