Mexico Trade and Economic Overview (June 2015)

Mexico Trade and Economic Overview (June 2015) 1. Economic performance The Mexican economy is highly concentrated in services, accounting for 62% of GDP, then industry 34% and agriculture only 4%. Mexico is the 8th largest oil producer in the world. Oil revenues remain its main source of income, followed by remittances and tourism Mexico is the 14th most visited country in the world 1. Close to 60 % of the active workforce is employed informally and according to experts has contributed to an average of 25% of the national GDP. 11% corresponds to unregistered businesses and another 14% to informal employment. The sector with the highest informality is the agricultural sector with over 93% of its value-added generated informally, followed by domestic, repair and maintenance services with almost 79% of its economy generated informally. As of March 2014, nearly 29 million people were in the informal sector of whom more than 23% work for governmental and public institutions. Area Length of borders Population (2010) Basic Economic Facts 2 million square km 4,353 km 112,3 million, most recent official figure (source INEGI) IMF estimates 119.7 million in 2014 Economy 2014 GDP in USD billion, 1,283 GDP growth rate, +2.1% GDP per capita US$ 10,714.83 Exports of goods USD 397.5 billion, 31% of GDP Imports of goods USD 400 billion, 31.2% of GDP Trade Balance, USD -2.5 billion Public debt is 36.3% of GDP Annual Inflation 4.1% Unemployment rate 4,4 % Ease of doing business, Mexico is ranked #39 out of 183 countries Politics Federal Presidential Representative Democratic Republic Head of State: Enrique Peña Nieto Next presidential elections in July 2018 Major parties: Partido Revolucionario Institucional (PRI)- current administration; Partido Acción Nacional (PAN); Partido de la Revolución Democrática (PRD) Local government structure Legislative power Socio-Economic Indicators 32 federal entities 31 states 1 federal district 628-seat bicameral congress Human Development Index (2013) 0.756 (high) % Population at national poverty line: 42% Life expectancy: 77.5 years % Population living on less than 2US$/day: 6.5% Poorest States: Chiapas, Guerrero, Oaxaca, In 2014, the manufacturing sector, in particular the automotive 2 and textile sector (maquiladora), as well as services benefited from the recovery in the US economy and expanded by 3.7% and 2.2% respectively. Yet, household net income was hit by the tax increase of early 2014, impacting negatively on domestic demand. Investments have proved lower than expected due to a contraction of construction works. Besides, the combination of lower oil exports and lower price coupled with increased imports, has led to the lowest oil surplus in 22 years. Consequently, GDP grew by only 2.1%, far from the forecast of 3.9 % at the beginning of the year. 1 Based on 2013 international tourism arrivals World Bank data 2 The automotive sector, which in recent years has flourished, and still is, beyond all expectations, now contributes to around 4% of the country's GDP. 2014 was another record year for Mexican automotive industry, with a production of close to 3.3 million units (8.4% growth compared to the previous year). Mexico is now the 7th biggest producer (overtook Brazil in 2014 and expected to overtake South-Korea next coming years). Around 2.6 million cars were exported in 2014 (1,8 million for the US-market, 2nd exporter after Japan) and the sector remains on top with 21.6% of the export share. Industry estimates that Mexico will produce 4 million cars by 2017 and 5 million by 2020. 1

In the 2015 forecast, the Mexican government expects higher growth boosted by the structural reforms undertaken in 2013-2014, increased foreign investments (mostly in Energy and Telecom) and a stronger US economy. Nevertheless, the continued drop in oil price, the subsequent weakening of the Mexican peso (though good for exports), and the budget cuts will probably result in a lower than expected growth. Consequently, Ministry of Finance, Banxico and most analysts have already revised their forecasts downwards. Growth is now expected to be between 2% and 3% in 2015. SHCP has also recently cut its projections by 1pp to 2.2-3.2 as well as OECD, down from 3,9 to 2,9%. On a positive note, inflation is low at the official benchmark of around 3 % and is expected to be even lower towards the end of the year. 2008 2009 2010 2011 2012 2013 2014 GDP growth (%) 1.2-6 5.3 3.9 3.9 1.4 2.1 Inflation Rate (%) 6.5 3.6 4.4 3.8 3.6 3.8 4.1 Fiscal Deficit (% GDP) 0.1 2.3 2.8 2.5 2.4 2.1 3.2 Public Debt (% GDP) 18.1 27.3 29 30 32.6 36.9 38.3 Current Account (% GDP) -1.7-0.7-0.4-1.1-1.3-2.1-2.1 Source: INEGI, BANXICO, SHCP and World Bank 2. Trade figures, direction and composition a) Overall trade Mexico's main trade partners are the US (64%), China (9%) and the EU (8.1%). When it comes to the destination of its exports, the US accounts for over 80% of total share, the EU 5.1%, Canada 2.7%, the Pacific Alliance 2.2% and China 1.5%. In 2014, 48.8% of its imports originated from the US, 16.6% from China, 11% from EU, 4.4% from Japan and 2.5% from Canada. Mexico s total trade in goods accounts for around 31% of its GDP. In 2014, total trade amounted to USD 797.5 billion, an increase of 4.8% compared to 2013. Mexican total exports amounted to USD 397.5 billion, a 4.6% increase compared to 2013 and imports totalled USD 400 billion and recorded a 4.9% increase compared to 2013. Its total trade deficit increased to USD 2.5 billion in 2014, compared to the deficit of USD 1 billion in 2013. However, during the last ten years Mexico has regularly recorded trade deficits so the negative balance in 2014 is not triggering any alarm bells among Mexican industry circles or the Mexican government. Mexico's total trade for the first quarter of 2015 amounted to USD 183 billion (more or less at the same level as the same period in 2014). Overall exports for the same period totalled USD 90.4 billion, a decrease of 0.4%, while imports totalled USD 92.6 billion, an increase of 0.6%. In 2014, 48% of Mexico's exports were intermediary goods, 24% consumer goods and 28% were capital goods. Manufactured goods, which represent approximately 85% of Mexico's total exports, increased by 7.2% while oil-related exports decreased by 13% in terms of value. The vast majority of imports consisted of intermediary goods (75.5%), followed by consumer goods (14.6%), and capital goods (9.9%). Manufactured goods (especially Electric & electronic equipment followed by machinery for industry and the auto sector) represented almost 86% of all imports, followed by oil with 10.4% and agricultural products with 7%. 2

Despite the positive balance in services with the US, Mexico is a net importer of services from the rest of the world, in particular from the EU. Mexico's trade in services with the EU is mainly related to transport and travel services. Mexico ranks 21 st out of 123 countries on the WTO ranking for importing services and 24 th for exporting services including transport, financial services and tourism. In 2014, Mexico' services trade balance with the world reached a deficit of 13.9 billion USD 3. Remittances from Mexicans overseas are the main component of the Mexican current transfer surplus and reached a historical high in 2014 with an increase of 12.7% compared to 2013 and a total value of USD 23.6 billion. b) EU-Mexico trade Mexico ranks 15th among the EU's trade partners (16th in exports and 21 st in imports). In 2014, bilateral trade between the EU and Mexico grew by 3.2%, reaching nearly USD 65 billion compared to USD 63 billion in 2013. Both exports and imports grew around the same rate (3.2% for Mexican exports and 3.3% for Mexican imports). As for Mexico's trade deficit with the EU, it increased from USD 23 billion in 2013 to USD 24.1 billion in 2014. Overall trade has increased by close to 251% since the enter into force of the FTA (from USD 18,5 billion in 1999 to USD 65 billion in 2014). During the first quarter of 2015, bilateral trade EU-Mexico totalled USD 14.7 billion, which represents a decrease of 2% compared to the same period in 2014, due to a 3% decrease in Mexican exports and 1.2% decrease in imports. The EU remains Mexico's second largest export market, with a share of 5.1% of total exports (USD 20.4 billion). Main Mexican exports to the EU consist of crude oil (30%) followed by machinery and transport equipment (22.8%) and electric and electronic equipment (10%). Only 5% of Mexican exports to the EU are agricultural products, consisting mainly of processed foods and beverages. On the import side, the EU is an important provider of capital goods and intermediate products, which enter into the production process of Mexican assemblers exporting to the US. In this sense, the trade deficit Mexico has with the EU is largely offset by its surplus with the US. In 2014 imports from the EU totalled USD 44.6 billion and increased by 3.3% compared to 2013. Industrial machinery represented 23% of all imports, followed by electric equipment with 14%, the automotive sector with 10% and the oil sector with 7%. 3. Trade Policy Mexico joined the GATT in 1986 and has since been an active and constructive participant in the multilateral trading system (WTO) and particularly the Doha Development Round. Mexico is signatory of the GATS; is a member of the Asia-Pacific Economic Cooperation (APEC) and the G20. By joining the Trans-Pacific Partnership (TPP), Mexico seeks to deepen its economic integration with the Asia-Pacific Region and strengthen its insertion into the global value chains. The TPP aims at going beyond the liberalisation of goods and services by covering many fields such as behind the border barriers, intellectual property, services and public procurement. Mexico is also member of the Pacific Alliance (PA), a regional integration initiative with Chile, Colombia and Peru that promotes growth, development and competitiveness through economic and trade integration with an emphasis on the Asia-Pacific region. 3 Source: OECD 3

Over the last decade, Mexico's free trade and investment-friendly strategies and sound macroeconomic policies have consolidated the country's export vocation. Its open economy has rewarded Mexico with increased competitiveness and FDI attractiveness, despite internal issues related to security and difficulties of competing in the domestic economy. Mexico has a broad network of Free Trade Agreements (FTA); 10 FTAs 4 in force with 45 countries. Mexico is currently negotiating FTAs with Jordan, Turkey and is part of the TPP negotiations. Additionally it has Economic Complementary Agreements in the framework of the Latin American Integration Association (LAIA). The most prominent ones concern the automotive sector (quota agreements with Argentina and Brazil until 2019) and will start negotiations in July 2015 with Brazil to further reduce tariffs for 6,000 products including industrial and agricultural products. The numerous trade agreements signed by Mexico have led to substantial trade liberalisation; it ranks 15 th in exports and 14 th in imports in world trade. Further to the implementation of a widerange of free trade agreements, Mexico has unilaterally reduced or eliminated tariffs on goods. Mexico aspires to become among the 10 biggest economies in the world by 2020. 4. Foreign investments in Mexico Even though the US remains the main source of FDI in Mexico with 45.6% share accumulated between 2000 and 2014, the EU follows closely with 39%. In 2014, the EU investments reached 47% of total FDI (compared with 29% from the US). Most European investments in 2014 belonged to the financial, energy and auto sectors. Foreign investors may hold up to 100% of the equity of Mexican companies in all economic activities that are not expressly reserved or subject to specific regulations. Hydrocarbons has opened to foreign capital since the energy reform; others are reserved to Mexican capital, including domestic and land transport; some economic activities like cooperative and aerial transport maintain limits from 10 to 49% on foreign investment participation. According to the OECD, in 2012 Mexico was the eighth OECD member with the highest FDI restrictiveness index mainly on energy, financial sector and transport. The reform efforts, however, have removed many of these barriers to market entry and are likely to alter the index in the near future. 5. Measures affecting trade Mexico grants MFN treatment or better to all countries, whether or not they are WTO members. In 2013 5, Mexico has bound all its tariffs at an average rate of 36.2% for all goods. The MFN applied tariff is 7.9% for all goods. However, the MFN applied tariff for agricultural goods is at 19.7%. Mexico is a frequent user of anti-dumping measures. In June 2015, Mexico had 50 antidumping measures in force, 3 countervailing duties and no safeguards, with 45% of the measures against goods of Chinese origin, notably in the steel and metal sector 6. 4 NAFTA, EU, EFTA, Japan, Israel, Uruguay, Colombia, Peru, Chile, Central America (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua). The recently concluded FTA with Panama has not yet come into force and is therefore not counted among the 10 FTAs. 5 Source: WTO, September 2014 data 6 Source: Secretaria de Economia 4

Mexican official standards (NOMs) are the procedures for adopting technical regulations. Agricultural products many times face stricter requirements than international recommendations (SPS-measures) and overly cumbersome and costly procedures (i.e. no facility for pre-listing, not recognising regionalisation, etc) de facto impede EU exports. Mexico is not signatory, nor observer of the WTO Agreement on Government Procurement. Procurement at sub-federal level is only open to Mexican nationals. The EU-Mexico FTA provides for participation of EU companies in procurement at federal level. Mexico is participating in the Trade in Services agreement (TiSA) but it is not member of the Information Technology Agreements (ITA). Since the economic crisis, Mexican Government has given administrative facilities for external trade, making customs procedures more effective. As part of these measures, the Digital Single Window was launched as a single electronic entry point to perform all trade related procedures. Mexico has also subscribed to the decisions (including the Trade Facilitation Agreement) emanating from the 9 th Session of the WTO Ministerial Conference held in December 2013 in Bali. Also, the government decided to unilaterally reduce and gradually eliminate, by 2013, MFN import tariffs affecting over 70% of industrial products. However, in 2014 and 2015, the government decided to revert to import controls in sensitive sectors such as shoes and textiles. 6. The future of the EU-Mexico trade relations The EU-Mexico FTA foresees review clauses to further liberalise agriculture, services and investment. Discussions/negotiations on these issues, where the content of the FTA is quite modest (notably as regards agriculture, services and investment), have taken place on an "on and off basis" since 2005 but the sectorial approach makes it difficult to reach a balanced outcome. In the meantime, world trade policy has moved on and recent FTAs that the EU has concluded are much more sophisticated, in particular the CETA and what the EU are hoping to obtain with the US. In the EU-CELAC summit in Santiago in January 2013, President Barroso and President Peña Nieto decided to explore the options for modernizing the EU-Mexico Global Agreement, including the trade part, and to establish an EU-Mexico Joint Working Group (WG) in order to elaborate a Joint Vision report (JVR). Several WG meetings took place in the course of 2014-2015 and the JVR was finally concluded in time for the VII EU-Mexico summit that took place on 12th July 2015 in Brussels. The joint declaration following the Summit contained the following statement: "..to launch, in 2015, the process of starting negotiations, according to the legal framework of each side". Consequently the EU now needs to follow its internal procedures regarding impact assessment and the work will continue for presenting a proposal to the Council for a negotiating mandate in due time. 5