US President Donald Trump’s enthusiasm for building a wall at the Mexican border to prevent the arrival of illegal immigrants in the US continues to produce uncertainty across the American continent.
Wall or no wall, what the Mexican government has taken seriously, however, is Trump’s call to the US automotive industry to dismantle its Mexican assembly chains or face high duty taxes on returning finished products to the US. Trump’s argument is that this will be a step toward returning Detroit factories to their former success.
Trade threats like this are taken more seriously than generic proclamations against immigration because they are more feasible. Trade threats can also cause widespread economic damage.
Josè Guerra Abud, the Mexican ambassador to Italy, recently argued that Trump’s threat of closure might be beneficial to Mexico. He stated that the economy of his country is too closely tied to the US, and Mexican entrepreneurs would do well to look for other markets.
Since NAFTA was enacted in 1994, trade between Canada, the US, and Mexico has grown exponentially. According to analysts, this growth is largely due not to new wealth, but rather to the redistribution of resources away from Mexico’s primary trading partners pre-NAFTA.
Market diversification policy
In this sense, the wall could let Mexico further diversify its export destinations and reduce its overdependence on the US for its foreign trade. With more than 100 million consumers in Mexico, this market diversification policy could offer suppliers from other countries opportunities to commercially penetrate one of the Latin American markets with the most commercial potential.
Mexico is part of the G20 and the OECD, and has greater economic stability than many other Latin American countries. It also has a population of 120 million people, about half of whom are under 30 years old, a key indicator of a growing, emerging market.
Mexico’s economic performance also tells a promising story: GDP growth slowed down in 2016 but still increased by 2.0 per cent; the government deficit is at 2.6 per cent of GDP; and public debt at 50.2 per cent.
With these strong credentials, a new trade agreement with the European Union could ultimately prove to be the more realistic and immediate opportunity. Indeed, recent months have seen an acceleration of the negotiations aimed at renewing and extending the 2000 Free Trade Agreement between Mexico and the European Union.
Closer ties with Brazil and Argentina
Trade deals which are likely to require longer negotiations include possible free trade agreements with potential trade partners in the sub-regional bloc of Mercosur (comprising Argentina, Brazil, Paraguay, and Uruguay) and Asia Pacific.
In Mercosur, Mexico is trying to pursue closer ties with Brazil and Argentina, both major exporters of agricultural products, to meet its national agricultural needs. Furthermore, it is discussing bilateral deals with Australia and New Zealand, two other important food-exporting countries.
The main investment opportunities in Mexico primarily concern the energy sector, both for the exploration and exploitation of Mexico’s huge offshore oil fields, and for the development of renewable energies. Mexico aims to increase its use of renewable energy from 25 per cent to 35 per cent of energy consumption by 2024.
Demand for environmental technologies and services in Mexico are also growing: water treatment, urban solid waste treatment, and public transport will surely be welcome in a country where, in recent years, climate and environmental emergencies have increased alongside population and economic growth.
Australian companies developing a significant footprint
Construction and public works offer a third investment opportunity. This is particularly true in the areas of civilian housing and infrastructure works, such as roads, highways, railways, ports, airports, which the government is promoting to accelerate modernisation.
The automotive industry remains a key sector. Many car manufacturers have factories in Mexico, making the country the seventh-largest car manufacturer in the world. More than 600 automotive companies have been established in Mexico over the last few years and, by 2023, automotive production is expected to quadruple from 2016 levels.
Many Australian companies are already fast developing a significant footprint in Mexico across a range of sectors such as advanced manufacturing, education, energy, food and agribusiness, health, infrastructure, mining, and technology. Mexico is Australia’s largest trading partner in Latin America.
Given the current political and economic developments, this partnership could prove to be even more beneficial for both the countries in the future.
Mark Hoppe is managing director, ANZ, Atradius www.atradius.com.au