Since 1985, there have been important changes in the Mexican petrochemical sector, including trade liberalization, deregulation and the elimination of subsidies. NAFTA represents another step towards liberalization of the sector. Given the low tariffs currently applied to international trade among the three nations, we do not anticipate major impacts of NAFTA on trade flows. Nevertheless, the elimination of restrictions to foreign investment is expected to increase capital flows into the sector and to promote productivity increases. On the other hand, the new barriers to trade in petrochemical feedstocks and the restrictions on private investment in infrastructure may negatively affect the sector's growth, making it necessary to adjust domestic regulations to improve the performance of Pemex.
INTRODUCTION
Petrochemical production began in Mexico in the late 1950s with the installation of a small plant to produce ammonia. The petrochemical sector has grown since then, and now accounts for approximately 2.5% of GDP and 10.4% of manufacturing value added. The sector developed in an environment characterized by guaranteed access to oil products and natural gas, low energy and feedstock prices, a domestic market protected from import competition by high barriers to trade, and regulatory barriers to entry into the industry.For more than two decades, regulatory barriers to entry, subsidized input prices, together with import protection resulted in increased rates of return on investment. Thus, new producers and capital flows were attracted to the sector. Capacity increased at an average rate of 9.2% between 1975 and 1991, with a corresponding increase in production. As in many other developing countries, Mexico imported process technology, but the small size of the domestic market resulted in the installation of plants with inefficient scales by world standards. Although rates of return on investment were high and the sector was increasing its share in manufacturing production, productivity levels tended to be low.
Since 1985, economic policy directed towards the sector has been modified substantially. The most important changes include trade liberalization, a movement towards deregulation, and the elimination of subsidies on petrochemical feedstocks produced by Pemex. NAFTA represents one more step towards the liberalization of the sector through the reduction or elimination of import and investment barriers for most petrochemical products. The changes in economic conditions and the expected increase in import competition are forcing petrochemical producers to increase efficiency.
