Is Mexico ready to diversify its relationships beyond America?

After the North America Free Trade Agreement (NAFTA) between Canada, Mexico and the US went into effect in 1994, Mexico’s attention has been concentrated mainly on the US market. As a result, it has turned a blind eye to Latin America and the rest of the world.

According to the World Bank, 80% of Mexican exports go to the US market and 47% of its imports come from this same market.

There have always been concerns regarding Mexico’s heavy dependence on a single market since any economic recessions or market failures in the US economy – a clear example being the Great Recession of 2008 – have a negative impact on the Mexican economy.

But, until now, Mexico never had to worry about the US questioning the benefits of NAFTA since the US has been historically the most ardent supporter of free trade.

This, however, no longer seems to be the case since the US President Donald Trump criticised NAFTA as being “the worst trade deal” signed by the US and has begun the process of renegotiating the 23-year-old agreement.

The net consequence of this has resulted in the economic links that has united the three North American economies being questioned.

Mexico now has to worry about having its economy tied to a United States whose leader is unpredictable and who has questioned, at least in his discourse, one of the core principles of the current liberal world order which is economic integration through free trade.

With the future of NAFTA uncertain, Mexico will finally be forced to look towards Latin America for new economic opportunities. This shift presents its own challenges since Mexico’s foreign policy towards its southern neighbours has been ambitious but has lacked a clear strategy. As a result, Mexico’s status as a regional power has been eroded, as seen by its exclusion from the Union of South American Nations (UNASUR) and by Brazil’s attempts of establishing South America as its own sphere of influence.

However, the Pacific Alliance (PA), an initiative that began to take shape in 2011, provides an opportunity for Mexico to diversify its trading partners and to regain its status as a regional power. The alliance is composed by Chile, Colombia, Mexico and Peru – all of which share a Latin American cultural identity, a democratic form of government, and a liberal economic model.

The PA aims to establish a deep form of integration that allows the free movement of goods, services, resources and people. It aims to serve as a launching pad for its members to insert themselves in the dynamic Asia-Pacific region.

As a bloc, the PA ranks as the world’s eighth largest economy, has a population of 225 million people, represents 39% of the region’s GDP, 50% of the region’s trade, and receives 44% of the region’s foreign direct investment.

This new regional integration initiative is a break from the past in that it is actually producing concrete results. Its major accomplishments include 92% of goods being able to be traded freely among its four members; integrating the four members’ stock exchanges to create the Latin American Integrated Market, which is now the largest stock exchange in Latin America; agreeing to establish a fund to be used for natural disasters; and establishing shared embassies in some countries.

The economic potential of the PA has not gone unnoticed since 52 countries are now observing members and negotiations to accept Australia, Canada, Singapore and New Zealand as associate members have begun.

Based on data from the World Bank, Mexico’s $1.046 trillion GDP makes up 59% of the PA’s total GDP, and Mexico’s population of 127 million people make up 56% of the bloc’s total population, which makes Mexico the uncontested giant. As the second largest economy in Latin America, Mexico has the economic resources and experience to be the leader that the alliance needs to continue the process of regional integration.

The PA is still in its early phase, so it will have to overcome major obstacles before it can achieve the deep form of integration that it seeks. According to the World Bank, trade flows between Mexico and Chile, Colombia, and Peru are insignificant since these three countries combined make up a mere 0.76% and 1.67% of Mexico’s total imports and exports respectively.

But since the economic composition of its members is diverse – Mexico exports manufactured goods while the other three’s exports are concentrated in raw materials and intermediate goods – there are opportunities of establishing high-value production chains that complement their respective economies in the near future.

Having the world’s largest economy as a neighbour and partner has made Mexico economically complacent. After NAFTA, the Mexican elite did not see the need to look elsewhere since what could be better than having open access to the vast US market?

With drastic changes occurring in the US economic policy, there is a need for Mexico to look beyond the north and to start looking south towards its neighbours in Latin America and east towards the fast-growing Asia-Pacific economies.

Mexico needs to capitalise on its shared interests with Chile, Colombia and Peru, and continue the process of regional integration through the AP as it provides a way for Mexico to diversify its trading partners and regain its status as a regional power in Latin America.