Mexico - Manufactured exports : growth, problems and prospects

FiL E 1 B12i1iiN1 DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 79-ME MEXICO'S MANUFACTURED EXPORTS: GROWTH, PROBLEMS AND PROSPECTS February 28, 1973 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  ABBREVIATIONS AND ACRONYMS BANXICO - Banco de M4xico, S.A. BNCE - Banco Nacional de Comercio Exterior CEDI - Certificados de Devolucio'n de Impuestos Indirectos CNCP - Comisi6n Nacional Coordinadora de Puertos CCM,SEC - Compania Mexicana de Seguros de Credito, S.A. ECX - European Conmnon Market EFTA - European Free Trade Association ESP - Empresas de Servicios Portuarios FOMEX - Fondo para el Fomento de las Exportaciones de Productos Manufacturados FCNEI - Fondo de Bquipamiento Industrial IMCE - Instituto Mexicano de Comercio Exterior LAFTA - Latin American Free Trade Association NABALALC - Nomenclatura Arancelaria de Eruselas - Asociacion Latino-Americana de Libre Comercio PEMEX - Petroleos Mexicanos, S.A. SIC - Secretaria de Industria y Comercio de M&xico CURRENCY EQUIVALENTS US$1 = 12.5 Pesos 1 Peso = US$0.08 1 Billion Pesos a US$80 million FISCAL YEARS January 1 - December 31  This report is based on the findings o' a Special Industrial Mis- sion to Mexico during September-October, 1972, which consisted cf Messrs. Jivat N. Thadani (Chief of Mission), Thomas L. Hutcheson (Economtist, LAG), Edilberto L. Segura (Industrial Engineer, NDP), Francisco E. Thciumi (Econo- mist, DPS) and L.T. Graham (Consultant, Engineering Industries). Discussions were also held with concerned officials in April 1973. The Mission's terms of reference required Jt to review the Government's current policies for promotion of manufactured exports and protection of import substituting in- dustries, and to examine the current status and prospects of a Eselected group of engineering industry exports. Manufactured exports in this report are defined in accordance with the Mexican classification of exports by basic economic activity and princi- pal products, and correspond to the Standard International Industrial Clas- sification, divisions 31 to 39: 31. Food, beverages, and tobacco 32. Textiles, wearing apparel and leather products 33. Wood products 34. Paper products and printed matter 35. Chemical, petroleum, rubber and plastic products 36. Non-metallic mineral products 37. Basic metal products 38. Fabricated metal products, machinery and equipment 39. Other manufactured products. Based on the Standard Tnternational Trade Classification (which is similar to the Mexican classification of foreign trade by custom tariffs), the above definition includes sections 5, 6, 7, 8, and selected items of sections 0 through 4, in accordance with earlier Bank practice. (See Braz:il Report No. WH-210 of September 30, 1971)  TABLE OF CONTENTS Page No. BASIC DATA SUMKARY OF FINDINGS AND CONCLUSIONS i - iv I. RECENT TRENDS 1 - Economic Growth, Industrial Output and Exports 1 - Diversification of Manufactured Exports 3 - Diversification of Markets 4 II. PROBLEMS OF COST 5 - Domestic Materials Costs 5 - Financial Costs 6 - Transport Costs 7 III. TARIFFS AND INCENTIVES 10 - Government Policy 0 - Tariff System I0 - Export-Import Linkage 12 - Tax Refunds '15 - Temporary Imports 17 - Free Zone, Border Area, and "Maquila" Industries 20 IV. OTHER FACTORS AFFECTING EXPORTS 23 - Trade w:ith LAFTA Partners L23 - Export Restrictions in Licensing Agreements 25 - Institutions for Export Promotion 26 - Fondo de Equipamiento Industrial (FONEI) 26 V. PROSPECTS FOR MANUFACTURED EXPORTS 28 - Engineering Industries 28 - Other Manufacturing Sub-Sectors 30 - Expected Growth Rate for all Manufactured Exports 31 TABLES 1 - 1 32 - 42 ANNEXES I. Engineering Industries II. Petrochemical Industries III. Textiles IV. FONEI (Fondo de Equipamiento Industrial) V. Export Finance   BASIC DATA Area: 1,972,547 sq. Im. 1969 1970 1971 Population (millions) 48.8 50.4 52.2 Annual Rate of Population Growth 3.5 3.5 3.5 Gross Domestic Product Amount at Current Market Prices (US$ million) 29,992 33,520 36,400 Rate of Growth atOConstant Prices(%) 6.7 7.2 3.7 Rate of Growth at Current Prices (%) 10.6 11.7 8.6 GDP per Capita at Current Market Prices (US$) 613 668 697 Origin of GDP (in percent) 100.0 100.0 100.0 Agriculture 11.9 11.6 11.6 Mining 1.0 0.9 0.9 Manufacturing 26.6 27.0 27.1 Construction 4.7 4.5 4.5 Power 1.7 1.8 1.9 Commerce 32.0 32.2 31.5 Other 22.1 22.0 22.5 Exports of Goods (in million US$) Total Exports (f.o.b.) 1,385 1,373 1,474 Total Manufactured Exports (including basic mineral products) 463 517 617 Manufactured Exports/Total Exports 33.4% 37.7% 41.9% Balance of Payments (in million US$) Exports of Goods and Non-factor Services 2,871 3,011 3,345 Imports of Goods and Non-factor Services -2,862 -3,347 -'3,494 Balance Before Factor Income Payments 9 -336 -149 Factor Income Payments (net) -602 -672 -774 Balance on Current Account -593 -1,006 -923 Change in Reserves 48 102 200 Prices (rates of increase) Wholesale Price Index, 1Mexico City (in percent) 2.6 6.0 3.7 GDP Deflator (in percent) 3.9 4.5 4.9   SITWh,RY C"F FINDINGS AND CONCLUSIONS Mexico's exports of manufactures have grown at an average annual. rate of over 15% since 1965 to about US$617 million in 1971. This figure in- cludes US$66 million for basic non-ferrous metal product exports which have remained fairly atagnant through the period; US$52 million for basic iron and steel product exports wh