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Still taking root: is four-year-old Mexico-EU trade deal a coup or will it become a squandered opportunity?

LONDON -- Last month, Mexico's deal with the largest economic bloc in the world passed an anniversary, but instead of champagne celebrations and giddy profit counting, insiders lamented four years of missed opportunities.

Hailed as a trade coup at its inception on July 1, 2000, the Mexico-EU Free Trade Agreement (Meufta) has since gone widely forgotten, according to finance leaders and diplomats on both sides of the Atlantic. And the European Union's deal with Mercosur (on schedule to be in place within 18 months) threatens to transform Mexico from a vanguard in Euro-Latin American relations to an outsider.

"I think (Meufta) has been a very underutilized and underpublicized agreement for reasons that escape me," Andres Rozental, who has served as Mexican ambassador to Great Britain and Sweden and currently runs an international consulting firm, told BUSINESS MEXICO in a telephone interview. "The EU and Mexican government authorities have not done a lot of work or taken advantage of the opportunities it offers, specifically in science, technology and other cutting-edge business sectors."

Statistics support Rozental, as commerce between Mexico and the EU has not grown in the four years since the deal was signed. Over 80% of Mexico's imports and exports continue to circulate in the Americas, and any gains made in the European market have been largely the result of private-sector moxie rather than a sea change in how the two markets interact.

"I arrived here at the beginning of the trade agreement, and unfortunately trade has not grown," Elena Espinosa de los Reyes, a Bancomext representative and Mexico's commercial counselor to the United Kingdom for the past four years, told BUSINESS MEXICO in an interview here. "It grew a little at the very beginning, but then it just stabilized and in some cases even decreased. Certainly companies have not taken full advantage of the agreement."

It wasn't supposed to be this way. For Europe, the deal offered an opportunity to achieve some free-trade parity with the United States, which enjoyed the inside track of Nafta in addition to its geographical foothold. For Mexico and the political leaders who inked the accord, the deal was intended to propel Mexico into the enviable position of a center of commerce between the United States, Latin America and Europe.


But this golden bridge connecting Mexico to the European Union, the largest integrated economy in the world that accounts for nearly one-quarter of global production, remains incomplete. Commerce between Europe and Mexico has never surged--for reasons of logistical difficulty, ignorance on the part of Europe as to what Mexico has to offer besides Cancun and handcrafts, and the excesses of Mexico's own deal-signing orgy. Although it leads the world with 43 free trade deals, these have been called nothing more than a gloss over deep economic problems by some observers

"The problem for Mexico is that the signing of free trade accords has served as a substitute for development," the European Parliament stated earlier this year in a paper entitled, "Lessons Learned by the Trade Accord between Mexico and the European Union."

Failure to reform the energy sector, in particular, has discouraged investment, while nationalistic rants by Mexican lawmakers, in which outside criticism is often interpreted as an intrusion on the nation's sovereignty, have displeased many Europeans. "The EU is not a priority for the Fox government," the European Parliament said in its study, explicitly stating that Meufta had not lived up to expectations.

The World Bank also continues to criticize Mexico for low education levels, bad government, corruption, inadequate regulatory standards, poor infrastructure and technological shortcomings.

This negative perception of Mexico has mixed with logistical problems that inherently cripple transatlantic commerce, making any advances between the two markets laden with risk.


Logistics invariably tops businesspeople's lists as the No. 1 enemy of increased Mexico-EU trade. Shipping time across the Atlantic takes at least 17 days, handicapping agricultural producers and other suppliers of perishable goods.

"If you are exporting to the United States, you just put it in a crate on a truck and maybe it takes 12 hours to get across the border. But with Europe, we are talking about transporting to the other side of the world," said Espinosa.

The proximity of Mexico to the United States and of European countries to one another fundamentally discourages Mexican and European exporters from getting involved in the Atlantic shipping lanes, choosing instead to stay in their own neighborhood. "In order to do business consistently, there is no alternative than to set up your own factory in the region," said Rozental.

An emboldened few Mexican companies have tackled this logistical problem by aggressively investing in Europe.

Tortillas in England and Mexican cement in Spain attest to their proficiency.


The shining example of that strategy is Cemex, widely considered a model of Mexican efficiency to the world and an illustration that conceptions of Mexico as backward and unsophisticated are unfounded.


Cemex, one of the top three cement companies in the world with operations in over 30 countries and trade relations with over 60 nations, is currently the leading cement company in Spain. It entered the market in 1992, acquiring Valenciana and Sanson, which were then Spain's two largest cement companies. These aggressive, transatlantic moves even predated the Mexican company's expansion into neighboring markets in Central and South America. At first intended simply to counter a European rival's expansion into the Mexican market, Cemex's Spanish incursion has blossomed into the cornerstone of the company's worldwide operations, with its 85 Spanish factories ranking second only to its Mexican operations and outnumbering its U.S. presence by 20 plants.

This astute recognition of the Spanish market, with its mountainous terrain and high transportation costs, has paid dividends for Cemex. Shipping bags of cement across the Atlantic was not a viable option.

In addition to the fruitful Cemex sojourn into Europe, the foodmaker Maseca has set up operations in Coventry, England, from where it distributes tortillas throughout Europe, and the auto parts dealer Alfa has established profitable operations in Central Europe.

But these companies are the exception rather than the rule, and for Mexico there still remain many opportunities as yet untapped in Europe, regardless of what politicians may tell the business community.


For political leaders, Meufta has been painted as a triumph, and Foreign Relations Secretary Ernesto Derbez earlier this year said, "The accord has contributed significantly to our integration into the world economy and our dynamic export performance."

Mexico is indeed the seventh-largest exporter in the world, but the lack of creative business ties between Mexico and its European partners was glaringly obvious at the late May summit in Guadalajara between Latin American and European leaders. While Spanish Prime Minister Jose Luis Zapatero was remarking how an EU-Mercosur trade pact sits "on the launching pad" (expected to go into effect in January 2006), the only major reference to Mexico-EU commercial cooperation was a modest proposal presented by President Fox to help small- and medium-sized enterprises. The program, known by its Spanish acronym PIAPyMES, will have a budget of 24 million euros and will help small Mexican businesses get involved in Europe and vice versa. Meufta got nary a mention, as multinational-minded businessmen waxed realistic about what the once-considered trade deal has become.

"It really has turned out to be more of an investment facilitation agreement than anything else," said Rozental, who heads a consulting firm that specializes in multinational corporate enterprises in Latin America. (Rozental is scheduled to address AMCHAM members in a Face-to-Face in mid-August).

Rozental was among the observers who said the May summit did little more than offer Mexico the opportunity to get to meet the 10 new EU members joining the 15 original members who signed the 2000 trade deal.


The fact that there was a Meufta deal signed at all--and it did mark the first agreement between the EU and an American nation--testifies to Mexico's emergence as a major player on the international stage. But what it does to build on that early advantage will go a long way to determining its place in the global market.

"That comprehensive accord, which is beginning to demonstrate its potential, was possible in large part due to the unprecedented process of political reform and institutional renewal that Mexico went through in the past decade," Mexico's Ambassador to the United Kingdom Juan Jose Bremer--who has served as ambassador to five European nations over the past two decades--told BUSINESS MEXICO in an exclusive interview.

"Although the presence of Mexico in the UK is growing, and the bilateral relationship is at a good level in the political, economic and cultural areas, its real potential is not yet thoroughly exploited," Bremer said.


Progress on the EU-Mercosur deal--which several heads of state in the Americas and Europe have described as a priority--illustrates how Mexico, which at the turn of the millennium was considered LatAm's face to Europe, has transgressed and now sits in a perilous position.

With Brazil and Chile increasing their commerce with Europe and the Mercosur-EU deal getting closer to realization, Mexico must take advantage of this window of unrivaled trade opportunity to profit outside of the American hemisphere. Mexico has always been tied to its northern neighbor, and many insiders say that monolithic U.S. presence has deterred European investors and led Mexican exporters--many of whom have factories just a stone's throw from the U.S. border--to balk at getting more involved in the European market.

"In Mexico, there is an enchantment with the United States, and Fox is down in Brazil (in mid-July) negotiating with Mercosur partners. Our immediate neighborhood is what has been important," said Rozental. "But Mexico is primarily a European-orientated country in terms of language, culture and religion. Certainly its roots are there.

"However, on the European side, there has been the perception that Mexico is not worth making an effort for because Mexico has thrown its lot in with the United States. And that is very tough to compete with," he said.

A hint of European arrogance has also colored dealings with Mexico, whether it be decrees by the European Parliament that Mexico is "technologically weak" or statements from leaders that imply that Mexico must come to Europe, rather than the reverse. "Europe is an inevitable dimension to any sensible business plan," EU Ambassador to Mexico Nigel Evans said recently.


Europe's private sector, however, has made moves to get involved in Mexico. In banking, Spanish BBVA took control of Bancomer earlier this year, while in the construction sector, the Swiss cement company Holcim took a page out of Cemex's book and purchased the Mexican firm Apasco.

And statisticians are quick to point out that numbers can be misleading. Europe has invested more in Mexico than the spreadsheets would imply, as investment is often made in Mexico through U.S. subsidiaries of European-based enterprises. Likewise, exports to and from Europe often pass through the United States in transit and are recorded as a U.S. import or export.

Regardless, there remains a lot to do in improving commerce, and even staunch supporters of Mexico-EU trade recognize that there is a ceiling on how far commerce can go between the two entities. "Because of time zone differences and exchange rate issues, I don't think the Europeans look at this as a market to conquer but rather as a platform (to the LatAm region as a whole)," said Rozental.

Although bilateral observers recognize the pitfalls and limitations of Mexico's relationship with the EU, there remains the sense that any gains made between the two sides--given Mexico's profitable relationship with the United States and its other neighbors--will serve as gravy for a country dependent on its exports.

"When you are talking about the largest trading bloc in the world, why shouldn't we be more involved in it?" said Bancomex's Espinosa. "It is not a matter of dividing our export cake differently, but rather a question of making it larger."
Exports to EU countries (in millions of US dollars)

Country 1999 2000 2001 2002 2003

Total EU 5,202.70 5,610.10 5,332.60 5,214.50 5,591.70
Germany 2,093.10 1,543.90 1,504.10 1,263.30 1,753.00
Spain 822.40 1,519.80 1,253.90 1,431.00 1,464.40
Belgium 240.70 227.00 317.80 295.80 137.30
Denmark 49.10 44.70 44.40 37.80 38.90
Austria 10.80 17.00 19.60 15.40 10.20

Country Total '99-'03 Jan.-March 2004

Total EU 26,951.60 1,416.70
Germany 8,130.40 450.70
Spain 6,491.50 385.50
Belgium 1,218.60 37.00
Denmark 214.90 9.60
Austria 73.00 3.30

Source: Economy Secretariat

Imports from EU countries (in millions of US dollars)

Country 1999 2000 2001 2002 2003

Total EU 12,742.80 14,775.10 16,165.50 16,441.60 17,861.90
Germany 5,032.10 5,758.40 6,079.60 6,065.80 6,274.90
Spain 1,321.80 1,430.00 1,827.40 2,223.90 2,288.30
Belgium 305.20 465.60 630.50 556.90 573.00
Austria 170.10 176.80 219.60 186.60 254.80
Denmark 126.50 142.00 169.20 177.40 198.80

Country Total '99-'03 Jan.-March 2004

Total EU 82,499.60 4,512.70
Germany 30,890.20 1,679.40
Spain 9,663.20 571.80
Belgium 2,645.40 114.20
Austria 1,083.90 76.00
Denmark 864.40 50.50

Source: Economy Secretariat

Foreign Direct Investment in Mexico by country and economic region (in
millions of US dollars)

Country/region 1999 2000 2001 2002

North America 7,715.8 12,584.3 21,504.4 8,608.6
Canada 623.3 664.7 988.1 184.9
United States 7,092.5 11,919.6 20,516.3 8,423.7
European Union 3,722.7 2,827.6 4,034.3 3,836.7
Holland 1,008.5 2,582.8 2,558.2 1,153.3
Spain 997.2 1,909.5 754.2 407.7
Germany 753.1 344.4 -151.0 597.3
United Kingdom -193.4 265.8 87.2 1,149.2
France 169.5 -2,520.9 386.9 170.2
Denmark 179.6 201.0 231.8 156.0
Other countries
Switzerland 124.6 132.9 130.2 422.0
Japan 1,232.6 416.8 178.3 149.7
Total FDI 13,205.5 16,585.7 26,775.7 13,628.2

Country/region 2003 Jan.-March 2004

North America 5,516.4 1,587.8
Canada 161.8 -4.6
United States 5,354.6 1,592.4
European Union 3,541.2 4,694.5
Holland 465.8 20.6
Spain 1,389.2 4,546.2
Germany 274.3 78.2
United Kingdom 855.0 3.3
France 315.6 0.0
Denmark 75.4 42.6
Other countries
Switzerland 315.5 1,073.9
Japan 97.7 5.1
Total FDI 9,738.5 7,424.8

Source: Economy Secretariat

Matthew Brayman is a former editor of BUSINESS MEXICO who now lives in London. He can be reached at
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Author:Brayman, Matthew
Publication:Business Mexico
Article Type:Cover Story
Geographic Code:1MEX
Date:Aug 1, 2004
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