Mexico & Nafta - February 2012 (ISSN 1741-444X)

State of the Union: President Barack Obama only made one tangential mention of Latin America in his state of Union address on 25 January. He noted that the US Free Trade Agreements with Panama and Colombia had now come into force.

Defence Industry: Mexico is now eyeing the global defence industry after becoming, on 25 January, the second Latin American country (after Argentina) to become a full participant in the Wasenaar Arrangement, which sets out export controls for weapons and dual-use goods.

Mexican companies are most interested in supplying the military aviation industry. The military aviation industry has sales that are four times as high as the civil aviation business, according to the Federación Mexicana de la Industria Aeroespacial (Femia). In 2008, the civil aviation industry had sales of US$450bn, while military aviation sales topped US$2trillion.

Carlos Bello, the managing director of Femia, said that the Wasenaar arrangement would allow Mexican companies to import equipment that previously was banned. The dual use equipment includes machines that could be used to manufacture bombs.

Bello said that the industry would now produce GPS equipment and other electronic products previously not manufactured in Mexico.

Flavio Díaz Mirón, the president of Femia and also managing director of Bombardier Transportation in Mexico, said that until signing up to Wassenaar, Mexican companies had been barred from the military aviation market. Currently, Mexico ranks 15^th in the world league of aerospace suppliers. Femia expects Mexico to be in the top 10 in the next decade.

Guadalajara: On 30 January President Felipe Calderón announced that Guadalajara had been chosen as Mexico’s City for Digital Creativity (Ciudad Creativa Digital). The aim is to create a hub of  digital, art, design and training companies. The government hopes that the hub will dominate the digital market for the Spanish speaking world, with US$10bn in investment in companies located in the hub and the creation of 25,000 jobs . The hub is backed by the Massachusetts Institute of Technology (MIT) and 20 other universities. The anchor investors are the Walt Disney Company, Sony Corporation and Time Warner.

Guadalajara was chosen from 11 other Mexican cities. The construction of the 180 hectare site is due to start in August. It will be based around the Parque Morelos, in the centre of the city, and will include, besides office space, theatre sets for the media industry.

The governor of Jalisco, Emilio González, who presided over the hugely successful (and peaceful) Panamerican Games last October, said that the project would make Guadalajara the “Hollywood of the digital arts.”

Capital flight: Since 1970, US$872bn has been illegally shipped from Mexico to other countries, according to a new report by a US research group, Global Financial Integrity (GFI). This is equivalent to 5.2% of Mexico’s GDP between 1970 and 2010. As GFI’s president Raymond Baker observed, the estimate is probably on the conservative side. The GFI argues that the bulk (74%) of the money was transferred either by under-reporting exports or over-reporting imports.

Drug Trafficking Organizations tend not to use the trade account to launder their money so the actual financial loss to Mexico could easily be over US$1 trillion over the 40 year period, according to the GFI.

The GFI ranks Mexico second, behind China, and above Russia, in its list of capital flight countries.

Baker claimed that in 1970 capital flight in Mexico amounted to about US$1bn a year. In 2010, he said, it was worth US$68.5bn. The record year for capital flight was 2007, when US$97bn went missing, on GFI estimates. In GDP terms, the worst year was 1995, when 12.7% of GDP was lost. The GFI argues that the implementation of Nafta in1994 increased capital flight dramatically. From 1970 to 1994 the average loss to capital flight was 4.6% of GDP; after Nafta took effect (leading to a huge expansion of Mexico-US trade), the figure rose to 6.3%.

Baker suggested that the simplest way to curb the flow would be for the US and Mexico to share tax information. He noted that the US and Canada already share tax information.