Can Mexico lure investment from Asia, as USMCA North American trade deal takes effect?

As global trade is shaken by the coronavirus pandemic and US-China trade war, Mexico has expressed its desire to lure investment from international companies based in Asia. This follows the implementation of the US-Mexico-Canada trade agreement, known as USMCA, which took effect on July 1.

It is an updated version of the nearly 25-year-old North American Free Trade Agreement (Nafta), featuring tougher content rules for the automobile, steel and aluminium industries. 

But can Mexico match the conditions offered by Asian economies? Some observers say China and other Asian nations should brace for greater competition from Latin America, especially when it comes to the steel, automobile and textile industries.

Guanie Lim, a research fellow at the centre for public administration at the Nanyang Technological University (NTU) in Singapore, said American firms and other international companies based in Asia are likely to consider relocating their supply chains to countries such as Mexico.

“As firms make better sense of how the [new trade agreement] rulings benefit their operations, some may eventually move over to Mexico,” Lim said.

He noted that global trade and investment had slowed down in recent years, even before the Covid-19 pandemic, and the new trade agreement is unlikely to drastically disrupt the industrial and trade equilibrium in East Asia in the short term.

“But given time, it is reasonable for East Asia to expect more intense competition from the Latin American economies,” Lim said.

“Latin America hosts several economies that are at a similar stage of development” to some Asian economies, the researcher noted, comparing Brazil and Mexico to Thailand and Malaysia. “So some industries will find it beneficial to relocate to Latin America if the need arises.”

However, Lim said it is too early to make a final judgment on this. “The impact will likely be highly uneven across industries – for both trade and investment,” he said. “There is also the possibility of both Asia and Latin America growing together rather than in a zero-sum manner.”

Augustine Ha Ton Vinh, an economist and businessman based in Vietnam, noted that China and the 10 countries making up the Association of Southeast Asian Nations (Asean) are already facing intense competition from economies like India, Mexico and Brazil.

“After Covid-19, Asean countries will see more competition for foreign investment, technologies, and talents from India and countries like Mexico,” said Vinh.

The US-China trade war, which started in July 2018, is also affecting global trade.

“President Donald Trump has recently led a concerted effort to push multinational corporations out of China to help remedy the trade imbalance. With a new Indo-Pacific strategy in place, the exodus has begun,” Vinh said. “Companies are searching for their new landing sites, and India, Mexico [and], Brazil are on their radar.”

The economist noted that American firms have traditionally done business with neighbouring Mexico. “International companies based in Asia will likely move their factories with their American partners to [Latin American] countries to save transport costs and capture the big US market,” Vihn said.

Earlier this week, Mexico’s economy minister Graciela Marquez told Reuters that her government wanted to lure business from Asia, and that talks had been held with foreign companies about investing in Mexico to produce steel for the auto sector.

She said the country would also approach Apple and other American firms about relocating their supply chains to Mexico.

Francisco Jileta, general director of global economic promotion in Mexico’s Ministry of Foreign Affairs, told This Week Asia that as of last year, Mexico was the 14th largest steel producer in the world, having shown sustained growth in that sector during recent decades.

“Due to its open trade economic profile and strategic geographic location, Mexico is a natural candidate for industries of any sector to relocate their production chains. Particularly, sectors such as health, automotive, aerospace, defence, fintech, food industries, among others,” he said.

Jileta noted that the current government was focused on boosting investment, economic diplomacy, and the internationalisation of the Mexican economy. In areas such as infrastructure, for instance, “the administration is willing to provide tax support to those companies undertaking investment projects in tune with” government strategy, Jileta said.

But Enrique Dussel Peters, coordinator of the China-Mexico Studies Centre at the National Autonomous University of Mexico, raised doubts about whether the new trade deal would enable Mexico to attract international companies based in Asia. He pointed out that Mexico had failed to lure foreign firms despite many incentives that had existed since the beginning of Nafta.

“Mexico’s public sector has so far not been able to materialise specific policies for enhancing foreign direct investment in Mexico,” the economist said, arguing that the new government has not put forward specific policies focused on global value chains and firms.

“The potential exists since 1994 and very probably in future decades, but this potential has not been realised or materialised,” Dussel said.

Despite the missed opportunities, the potential is there, he said. “Mexico could be of utmost interest for firms based in Asia, considering several decades of export orientation to the US and the European Union, as well as to Japan and Latin America and the Caribbean.”

In addition, Mexico offers “extremely cheap labour compared to any major economy – US, EU, and even China – and successful global infrastructure and logistics with suppliers and clients for specific global value chains”, Dussel said. These include auto parts, aeronautics, electronics and also manufacturing segments, such as textile garments and footwear.

According to researcher Lim, mainland China and Asean economies may face greater competition in a number of sectors, with steel emerging as the most obvious one.

“We have to bear in mind China’s overcapacity in basic commodities like cement and steel, which are slowly spilling over via cross-border investment and exports to Southeast Asia,” he said. “With overcapacity in East Asia – more so in China than Southeast Asia – steel corporations will have to look elsewhere.”

The East Asia-Latin America competition may also intensify in the auto sector.

“Mexico’s automotive production network is similar to Thailand’s, with both competing for the investment dollars of Japanese and Western automobile firms to upgrade a moderately competent domestic industrial ecosystem,” Lim said.

He expects that with slowing global demand for vehicles, which was already seen before Covid-19, automobile firms will be more careful about where and how they invest.

A similar dynamic may play out in the textile industry.

“Textile and apparel factories in both East Asia and Latin America derive much of their order book from the US, so competition seems inevitable if one were to take a longer term perspective,” Lim argued.

The electronics sector, however, appears to be less likely to move away from East Asia to Latin America. “East Asia’s highly integrated electronics industry should prove sturdy enough for now,” Lim said.

Source: South Morning China Post