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World Bank Reprint Series: Number 281

Trade Policy in Mexico

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Bela Balassa

Reprinted with permission from World Development, vol. 11, no. 9 (1983), pp. 795-811.

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Trade Policy in Mexico BELA BALASSA* Johizs Hopkins University, Baltimore, Marfland Summary. - This paper provides an evaluation of the trade policies applied in Mexico in the last quarter century (1956-1982). It examines the policies in thrce well-defined periods: (1) 1956-1971, considered to be a period of relative stability following the rapid inflation and devaluations of tlhe first post-war decade, thouglh ehlaracterized by increasing overvaluation of tlhe peso; (2) March 1972-December 1976, beginning with the acceleration of government spending under President Echeverria and ending witlh the devaluations of thc peso; (3) December 1976-Deceniber 1982, covering the Presidency of José López Portillo. For caclh period, the autlhor discusses macroeconomic policy, trade policy developments and changes in Mexican exports and imports and tlhcir contribution to industrial growth. Ilaving demnonstrated thc interdepenidence of macrocconoinic and trade policies, the paper concludes with recominendations for policy reform, e.g. for remedying macroeconomic disequilibria, reducing price distortions and reforming trade policy, with a view to moving towards an outward-riented development strategy in Mexico.

1. INTRODUCTION

and imports and their contribution to industrial growth are discussed.

This paper provides an evaluation of the trade policies applied in Mexico during the last quarter century and makes recommendations for the future. It follows the author's advisory reports for the government of Mexico, which proposed introducing an export subsidy scheme (Balassa, 1970) and reforming foreign trade and industrial policies (Balassa, 1977), as well as his appraisal of the policies of the 1973-1978 period and recommendations for modifying these policies (Balassa, 1980). The paper will examine the policies applied in three well-defined periods. The first period, from 1956 to 1971, is considered to be one of relative stability following the rapid inflation and devaluations of the first postwar decade, although it was characterized by the increasing overvaluation of the peso. The second period starts with the acceleration of government spending

in

March

1972

under

President

2. THE PERIOD OF 'STABILIZING DEVELOPMENT' (1956-- 1971) (a) Macroeconromicbackground In the first decade following the Second World War, prices rose rapidly in Mexico, giving rise to an inflation-devaluation cycle. With successive devaluations, the peso-dollar exchange rate more than doubled, fromr 4.85 in 1945 to 12.50 in September 1954; it was maintained at that level until September 1976. Antonio Ortiz Mena, Secretary of Treasury from 1958 to 1970, called the decade following * Tlhe atutlhor is Professor of Political Econoniy at the

1976. The third period

Johns Hlopkins University and Consultant at the World Bank. 1-le has greatly benefited from discussions un the subjcct with Mcxican policy makers and cconomists.

covers the Presidency of José López Portillo

The autlhor alone is responsible, however, for the

Echeverria and ends with the devaluations of September---December

(December 1976-December 1982).

contents of tlhe paper and should not be assumed to

The discussion of each of the three periods begins with a description of the macroeconomic s ncessry tlat or ndertaning background backroud that is necessary for understanding changes in Mexico's trade policy. It is followed by an analysis of trade policy developments,

reflect the views of the World Bank. Unless otherwise noted, tlie data originate in official Mexican statistical suoLrces. Researchi assistance by Keiinetlh Meyers is grateftlly acknowledged. This paper was first presented at the Conference on 'Industrialización y Comercio l.\terior'. organized by the Colegio Nacional de Economistas and held in Mexico City, 3 January 1983.

with further attention given to industrial policy

measures. Finally, changes in Mexican exports 795

796

WORLD DEVELOPMENT

the establishment of the new exchange parity a period of 'Stabilizing Development' in MexicQ (1969). This designation is appropriate to the extent that the rate of inflation declined from the preceding decade. Nevertheless, it continued to exceed inflation rates in the United States, Mexico's principal trading partner, that accounts for two-thirds of its merchandise exports and imports. The US share reaches nine-tenths for service transactions and it is nearly 100%0 for border trade. Gerardo Bueno calculated real exchange rates for the peso vis-d-vis the US dollar by taking 1956 as the base year, on the grounds that this year represented an approximate equilibrium position in Mexico's balance of payments (1974, p. 315). A further argument in favour of his choice is that the price increases resulting from the September 1954 devaluation can be assumed to have run their course by that time. In the event, wholesale prices rose by 32% in Mexico and by l0%in the United States between 1956 and 1967. With the nominal exchange rate remaining unchanged, the Mexican peso appreciated in real terms by 17% vis-d-vis the US dollar during this period (Table 1). According to Leopoldo Solis, Head of the Economic Programming Group of the Secretary of the Presidency between 1971 and 1975 and long-time Director of Research at the Bank of Mexico, '1968 . . marked the beginning of the inflation period that became rampant in the 1970s' (1981, p. 30). But, inflation accelerated in the United States as well, so that there was little further appreciation in the real value of the peso until 'the spending spree of 1972' (Solis, 1981, p. 67) under President Echeverria. All in all, wholesale prices increased by 52% in Mexico between 1956 and 1971, compared to a rise of 26% in the US wholesale price index, while the peso-dollar exchange rate remained unchanged. Increases in public consumption, with its share in the gross domestic product rising from 4.4% in 1956 to 8.1% in 1971, contributed significantly to inflation in Mexico (Table 2). The increased expenditures augmented the deficit of the public sector that equalled 5.1% of GDP in 1971. The deficit was financed in part through money creation, leading to the rise in the ratio of the money supply (money and quasi-money) to GDP from 15.1% in 1956 to 16.5% in 1971, and in part by the inflow of foreign capital, with Mexico's current account deficit rising from 1.4% of the gross domestic product in 1956 to 2.3% in 1971. Increased foreign indebtedness, in turn, gave rise to

increases in the debt service ratio (the ratio of debt service charges to the value of merchandise exports) that reached 5 8% in 1971. The increase in the ratio of the current account deficit to GDP was concentrated in the first several years of the period, when much of the deterioration of Mexico's competitive position occurred; the real value of the peso appreciated by 10% between 1956 and 1960. In turn, the ratio of the merchandise trade deficit to the gross domestic product increased from 2.8%o of GNP in 1956 to 3.2% in 1960, subsequently declining to 2.5% in 1971. These changes occurred as export and import shares declined at different rates, in response to the incentives provided. (b) Trade policy developmnents With the increasing overvaluation of the peso, pressures developed to raise protection levels. In the early part of the period, tariffs were raised in the framework of the 1956 revision of the general tariff classification and increased use was made of quantitative import restrictions. As shown in Table 3, the number of controlled import categories nearly doubled between 1956 and 1962, with their share in the total rising from 33 to 44%. In the same period, the share of controlled imports in import value increased from 28 to 52%. Under the 1956 Regulation for the Granting of Import Permits, newly imposed import controls were often accompanied by agreements with firms on the replacement of imports in exchange for the free importation of parts, components and accessories. This regulation was the counterpart of the Law of Promotion of New and Necessary Industries, whichprovided incentives to newly-established industries as well as to industries where domestic output supplied less than 80% of consumption. Both groups of industries were granted tariff exemptions on the importation of machinery and of inputs used in the production process, thereby increasing the level and the variance of effective protection. The unification of customs classification in 1960 provided another opportunity for raising tariff rates. Subsequently, a surtax of 10% was imposed on luxury imports in 1962. Fliially, all tariffs were increased by 6 percentage points in 1965. The scope of import controls was also enlarged during the 1960s, with approximately one thousand import categories added to the controlled list every year. By 1970, the number of controlled items reached 65% of the total

Table 1. Clha iges in real exchiange rates in Mexico, 1956-1980 1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

12.5 100.0 68.4 82.3

12.5 100.0 71.4 84.5

12.5 100.0 74.6 85.7

12.5 100.0 75.4 85.9

12.5 100.0 79.1 86.1

12.5 100.0 79.8 85.7

12.5 100.0 81.3 85.9

12 5 100.0 81.6 85.6

12.5 100.0 85.1 85.7

12 5 100.0 86.8 87.5

12.5 100.0 87.8 90.5

12.5 100.0 90.3 90.6

12.5 100.0 92.1 92.9

12.5 100.0 94.5 96.5

12.5 100.0 100.0 100.0

83.1

84.5

87.0

87.8

91.9

93.1

94.6

95.0

99.3

99.2

97.0

99.7

99.1

97.9

100.0

120.3

118.3

114.9

114.3

108.8

107.4

105.7

105.3

100.7

100.8

103.1

100.3

100.9

102.1

100.0


ress. 1981). Solis. L.cpoldo. Economnie P'olicv RejOrm»u ¡ti M1+exico, pp. 8 3 100. A Case Stud(l forDel elopiing Couintries (New York: Balussa. Belat, 'Tracle in manuibacturecd goocls: patterms l'ertunion Press. 1981). of change'. 4World D)evelopmenl (March 1981), Salas-. avier. 'lsitimation ofthle structure andcí elsticities pp. 2 6 3 -275. of Mexican iniports in tlie period 1961 1979', Balassa, Bela, 'Structural adjucstment policies in Jolurnal of' De'elopmnent Economnies (J uhe 1982). developing ect)lonimies'. Wt'orild Derelopment pp. 297 311. (Januury 1982). pp. 23 - 38.

analisis y proposiciones', com?zercio Ekterior (Noveniber 1970). pIp. 922 -930. Repirinited in Miguel Wionczek (ed.). La sociedad tmiexyicanza.' Su presenite ' fJutuiiro (Mexico, D.F.: Editoriatl lRA,

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