Open Economy Brings Rewards

Drive north along Highway 57 past the city of Querétaro and you will glimpse what is fast becoming the future of Mexico.

On what used to be tracts of sun-bleached scrub and cactus sit internationally owned industrial plants that churn out everything from plastic-injection pieces to automotive parts. And all for export.

Over the past couple of decades, Mexico has not only fulfilled its promise as one of the world’s leading exporting nations, it has also diversified its range of products and export markets. Six years ago, 90 per cent of exports went to the US, Mexico’s huge northern neighbor. Today, that market is less than 80 per cent of the total.

Trade is increasing rapidly with Central and South America, as well as with Asia. In November, Mexico asked to join negotiations on the Trans-Pacific Partnership (TPP), a block of Pacific countries that accounts for 30 per cent of global gross domestic product.

“It’s vital that we are part of it,” says Francisco de Rosenzweig, undersecretary for trade at the economy ministry.

The country has moved steadily up the value chain, manufacturing more sophisticated goods – in 2009, it was the world’s largest exporter of flat screen televisions – and even providing engineers to help design pieces for use in some of the world’s leading brands of cars and industrial engineering equipment.

“We have an industrialization platform that didn’t seem feasible just five years ago,” José Antonio Meade, finance minister, told the FT in an interview.

This has led many companies that only a few years ago looked to China as their chief manufacturing centre to see Mexico as a better base when it comes to supplying the Americas.

Siemens is in the process of bringing production of its high-voltage surge arresters to Mexico.

Until now, the arresters, which are destined for sale in the Americas and cost thousands of dollars each, have come from China and Germany.

“We don’t just manufacture cheaply here, we can also carry out engineering and design,” says Alfredo Phillips, Siemens’ government affairs and corporate communications officer in Mexico.

In a sign of how much things have changed, the value of Mexico’s manufactured exports in 1980 was equivalent to 2 per cent of GDP. By 2010, it was about 24 per cent, with much of that change in the auto sector, which represents 28 per cent of manufacturing exports. Oil exports, which were roughly 71 per cent of total exports in 1980, now only account for 13.8 per cent.

Mexico is now the most open of the world’s leading economies. In 2010, the sum of imports and exports as a percentage of GDP, a principal indicator of openness, was 58.6 per cent. Compare that with China at 47.9 per cent, Russia at 41.9 per cent and the US with 21.6 per cent. Brazil’s total trade in 2010 represented a meager 18.5 per cent of GDP.

Look forward and the picture is even more startling. HSBC in Mexico City estimates that trade, which totaled US$701bn last year, is likely to rise to 69 per cent of GDP this year, and a staggering 85 per cent by 2017.

Sergio Martín, the bank’s chief economist for Mexico, estimates exports could double in six to eight years.

This transformation stands out against a protectionist backlash in much of the rest of the region. In February, Brazil, Latin America’s largest economy, announced it was considering abandoning a 2002 trade agreement on cars after imports from Mexico rose 30 per cent last year. Argentina tried to follow suit.

By contrast, Mexico remained silent as it endured trade deficits with Brazil and Argentina for much of the first decade of this century, believing openness was in the country’s long-term economic interests.

None of this success could have come about without a solid macroeconomic framework. Since the Tequila crisis of 1994-95, Mexican governments from both the centre-left Institutional Revolutionary party and the conservative National Action party have worked hard to put public finances in order.

Public debt is a modest 36 per cent of GDP, while external debt has fallen from 16.5 per cent of GDP to 5 per cent. Economic growth – 3.9 per cent last year – is expected to be at least 3.5 per cent this year. International reserves at the central bank are near record highs of US$150bn. And inflation in the 12 months to March was 3.73 per cent – down from 3.87 per cent in February and within the bank’s target ceiling of 4 per cent.

“Monetary policy has worked well for us,” Agustín Carstens, Mexico’s central bank governor, told the FT in a recent interview. Many would call that an understatement: since Mr Carstens became governor in January 2010, the central bank has not touched interest rates, which remain at 4.5 per cent.

Mexico faces several challenges. The war on drugs has cost 50,000 lives in the past five years, and continues to pose a serious security threat in some parts of the country. International companies, in particular those already established in Mexico, continue to invest. But there are doubtless many cases of companies deciding to stay away.

Then there is the difficulty of competing in the domestic economy. Most leading sectors are dominated by one or two companies, which reduces competition, creates high barriers to entry and acts as a brake on investment.
There is also the need to deepen local supply chains for international companies manufacturing in Mexico. These have begun to form but not at the pace most people would like to see. As Luis Rubio of CIDAC, a respected Mexico City think-tank, says: “The government needs to provide incentives for suppliers to come to Mexico.”

However, Mexico’s exporting success over the past 20 years and, in particular, since the 2008 crisis, has been remarkable. Clearly, this would not have happened without the benefit of Mexico’s location. Sharing a 2,000-mile border with the US provides Latin America’s second-largest economy with a wealthy trading partner to which it can supply goods within 48 hours compared with between 20 days and two months in the case of China.

But there are other factors that have made all the difference. First, Mexico’s exporting vocation has been boosted by its predominantly young population. This “window” that began in 2006 is expected to provide an abundance of cheap labour until at least 2028.
Some experts predict that the once-yawning gap between Chinese and Mexican labour costs will close, and even turn in Mexico’s favour within five years.

Mexico has an abundance of skilled and semi-skilled labour. The number of engineers graduating from US universities since 1999 has remained steady at 0.22 per 1,000 people. In Mexico, it has risen from 0.39 per 1,000 to 0.61, says Unesco. Inegi, the country’s statistics agency, estimates that 114,000 Mexicans graduated in engineering and technology in 2010, more than double the number in 1999.

The second factor, and the backbone of Mexico’s trade strategy, is the constant stream of negotiated accords with the country’s main trading partners, starting in 1994 with the US and Canada through the North American Free Trade Agreement.
Since then, Mexico has negotiated 11 tariff-reduction accords and has agreements with 44 countries – more than any other leading economy. That has given the country preferential access to two-thirds of the global economy.

Little wonder that on a recent trip to Mexico City, Richard Fisher, president and chief executive of the Federal Reserve Bank of Dallas, described the country as “an exporting powerhouse”. Addressing journalists and analysts at the local stock market, he added: “The moment has come to change our perception of Mexico.”

Source: Financial Times

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