The Mexican Economy after NAFTA with a Focus on the Aerospace Industry - Essay Example

The Mexican economy after NAFTA with a focus on the Aerospace industry Mexico is located in the southern part of North America. To the north of Mexico are the bordering states of New Mexico, Texas, California, as well as Arizona. Moreover, the Pacific Ocean surrounds its south and west, and in the east is the Gulf of Mexico. Mexico’s geographical position is very crucial, as it is able to carry out air, road, as well as sea trade with no setbacks at all. These geographical position factors play a very significant part in the economy of Mexico. Another factor that has been beneficial for Mexico’s economy is that, North American Free Trade Agreement (herein after) facilitated the booming aerospace industry in Mexico. What is more, Mexico has been in the aerospace as well as defense business since the 1970’s, yet in this review we re-examine Mexico’s Aerospace Industry beginning with the year 2000. Since then the industry has grown from 100 U.S, Canadian as well as European manufacturers in 2004 to roughly 300 in 2013 (Moloman, 2013). Even though some consider NAFTA as double edge blade for Mexico’s economy, it undoubtedly opened up opportunities for Mexico’s aerospace industry. This paper will review how this came about as well as how Mexico’s economy improved due to the factors stated above (Mexico’s unique geographical position as well as the NAFTA agreement); additionally, review how these factors may impact the future of Mexico’s aerospace industry as it anticipates to become an advanced country. Economy of Mexico According to the World Bank, Mexico has the fourteenth largest economy in the world supposedly and is listed as tenth in the world with regard to purchasing power. Even though Mexico had a $93 billion trade superfluous with the United States in 2010, in general it endured a trade shortfall. Mexico dropped from the twelfth biggest exporter in 2000 to the fifteenth biggest exporter in 2010, with its allocation of worldwide exports declining from 2.61 percent to 1.96 percent. Cheaper imported consumer and intermediate goods (inputs) also undermined the domestic industrial base. Falling wages, stagnation, growing unemployment rates as well as escalating migration from 2001 throughout 2008 revealed the letdown of NAFTA’s export-led strategy (Cypher, 2011, n.p). Following, the global 2008 economic recession, Mexico’s economic woes were further compounded, which impinged on its gross domestic product (GDP) significantly lessening it to 6% (Anyul). Despite these facts, Mexico is shaping up to be a flexible as well as competitive airplane manufacturer around the world (Lanthemann, 2014). Introduction to the NAFTA Agreement The main reason behind the establishment of NAFTA was to promote the economy positively and to promote domestic trade within the country to promote local producers and to advance investment from foreign and domestic sources as well. After a period of two decades of its implementation, NAFTA has played has played an important role in increasing the intraregional trade between Canada, Mexico and United States. The major strides taken by NAFTA have greatly improved the trading factors within the member states which have made companies, especially, in the manufacturing industry grow tremendously. The free trade agreement was signed in 1992 by President George Bush, Carlos Salinas de Gortari, President of Mexico as well as the prime minister of Canada Brian Mulroney. It was ratified in 1994 under President Bill Clinton with the agreement that free trade would be permitted with the signing countries. The agreement abolished tariffs on the traded products which would benefit all the countries involved in this agreement which has played a significant role in advancing the trade (Anyul, 2001). NAFTA has played a key role in increasing trade. Though it’s very difficult to understand the impact of NAFTA on Mexico’s economic growth and to determine the increase as well as growth of economy with the aid of NAFTA, it can be easily concluded that intraregional trade rate between NAFTA member states has increased immensely. In the first two decades of the agreement, the trade flow increased at a very rapid rate, from $290 billion in 1993 to $ 1.1 trillion in 2002. This is a great outcome and success of the signed treaty (Moreno-Brid, 2005). This has also served beneficially in increasing the international investments in Mexico which has proved and marked golden success for the country. This treaty has provided the United States with great confidence to carry out trade with Mexico and Canada at a much higher rate as compared to other countries of the world. The basic reason behind this factor is the NAFTA agreement which by eliminating the tariffs greatly benefitted both producers and buyers. Consequently, there was an increase in imports and exports from a mere $1.7 billion U.S surplus in the year 1993 to a $61.4 billion difference in the year 2012 (Anyul, 2001) At the time of agreement signing, NAFTA promised Mexico that the per capita income of the country would increase rapidly as well as tremendously but the per capita income of Mexico increased annually by only 1.2 percent in a period of two decades from an amount of $6.932 in 1994 to an amount of $8.397 in 2012. This per capita income increase is far less compared to the improvement in per capita income of the countries such as Peru, Chile, and Brazil. Another major factor which was not followed as promised by NAFTA was that it would discourage the immigration of people from Mexico to America which it failed to do. Both Legal as well as illegal immigration escalated exponentially from Mexico to the U.S. (Moreno, Santamaria, and Rivas, 2005). Some of NAFTA’s rules just to name a few which allowed this boom can be enumerated as follows: Duty free, Reduce barriers to trade, Increase cooperation for improving working conditions in North America, Expand a safe market for goods and services produced in North America, Establish clear and mutually advantageous trade rules as well as Develop and expand world trade catalyst for broader international cooperation. These rules, under the agreement, opened the door for the aerospace industry (Moreno, Santamaria and Rivas, 2005). Mexico’s Aerospace Industry and its new awakening Mexicos geographic closeness to the United States as well as high levels of internal wage in addition to skill disparity made its airplane manufacturing sector more viable than Chinas after 2012. The detonator for all of this is the increase of the worldwide aerospace demand that is experiencing more or less all OEM’s reminiscent of Bombardier, Boeing, Embraer, Airbus, etc. Scores of them are building up their fleets as well as placing large orders in reaction to the requirements of new emerging markets. Moreover, this scenario is also spurring the growth as well as development of the aerospace suppliers that are instituting manufacturing operations in Mexico such as SAFRAN, General Electric, Honeywell, United Technologies, etc. In addition, some of the key players in the aerospace industry in Mexico are Bombardier, Honeywell, Eaton, Safran Group, Rockwell Collins, GE Aircraft Engines, Textron United Technologies, as well as Snecma, Textron International, Hawker Beechcraft, Cessna Aircraft, etc. Furthermore, there are currently over 70 foreign aerospace suppliers constituting of approximately 250 international aerospace companies, organized in groups, where the major aerospace cluster is situated in Baja California. Aerospace parts manufactured in Mexico include, among others, turbine fuselage, harnesses, landing gear components, audio and video systems, cables, insulation panels, heat exchangers, as well as interior parts, etc, and at the same time industry is gearing up for the next big step consisting in design as well as assembly of entire aeroplanes (Moloman, 2013). Up till now, Mexico seems to have established a way to steering clear of the Chinese curse of relying on low-cost manufacturing. Moreover, its high-tech exports contributed to 17 percent of Mexican GDP in 2012, whereas cars totaled to a quarter of the entire Mexican exports that same year. Moreover, high tariffs on high-tech merchandise manufactured outside of NAFTA gives Mexico a remarkable benefit. Above all is Mexicos flourishing aerospace industry. This segment has received the most foreign direct investment (FDI herein after) in the global industry for the last four years due to the erection of a massive manufacturing plant by the Montreal-based company Bombardier in the central highlands of (Querétaro) Mexico in 2006 (Lanthemann, 2014). Bombardier is worlds third-biggest airplane manufacturer. It ventured into Mexico, betting that a combination of reduced labor costs, local engineers, as well as closeness to markets in the north and south are the precise combination for the Learjet 85, Bombardiers latest corporate jet, that was due out in 2013. Moreover, Half ago, Bombardiers site in Querétaro was dry cactus fields. At this moment it is a thriving assembly line of half-built fuselages as well as a workforce of 1,600. It is the newest project of Mexicos promising aerospace industry, a sector that has averaged 20% growth the past five years whereas luring the likes of Textron Inc.s Cessna Aircraft Co., engine-maker General Electric Co., and a range of suppliers outsourced by giants Boeing Co.  as well as Airbus, an entity of European Aeronautic Defence & Space Co (Casey, 2011) (Gallagher, 2002). While Mexico has a long way to go to contend with aerospace industry bigwigs in the U.S.as well as Europe, it gained $1.15 billion in FDI for aerospace in 2010; the maximum of any nation for the second successive year, according to the Mexican government. At present, Mexico exports roughly $3.5 billion worth of aerospace gear per annum, according to the Mexican Aerospace Industry Association, positioning it at Number 12 in worldwide rankings. Currently, the risks are elevated for Mexico, which is gambling that higher-end industries similar to aeronautics will be a major ingredient of its future. From the 1990s, Mexico has thrived on low-end manufacturing with its supposed maquiladoras (border factories for essential assembly) however in the last ten years it has relinquished part of that terrain to Chinese factories, which are frequently cheaper. As a result, Mexico is implementing airplane manufacturing in Querétaro, a colonial-age city now a habitat to approximately 1.1 million inhabitants and located a couple hours drive from the Mexican capital. Economically, Querétaro is more affluent than most Mexican cities; in addition to that educational standards are higher, mostly for engineers. The main attraction is price. What is more, company executives suggest that its cost of labor presents savings of 25% - 30% over the U.S. as well as at least 30% more than Japan. Furthermore, closeness to North American companies implies shipments can arrive in days, not weeks; moreover executives can organize plans in working hours (Casey, 2011). Additionally, companies such as Honeywell as well Bombardier have invested in training programs and the Mexican government is also investing in aerospace affiliated programs at Mexican universities. In the chart in the appendix the enrollment in aerospace engineering has had an important increase. For example in 2007 the enrollment was at 1000 students per year and recently in 2012 the enrollment increased to 3,500 students per year. Another chart in the appendix shows the number of Mexican universities that have added or expanded their aerospace engineering programs (Casey, 2011). Some cons of NAFTA include: Since the beginning of the NAFTA agreement the country’s economy has grown to an estimated of 2.6 percent and still is increasing with the passage of time. Along with benefits gained from the agreement NAFTA has also caused several negative draw backs for the country. These include persistent and high poverty levels for a budding industrial economy. This is further exacerbated, by the continued existence of economic disparities which are visible throughout the country. Challenges still persist for Mexico, income inequality is a double-edged sword, and while the middle class grows at a slow pace, Mexicos poor education system persistently to creates a scarcity of skilled labor for high value-added manufacturers considering a shift to Mexico. Organized crime continues to be an issue that could slow foreign investment (Strafor weekly, n.p) Some pros of NAFTA include: This trade pact which is signed between the three major countries which include United States, Mexico and Canada has resulted in the making up of a huge economic force which includes a number of 470 million people and an economy consisting an estimated $19 million trillion which is a very high rate possessed by the economy. This increase in trade happened to take place because of the agreement signed as because of it the tariffs were to be lowered down therefore the trading within these three countries increased rapidly and started fulfilling the requirements of each other as a result of which these three countries became self-sufficient and the requirement to trade from other countries was not required. This process of trading on lower tariffs caused great benefits to the countries that were able to maintain a high level of economic standards, this enabled them to get economically stable and start their own industry of huge machinery and equipment among which the production of aerospace played a very important role. The starting of an industry to set up the making of aerospace is not at all an easy task and requires lots of finances to be invested in it to start and then more investment to produce good outputs from the industry. But there is more promise of Mexico’s aerospace industry boom. Since the passing of the Wassenaar agreement, more international including from Europe will be able to invest in Mexico’s aerospace industry thus benefitting Mexico further more (Wassenaar.org). This bright future planning indicates the benefits which the country has gained from the agreement of the NAFTA signed by the country. NAFTA has given a boost to the process of Mexican globalization and has also effected the dissertation of the politicians and also the population. Another major effect caused by the agreement to be signed is that the Mexicans have become more pro Americans as compared to what they have been in the past (Waldkirch, 2010). Conclusion: NAFTA has proved to be a very beneficial agreement that was signed by the three major countries of the world who timely took the decision to sign this treaty for their betterment. This treaty increased the intraregional trade and made the countries to give a boost to their economy and become self-sufficient. This factor not only benefitted the country, its government, but along with this the people of these countries also benefitted and plus they took a major step in becoming allies of each other. There is no doubt that Mexico did prosper with the agreement but along with the positive factors some negative factors were also witnessed. The country was able to gain success and prosperity in various sectors especially in the aeronautical industry which turned out to be a very big achievement and needs to be appreciated a lot. The North American free trade agreement proved to be a very good and positive decision in opening the door to this industry. This self-sufficiency is not only enjoyed in the trading sector but also financially as Mexico faces no challenges which is very favorable and beneficial for any country to prosper. This has also been beneficial in increasing the international investments in Mexico which has proved and marked golden success for the country. This agreement has provided the U.S. with great confidence to carry out trade with Mexico and Canada at a much higher rate as compared to other countries of the world. Though there are several factors on which the country needs to work and prosper. These factors if accomplished and made worthy can make Mexico among the most noteworthy countries of the world progressive not only in economic sector but over all a safe and appealing infrastructure to be vested in. References Anyul, M. P., & Punzo, L. F. (Eds.). (2001). Mexico Beyond NAFTA. Routledge. Casey Nicholas. “Low Labor Costs Attract Bombardier, Which Employs 1,600; Fuselages Where Cacti Once Stood”. Wall Street Journal. July 29, 2011. http://online.wsj.com/news/articles/SB10001424053111904233404576458561238682634 Cypher, James M. "Mexico Since NAFTA: Elite Delusions and the Reality of Decline." New Labor Forum. Vol. 20. No. 3. The Murphy Institute/City University of New York, 2011. Gallagher, K. P. (2002). Industrial pollution in Mexico: Did NAFTA matter?. Greening the Americas: NAFTA’s Lesson for Hemispheric Trade, 119-141. Lanthemann, Marc. " NAFTA and the Future of Canada, Mexico and the United States” Stratfor Global Intelligence. N.p., n.d. Web. 28 Apr. 2014. http://www.stratfor.com/weekly/nafta-and-future-canada-mexico-and-united-states Marc Lanthemann."20 Years after NAFTA." The Dallas Morning News. N.p., n.d. Web. 28 Apr. 2014.www.stratfor.com/weekly/nafta-and-future-canada-mexico-and-united-states Moloman, Adina. “The Aerospace sector in Mexico” N.p., Web. October 24, 2013.  http://www.madeinmexicoinc.com/aerospace-sector-mexico/ Moreno‐Brid, J. C., Santamaria, J., & Rivas Valdivia, J. C. (2005). Industrialization and economic growth in Mexico after NAFTA: the road travelled. Development and Change, 36(6), 1095-1119. "ProMéxico: Inversión Y Comercio." ProMéxico: Inversión Y Comercio. N.p., n.d. Web. 28 Apr. 2014. "The Wassenaar Arrangement | Homepage." The Wassenaar Arrangement | Homepage. N.p., n.d. Web. 28 Apr. 2014. Waldkirch, A. (2010). The effects of foreign direct investment in Mexico since NAFTA. The World Economy, 33(5), 710-745. Appendix Read More