The Free Trade Agreement Between Mexico and The European Union

09/01/2001

I. Introduction
 
For Mexico, the Free Trade Agreement with the European Union (“FTAEU”) was a natural step after the North American Free Trade Agreement (“NAFTA”).  After NAFTA, the administration of President Carlos Salinas and the following administration of President Ernesto Zedillo (1994-2000) continued the negotiation of other free trade agreements to take advantage not only of NAFTA, which provided access to one of the greatest markets in the world, but also of Mexico’s strategic geographical position.  These administrations, in a first phase, envisioned Mexico as a commercial bridge between North and Central-South America; in a second phase, as a bridge between America and Europe; and finally, in a third phase which is still in process, as a commercial link between America and Asia. Therefore, between the years of 1994 and 2000 Mexico executed six free trade agreements with nine different American countries, which included Bolivia, Chile, Costa Rica, Colombia, Venezuela, Nicaragua, Salvador, Guatemala, and Honduras. In addition, Mexico has executed the FTAEU and the Free Trade Agreement with the European Association of Free Commerce (“ALLEC”). 
 
Trade between Mexico and the countries comprising the European Union had been decreasing over the last ten years. The total contribution of the European Union in the Mexican market decreased from 10.8 percent in 1990 to only 6.4 percent in 1998.   In terms of investment, direct foreign investment from the European Union in Mexico decreased from US$1,932,350,000 in 1994 to US$1,657,322,700 in 2000, while the investment from the United States and Canada increased from US$5,608,965,000 in 1994 to US$6,776,493,700 in 1999.
 
One of the reasons for the decrease in trade and investment between the European Union and Mexico was the execution of various free trade agreements between other countries, not only by Mexico, but also by the European Union. Mexican products were more likely to be exported to countries that had executed free trade agreements with Mexico, including, among others, the United States. On the other hand, European Union products were more easily exported to other countries that had better tariffs than the ones established with Mexico for the same products. For example, the average tariff applicable to European Union products imported into Mexico before the execution of the FTAEU was twelve percent, while the average tariff applicable to U.S. products imported into Mexico was two percent.    As a result, Mexican policy became more aggressive in looking for other blocs with substantial markets, including Europe.  The European Union is composed of fifteen states with a total population of 370 million  inhabitants and makes up one- fifth  of  the  total  commerce  of  the world. 
 
Mexico and the European Union formally started negotiations on July 14, 1998, which were concluded on November 24, 1999. The FTAEU is composed by three documents: (i) Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union, which entered into force as of July 1, 2000;  (ii) Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, which entered into force as of October 1, 2000;   and (iii) Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, which entered into force on March 1, 2001.
 
II Overview of the FTAEU
 
A. Trade of Goods

 
The FTAEU has the objective of creating a free trade area during a transitional period lasting a maximum of ten years beginning on July 1, 2000.  The FTAEU, like NAFTA, contemplates a gradual reduction of tariffs or customs duties leading to their complete elimination. Such reduction, as will be shown, is not symmetrical. Therefore, there are different commitments, in terms of time and extension, to reduce and/or eliminate customs duties.
 
The FTAEU covers all goods originating in the territory of the parties. The FTAEU classifies goods into the following three categories:  industrial, fisheries and agricultural.
 
Agricultural and fisheries products are subject to specific regulations. In general terms, there is a gradual reduction of the customs duties for these goods until 2010. The agricultural and fisheries areas were among the most complex in  negotiating the agreement due to the Agricultural Common Policy implemented by the European Union which subsidizes European Union exports, representing a threat to the Mexican agricultural sector.   Since liberalization of agricultural and fisheries goods was more limited than that of other types of goods, the parties agreed to take further measures to liberalize those sectors within three (3) years following the effective date of the agreement.
 
Generally speaking, customs duties may be classified as (i) custom duties on exports and (ii) custom duties on imports. All customs duties on exports for products originating either in the European Union or Mexico were totally eliminated as of July 1, 2000.  Customs duties on imports of industrial products originating either in the European Union or Mexico will be gradually eliminated as follows:

(a) For Mexican products, there are three main categories:  (i) Category A, which includes customs duties that were completely eliminated on July 1, 2000, (ii) Category B, which includes customs duties that shall be eliminated in four equal stages, the first stage taking place on July 1, 2000, and the other three stages by January 1 of each successive year, so that these customs duties are completely eliminated by January 1, 2003, and (iii) Other categories with different customs duties to be eliminated no later than 2010.
(b) For European  Union  products, there are five categories:  (i) Category A, which contemplates the customs duties eliminated on July 1, 2000, (ii) Category B, including customs duties that shall be eliminated in four equal stages, the first stage, taking place on July 1, 2000, and the other three stages by January 1 of each successive year, so that these customs duties are completely eliminated by January 1, 2003, (iii) Category B+, which includes customs duties that shall be gradually eliminated by January 1, 2005, (iv) Category C, including customs duties to be gradually eliminated by 2007, and (v) Other categories with different customs duties will be eliminated no later than 2010.

Thus, applicable customs duties depend upon the classification of each industrial product subject to importation.  Most of the customs duties applicable to Mexican products exported to the European Union will be eliminated by 2003, while most of the customs duties for European Union products exported to Mexico will be eliminated by 2007, thereby creating a temporary market advantage for Mexican products.
 
In order to receive the benefits of the FTAEU, all products must originate either in the European Union or Mexico. An originating product is one that complies with the following requirements: (i) the product must be considered originating in the territory of either Mexico or the European Union (complying with the Rules of Origin), (ii) the acquisition of the originating status must be fulfilled without interruption either in Mexico or the European Union (Territorial Rule), and (iii) the products must be transported directly between Mexico and the European Union (Direct Transportation Rule).   In other words, products enjoy the benefits of the FTAEU only when such products comply with all three rules: Rules of Origin, Territorial Rule, and the Direct Transportation Rule.
 
The FTAEU contains other relevant provisions expected in any treaty of this kind such as non-tariff barriers, national treatment for tax and regulatory purposes, antidumping, safeguard clause, requirements clause, customs cooperation, and standards measures, among others.
 
B. Trade in Services
 
The Decision of the Joint Council regulating services entered into force on March 1, 2001.  The objective of the Decision is to reach the necessary agreements with respect to: (i) the progressive and reciprocal liberalization of trade in services, (ii) the progressive liberalization of investment and related payments, (iii) ensuring an adequate and effective protection of intellectual property rights, in accordance with the highest international standards, and (iv) establishing a dispute settlement mechanism.  The objectives of the Decision are consistent with the interests of developed countries, which usually export services, thus the decision is intended not only to liberalize trade in services, but also to offer related protections, such as intellectual property rights.
 
According to the Decision, services will not be immediately liberalized.  The Decision states that the parties shall not adopt any further discriminatory measures that may affect services; therefore, the domestic regulations of services must be at least maintained. The decision establishes as a general rule for services, that the parties shall adopt a future decision providing the terms and schedule of the liberalization process, but no later than three years following the entry into force of the Decision. Furthermore the liberalization process shall take place in no more than ten years from the date the Decision enters into force.
 
The Decision includes all types of services with the exception of (a) audiovisual services, (b) air services, including domestic and international air transportation services, whether scheduled or non-scheduled, and related services in support of air services, other than (i) aircraft repair and maintenance services during which an aircraft is withdrawn from service, (ii) the selling and marketing of air transportation services, and (iii) computer reservation system services; and (c) maritime cabotage. 
 
The Decision also contains specific regulations for maritime transportation  and financial services . It is important to mention that financial services are practically liberalized at the moment of entry into force of the Decision. This liberalization was consistent with the one previously adopted by Mexico, when in January 19, 1999 the Mexican Congress approved modifications to the Foreign Investment Law in order to fully liberalize banking services.
 
III. Features of the FTAEU--Understanding the Differences
 
For several reasons, the FTAEU is the most important free trade agreement that Mexico has executed after NAFTA.  First, the European Union represents a huge market and also a great source of foreign investment for Mexico. It is clear that the execution of the FTAEU will create investment in Mexico by those European companies that will be willing to establish subsidiaries in Mexico to export products to North, Central and South American countries with which Mexico has executed free trade agreements. Second, the FTAEU assures the diversification for Mexican exports, amplifying the potential of the Mexican products and services, which had been heavily absorbed by the North American market. Finally, the agreement recognizes developmental differences between the two parties by providing an asymmetrical liberalization of custom duties, thus providing a relative, temporary advantage for some Mexican products.
 
IV. Impact of the FTAEU for Mexico
 
The FTAEU expressly implies new opportunities for NAFTA countries, as well as other countries with which Mexico has executed free trade agreements. Specifically in the short term, the FTAEU opens the door for United States and Canadian companies to export to the European Union products manufactured in Mexico without paying any or very low custom duties, depending upon each product.  In such cases, the products will have to comply with the rules of origin to be considered Mexican products. That requirement assures that the United States and Canadian companies will have to invest in Mexico to manufacture such products, which will create massive employment opportunities for Mexico with all the derivative benefits associated with the investment in the country. Likewise, European Union companies will manufacture products in Mexico in order to access the United States, Canada and other countries with which Mexico has free trade agreements. In the opinion of the author, the FTAEU will significantly increase the investment coming from the European Union countries in Mexico in comparison with investment coming from the United States and Canada because there already is more foreign investment in Mexico from the United States and Canada than from the European Union. From 1994 to 2000, United States and Canadian investment in Mexico represented 64.7% of the total direct foreign investment in the country, while during the same time the European Union investment in Mexico represented only the 21.3% of the total direct foreign investment. The FTAEU will be an instrument to promote the European Union investment in Mexico.
 
V. Conclusion
 
Commercial liberalization in the international arena is unavoidable. Globalization is a reality and America has to be part of the process. NAFTA was essential for the execution of other commercial agreements in America. Retrospectively, Mexico started its economical modernization process in 1982, and NAFTA was the culmination of Mexico’s twelve year economic, social and political transformation. However, the process is not over. As a matter of fact, after NAFTA, the transformation process for Mexico entered a fast track with the free market approach becoming more deeply ingrained by the executive branch, promoting the execution of eight free trade agreements in America and Europe as well as  contemplating the execution of others.
 
The FTAEU has been for Mexico the most important free trade agreement executed after NAFTA, not only because the European Union is the second commercial partner of Mexico  but also because of its synergies with NAFTA. The FTAEU creates many business opportunities for European Union and American companies. Such opportunities will generate more foreign investment and trade for Mexico, converting Mexico into a geographical and economical bridge, not only between North and Central-South America, but also with Europe.  Because Mexico is the only country in America that has free trade agreements with the European Union, and the United States and Canada, the FTAEU will undoubtedly benefit Mexico and its commercial partners.
 
Endnotes

  • Free Trade Agreements executed by Mexico with American countries: (i) Free Trade Agreement with G3 (Venezuela and Colombia), executed on June 13, 1994, in force as of January 1, 1995; (ii) Free Trade Agreement with Bolivia, executed on September 10, 1994, in force as of January  1, 1995; (iii) Free Trade Agreement with Costa Rica, executed on April 5, 1994, in force as of January 1, 1995; (iv) Free Trade Agreement with Nicaragua, executed on December 18, 1997, in force as of July 1, 1998; (v) Free Trade Agreement with Chile, executed on April 17, 1998, in force as of July 28, 1999; and (vi) Free Trade Agreement with Salvador, Guatemala and Honduras, executed on May 10, 2000, in force as of January 1, 2001. Mexico also executed a Free Trade Agreement with the European Association of Free Commerce (“ALLEC”), which is formed by the European countries not members of the European Union: Island, Norwegian, and Switzerland. The agreement was executed on November 27, 2000 and is still in process of internal approval. See Sergio López-Ayllón, id., and http://www.economia-snci.gob.mx.
  • Secretaria de Economia (Secretariat of Economy in Mexico). http://www.economiasnci.gob.mx/Negociaci_n/Uni_n_Europea/C…/comercio_mex-ue.htm
  • Secretaria de Economia (Secretariat of Economy in Mexico). General Direction of Foreign Investments. Investment from North America in Mexico. http://www.economia-snci.gob.mx.
  • Secretatia de Economia (Secretariat of Economy in Mexico). http://www.economia-snci.gob.mx/Negociaci_n/Uni_n-Europea/C…/comercio_mex-ue.htm
  • Secretaria de Economia (Secretariat of Economy in Mexico). http://www.economia.snci.gob.mx/Negociaci_n/Uni_n_Europea/Datos…/datos_b_sicos.htm
  • Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated September 30, 2000.
  • Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated February 28, 2001.
  • Article 2 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union. Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Secretaria de Economia (Secretariat of Economy in Mexico). Unofficial version of the Free Trade Agreement with the European Union dated November 29, 1999.
  • Article 10 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union. Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Article 3 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union. Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Article 5 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union. Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Article 6 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union.  Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Article 3 of the Decision 2/2000 of the Joint Council of the Interim Agreement of Commerce and Issues Related to the Commerce between Mexico and the European Union. Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated June 26, 2000.
  • Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated February 28, 2001.
  • Article 1 of the Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, Diario Oficial de la Federación (Federal Official Gazette-Mexico), dated June 26, 2000.
  • Article 7 of the Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated, June 26, 2000.
  • Article 2 of the Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated, June 26, 2000.
  • Article 10 of the Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, Diario Oficial de la Federación (Federal Official Gazette-Mexico), dated June 26, 2000.
  • Articles 11 and 12 of the Decision of the Joint Council of the Agreement of Economic Association, Political Understanding and Cooperation between Mexico and the European Union, Diario Oficial de la Federación (Federal Official Gazette-Mexico) dated  June 26, 2000.
  • See footnotes 5 and 10. Mexico has also contemplated to have negotiations with Japan in regards with a possible bilateral free trade agreement (See Yerkey, Mexico, Japan agrees to launch talks on investment accord, consider trade pact, 16 Int’l Trade Rep. 1471 (Sept. 15, 1999).
  • See Secretariat of Economy in Mexico. http://www.economia-snci.gob.mx/Negociaci_n/Uni_n_Europea/Rel_c…/rel_commercial.htm
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