A unique opportunity for Mexico

The new trade agreement with North America and the weakness that China presents due to several factors have set the table for the country to attract more investments.

At the end of January, President Donald Trump, in a very lively ceremony at the White House, signed the Mexico, United States, Canada USMCA (TMEC) Treaty, which will replace the North American Free Trade Agreement (NAFTA).

Although the Canadian parliament is still required to ratify this agreement, it is expected that it will be a mere process and that the 90 days established by the document itself will soon begin for this new legal instrument to enter into force.

Behind the ratification by the two chambers of the US Congress and the promulgation of the agreement by President Trump is the fact that in the United States there are business and political currents that see China as the great economic and commercial enemy of its country and they perceive that an alliance with Mexico and Canada is indispensable if the Asian giant is to be faced effectively and with possibilities of success.

Perhaps the clearest expression of these currents is the position of Peter Navarro, director of the Office of Commerce and Manufacturing of the White House and close adviser to Trump.

Navarro has pointed out in different texts the threat of China in the economic and commercial fields. One of his best-known and explicit books is “Death by China: Confronting the Dragon.” During the negotiation of the new trade agreement in North America, Navarro was one of the most determined drivers of the ratification of the new agreement, precisely as an instrument to confront China.

Perhaps by characters like Navarro, Donald Trump’s speech changed over the months regarding the future agreement with Mexico and Canada, although for public consumption he continued to blame NAFTA for the loss of manufacturing jobs.

However, when the current treaty and the new agreement are contrasted in detail, there are few substantive differences, beyond the degree changes in the automotive issue.

Most likely, however, the changes do not imply that automotive companies will leave Mexico to settle in the United States or return to Europe or Asia. Rather, it will force companies operating in Mexican territory to seek greater integration of their industrial processes.

In North American business circles there are those who perceive the conflict between the United States and China as something structural, which will not be resolved by a truce like the one signed in the first days of January.

It is estimated that economic growth and export power will make China, for many years, a rival of the United States.

For that reason, it is stated that if our neighbors are going to develop competitive capacities, they will have to seek an alliance with us. And in particular, despite all that is said in the speeches, the issue of lower labor cost in Mexico, already lower than in China, will remain a very powerful attraction.

Another of the weapons that President Trump has used to confront China has been the imposition of tariffs. The “Phase 1” agreement halted the increase in the volume of Chinese goods taxed, but did not remove the 25 percent that applies to about $ 250 billion of products exported from China to the United States.

As a result of the imposition of tariffs and due to the weakness of US manufacturing activity, a significant drop in the volume of purchases made by the United States to China can already be observed. Data from the Commerce Department indicate that as of November 2019, the decline in Chinese imports from the US was 15 percent compared to the same period in 2018.

For some months, Mexico has already been leading to the position of the first trading partner of the United States if exports and imports are added.

China continues to be the main exporter, but given the fact that it imports few North American products, Mexico surpasses it when considering the two trade flows, purchases and sales.

In addition to the fall in purchases that the United States makes to China, there is another important phenomenon that has already been noted. This is a sharp drop in foreign direct investment in China and Hong Kong.

If both economies are considered, in 2019 there was a 20 percent drop in foreign direct investment they received, compared to 2018.

This means that they stopped entering almost 50 billion dollars last year.

If you add to this fact the unfortunate situation of the coronavirus epidemic, it can be seen that there is at this moment an important fragility in the Chinese economy.

For Mexico, the sum of the above considerations is a great opportunity.

On the one hand, Mexican exporters can continue advancing in the North American market and occupy spaces that the Chinese leave.

But, additionally, Mexico could become an important magnet for the arrival of companies from European or Asian countries that intend to enter the North American market using the new trade agreement.

Under the terms of the TMEC, in addition, there could be a greater opportunity for the degree of national integration of sectors such as automotive, aeronautics or electronics to be even greater, with a more powerful effect on local growth.

Developers of industrial parks in various locations in the north of the Republic are having a strong demand receiving companies that are considering leaving their operations in China and are looking for an option in Mexico.

If the federal government and the governments of various states visualized this situation as a unique opportunity to leverage economic growth, they could develop a comprehensive strategy to attract foreign direct investment that would lead to it not only reaching levels of 30 to 35 one billion dollars, but exceed 50 billion in the span of five years.

It seems, however, that in some segments of the government, or even the private sector, this great opportunity is not being properly weighed.

It is something circumstantial and unrepeatable, derived in part from the strategies that Mexico has followed, but also from unpredictable or even as unique political events as an epidemic.

Mexico can take the opportunity or let it pass and lose again the option of becoming a developed nation, with income levels much higher than what it now has.

Part of the problem is that although there are incentives from the external environment that favor investment, there are also multiple problems that inhibit it.

As an example, there are three factors that weigh a lot: insecurity, lack of legal certainty and deficiencies in government operation.

In the case of insecurity, this condition forces large companies to invest a significant amount of resources to preserve their assets, the security of the goods they produce and even of employees in factories. A small and medium, leads them to suffer the ravages of crime.

In the case of legal certainty, it has been seen in recent months that there is distrust of the possibility that the government can make decisions that change the rules of the game “in the middle of the game.”

The most emblematic case was the cancellation of the Texcoco airport, however, the issue of gas pipelines operated by companies for the Federal Electricity Commission was also something that caused great concern, although in the end a negotiated exit was achieved because it showed the impulses of some officials.

According to the president of the Executive Council of Global Companies (the body that groups the transnationals), Claudia Jañez, the president of the Republic should behave like a true ‘snake charmer’, seeking to attract investments. On the contrary, Jañez adds, sometimes he and his government adopt a hostile attitude towards companies, making it increasingly difficult to convince the parent offices to invest in Mexico.

Other messages that have also put the investment at risk are changes in the energy sector, in particular those that limit the possibility of continuing partnerships with Pemex or oil rounds, but also the change of play in matters such as clean energy or of a competition with the national oil company in the gasoline supply market.

It is clear that there are lawsuits within the government of Andrés Manuel López Obrador, as some officials seem to encourage private investment while others appear to want to deter the arrival of capital.

The opportunity offered by the world environment and the new treaty is unrepeatable and if we do not take it, we will be regretting it for decades.

I hope President López Obrador realizes it.

Source: el financiero

The Mazatlan Post

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