Arizona-Sonora Border Economy
How NAFTA Partners Rank in Ease of Doing Business
By Lora Mwaniki-Lyman and Ivanna Fotinos
April 4, 2011
Introduction
Mexico has maintained its position as Arizona’s top export destination for over 10 years1. During this time, various trade agreements between the U.S. and Mexico have been implemented to improve trade flows and increase global competitiveness. The most recent and comprehensive trade agreement was the North American Free Trade Agreement (NAFTA). The goal of NAFTA was to eliminate all barriers to trade between the U.S., Mexico and Canada over a period of 10 years, beginning January 4, 1994. Between 1994 and 2006, trade flows between the NAFTA partner countries increased by more than 300 percent, from $300 billion in 1994 the year NAFTA was implemented to $901.9 billion in 2006 when the last NAFTA initiative took effect. The increased trade flows resulted in an increased demand for infrastructure improvements, as well as secure, expedited and efficient trade processing. This led to major physical and technological advancements, such as Cyberport Projects that include the construction and expansion of state-of-the-art ports of entry facilities, the CANAMEX corridor initiatives and self compliance and enforcement programs such as US-VISIT, SENTRI and C_TPAT. These programs represent some of the outcomes from the increased demand and the need for heightened security after September 11, 2001.
The attractive business incentives and increased efficiency in the processing and moving of goods, people and information between the U.S. and Mexico, has continued to make Mexico an attractive place to locate a business.
Ease of Doing Business Index
According to the 2011 Doing Business Report published by the International Finance Corporation2 (IFC) Doing Business Project, Mexico ranked 35 out of 183 countries in the ease of doing business, up from 41 in 2010. The Doing Business Project began providing measures on business regulation and enforcement of 183 counties in the world in 2002. The Project provides data to the public, indicating the business climate of each country, city and regional economy studied. Go to http://www.doingbusiness.org/ for more on the Doing Business Project and Reports.
Other NAFTA partners ranked high on the “Ease of Doing Business” list, with the United States placing 5th and Canada 7th. Singapore is the top ranked economy in the ease of doing business for 2011, while Chad ranked lowest for this indicator.
The Doing Business Project provides data on 11 regulatory topics for 183 economies used to assess a country’s or region’s ease of doing business. 9 of the 11 regulatory topics are ranked and averaged to provide an Ease of Doing Business Rank for each country, city and regional economy. These include: starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders and enforcing contracts; as well as the overall ease of doing business. Rankings on the nine topics for the United States, Canada and Mexico are shown in Table 1 below.
Table 1: NAFTA partners Ease of Doing Business Rankings, 2011
Source: Doing Business 2011, International Finance Corporation, The World Bank Group
The United States was ranked 20th, ahead of Canada and Mexico, when assessed by the ease of trading across borders indicator. Canada ranked 41st while Mexico ranked 58th out of 183 countries. The trading across borders indicator looks at both export and import procedures. For the U.S., export procedures include preparing export documents such as bills of lading, certificate of origin, commercial invoice, and customs export declaration; going through customs clearance and technical control, ports and terminal handling, and inland transportation and handling. Import procedures require the same actions to be taken, apart from some differences in documentation. Instead of a certificate of origin, a cargo release order is needed, and the extra packing list document is necessary. It takes one less day for the U.S. to complete port and terminal handling for import procedures compared to exporting procedures (See Table 2 below). The $265 difference in total export and import cost for the U.S. can be largely attributed to inland transportation and handling, which costs an extra $200 during the importation process.
The Doing Business 2011 Report states that it takes Canada 7 days to complete export procedures and 11 days to complete import procedures, however the cost is nearly the same, total for importing is $1,610, and $1,660 for exporting. In Mexico, however, import and export procedures take the most amount of time, 12 days for both the import and export process. Imports, though, cost a total of $1,880, that’s $460 more dollars than Mexico’s total cost for exports.
Table 2: NAFTA Partners - Trading Across Borders Rankings and Components
Data Source: Doing Business 2011, International Finance Corporation, The World Bank Group
Canada was the only NAFTA member to reduce the number of documents to export and import since the data began providing the measure in 2006. The cost to export and import increased for all three countries while Mexico reduced the time it takes to export and import by a day between 2009 and 2010.
As noted in the table 3 above, the trading across borders indicator does not seem to represent or measure any major NAFTA effects that have taken place in the last 10 years. This is because the costs to export and import exclude tariffs, duties and the cost of transporting goods across oceans. The most noticeable effect of reduced trade barriers between the United States and Mexico is in the increased trade between the two countries. Between 1994 and 2006, US exports grew by 164%. However, US imports grew by 301%, almost double the export growth, over the same period of time. See Graph 1 below.
Graph 1: US Exports to and Imports from Mexico (in billions), 1989-2010
Data Source: United States International Trade Commission DataWeb
Other Ease of Doing Business measures show the United States ranking highest among its NAFTA partners in half of the 9 regulatory topics (Table 1). Canada ranks highest in three while Mexico ranks highest in only one indicator: dealing with construction permits. United States and Canada are both ranked 5th in protecting investors, while Mexico trails behind 39 economies with a ranking of 44. The United States ranks 8th in Enforcing Contracts, above Canada and Mexico while Canada ranks 10th above United States, and even higher above Mexico in paying taxes.
Mexico may lag behind its NAFTA partners significantly in the ease of doing business indicators, but when compared with other Latin American and Caribbean countries, Mexico is continuously ranked in the upper half of the 32 countries ranked.
Reference:
“Doing Business 2011 - Making a difference for entrepreneurs”, The Doing Business Project, A co-publication of the World Bank and the International Finance Corporation (IFC), November 4, 2010.
Footnotes:
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