Made in Mexico: An Increasingly Viable Alternative to Chinese Outsourcing

November 9th, 2013
By Mark A. Bogar, CFA and Michelle Donley Holmes | Posted: 11-07-13 | 01:13 PM
Executive Summary
Amid evolutionary changes in economics, leadership and policy, Mexico has emerged as an appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. Wages have been sharply and steadily rising in China over the past decade, just as Mexico’s manufacturing landscape has undergone a dramatic shift, marked by high-tech manufacturing hubs that are synchronous with American manufacturing needs.The erosion of China’s comparative advantage over Mexico has resulted in global investment implications, with multiple industries positioned to benefit — or suffer — from the shift. In this paper, we highlight the economic, political and manufacturing climate in both countries, address relevant energy-supply and safety concerns, and identify emerging winners and losers from an investment standpoint.

The Economic and Political Backdrop

Although China has been a key driver of global growth over the past several years, it has recently experienced a slowdown,particularly within the manufacturing sector. At an April meeting of the International Monetary Fund’s International Monetary and Financial Committee, Gov. Zhou Xiaochuan of the People’s Bank of China said that his country’s 7.7% year-on-year GDP growth for the first quarter represented “a reasonable growth track,” with expected 2013 growth of 7.5%.1 While that outshines the tepid economies of many developed nations, it pales in comparison with the 10%-plus growth rates that China has enjoyed over much of the past decade. Many investors are also monitoring the monthly Purchasing Managers’ Index,which has been hovering precariously near the 50 level of demarcation between expansion and contraction.Also during April, China was the target of pessimistic comments from two major ratings agencies. Moody’s lowered its outlook on China’s government bond rating to stable from positive, while Fitch Ratings downgraded China’s long-term local currency credit rating to A-plus from AA-minus, both noting risks associated with excessive local government borrowing.2

The Chinese government, under the new leadership of President Xi Jinping, is well aware of these risks and is attempting to mitigate them, in part by increased austerity. Most recently, it tightened its controls over bond sales by local government financing vehicles, requiring them to have a rating above AA-plus.3 But other issues in the country, including suspected cyber attacks on the U.S. and renewed emphasis on strengthening China’s military, have stirred some concerns in the West.

Across the ocean, Mexico’s economy has also been struggling. For the first quarter, its GDP edged up a mere 0.8%, well below the 3.2% growth experienced in the fourth quarter of 2012. However, the slowdown was largely attributable to a calendar effect from an early Easter holiday and a 10% drop in public spending in the wake of December’s leadership transition.4 The country also posted a 4.9% drop in industrial output in March,in tandem with an easing in U.S. manufacturing growth.5 This has prompted speculation that Banco de Mexico (Banxico), the country’s central bank, will lower interest rates again this year; it last reduced its key rate by a half-point to 4% in March, the first cut in more than three years.

Nevertheless, sentiment about Mexico remains largely optimistic, at least over the long term. While growth expectations have been widely tempered for 2013, many investors are looking beyond that for compelling potential. In early May, Fitch lifted its rating on Mexico’s sovereign foreign currency credit rating to BBB-plus, the country’s first ratings upgrade since 2007, buoyed in large part by optimism about the country’s reform agenda.6

It is that ambitious reform strategy, promoted by Mexico’s new president, Enrique Peña Nieto, that has helped to strengthen the peso and underlined the country’s favorable investment climate. He has tackled labor reform, reining in some powers of the teachers’ union, and he has proposed to open the energy and telecommunications industries to more competition and private investment, thereby breaking up monopolies. If all of these reforms indeed reach fruition, Banxico estimates that GDP could hit 6%.

Manufacturing Climate

Amid these evolutionary changes in economics, leadership and policy, Mexico has emerged as a viable, appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. According to the World Bank’s 2013 Ease of Doing Business Index, which measures business regulation environments across 185 economies, Mexico ranked No. 48, up from No. 53 in the previous year, while China held steady at No. 91.7A crucial factor in determining companies’ outsourcing decisions is wages, which have been sharply and steadily rising in China over the past decade, as shown in Exhibit 1.

Most of China’s manufacturers are situated along the coastal provinces, which offer ready access to ocean transport as well as supply-chain logistics, but with a costly labor pool and expensive land. The government has been taking aggressive action to rein in soaring real-estate prices; for example, Beijing recently began imposing a 20% capital-gains tax on existing-home sales. Moving facilities inland will not solve the issue of rising costs, as wages are not significantly different there and transportation infrastructure is inadequate, as it can cost more to ship goods from China’s interior to its coast than from Shanghai to New York.8

By contrast, Mexico’s manufacturing landscape has undergone a dramatic shift in geography. As assembly-for-export plants, called maquiladoras, in the border states suffered from the effects of economic recession and rising drug-related violence,companies nimbly shifted their focus to Mexico’s interior,supported by an attractive cost of living as well as by decent infrastructure and transportation. In fact, in the past three years, manufacturing jobs in the central states of Guanajuato, Aguascalientes, Queretaro and San Luis Potosi have climbed 30%, largely on the back of growing auto and aerospace businesses, which have in turn committed to providing those local communities with relevant educational opportunities.9

In tandem with this change, the importance of Mexico’s once-dominant textile industry has diminished significantly,replaced by high-tech manufacturing hubs for the automotive and aerospace industries, clearly synchronous with American manufacturing needs. The U.S. is now using its neighbor to the south as “a just-in-time, conveniently located and inexpensive sourcing partner, rather than a competitor,” according to Morgan Stanley Research.10

Comparatively speaking, there are other notable differences between the two countries’ workforces. Mexico’s laborers generally work no more than 48 hours a week, as mandated by federal law, and then go home at night, in contrast to many Chinese workers, who live in on-site dormitories, work lengthy shifts and return home only for the New Year holiday.

Demographics are another contrast, as Mexico’s population skews young, while China’s one-child policy has effectively shrunk the upcoming labor pool.

Energy Supply
Another potential advantage for Mexico’s manufacturing sector is its proximity to cheap natural gas, as the country uses the fuel for 46% of its energy, according to Morgan Stanley Research. However, much of this is virtually untapped, as the production monopoly of Petroleos Mexicanos, also known as Pemex, has left as much as 1 trillion cubic feet of gas reserves sitting idle, as private-sector development is prohibited.11Meanwhile, Mexico’s demand for the fuel has continued to soar, forcing Pemex to effectively ration limited supplies to its largest customers because of capacity constraints.This could all change if Peña Nieto has his way, resulting in a constitutional change to allow for asset sales in shale gas and deepwater exploration and downstream petrochemical auctions. That could unleash substantial foreign direct investment in the country’s energy sector, as Mexico has one of the world’s largest shale gas resource bases, according to the Energy Information Administration.12

On the other hand, China is the world’s largest energy consumer,and its largest producer and consumer of coal, which powers much of its electricity generation. Natural gas accounts for only 4% of China’s energy consumption, according to the EIA. The country also pays more for natural gas: an average of $10.77 per million Btu on LNG imports in 2012, compared with the recent benchmark Henry Hub price in Louisiana of $3.80 per million Btu. However, China is pursuing cleaner energy sources to combat rampant pollution concerns.

Safety Concerns
Both Mexico and China have a bit of an image problem when it comes to safety. For Mexico, it’s been the alarming rise in violence since former President Felipe Calderon’s war on drug cartels began in 2006. According to a travel warning issued by the U.S. State Department in November 2012, citing Mexican government data, “47,515 people were killed in narcotics-related violence in Mexico between Dec. 1, 2006, and Sept. 30, 2011,with 12,903 narcotics-related homicides in the first nine months of 2011 alone.” The warning also cited gun battles occurring “in broad daylight on streets and other public venues” as well as the prevalence of carjackings and highway robbery in the border regions.13 However, February 2013 marked a three-year low in the country’s murder rate, which remains below that of Brazil.Yet Mexico’s violence problem can be a scary proposition for companies looking to locate facilities there. This isn’t lost on government officials, although Peña Nieto’s plan has amounted to little beyond naming a security adviser and targeting economic improvement to reduce crime. Something else must be done. In fact, in an article published last year by CNBC.com, Andrew Selee, director of the Mexico Institute, a Washington think tank, summarized the resulting chilling effect on business: “It’s like the Mexican economy is driving with the emergency brake on. You can only imagine if the violence weren’t going on,its growth could be extraordinary.”14

China has encountered challenges of a different sort when it comes to worker and consumer safety. Its labor problems have come to the forefront in recent years, after a number of incidents, including explosions and improper use of toxic chemicals, resulted in many injuries and even deaths at Chinese factories tasked with producing iPhones and iPads. One manufacturer made headlines in 2010 after a spate of employee suicides prompted the company to install worker hotlines and even safety nets on some of its buildings to catch people who jumped. A much-cited New York Times article detailed the working conditions at some of these plants, citing 12-hour workdays, six-day workweeks and dormitory accommodations of 20 people in a three-room apartment.15

Product safety has been another ongoing concern, peaking in 2007 with the Food and Drug Administration’s ban on imported Chinese toothpaste because it may contain harmful levels of diethylene glycol, which is used in antifreeze, and a massive recall of more than a million Chinese-made toys that may contain high levels of lead. As recently as this year, though,China has faced related issues, such as the discovery of cadmiumin its rice supply and more recalls of infant formula because of contamination problems. China’s leaders have been attempting to respond to concerns more transparently, especially those related to environmental issues.16

Less imminently dangerous, but also problematic for business in China are counterfeit production and a perceived lack of court enforcement for intellectual property rights. The advantage here goes to Mexico, according to Morgan Stanley, which noted that, “Mexico offers a more attractive environment for multinational corporations concerned about piracy, copyrights and protection from industrial espionage than some of its Asian competitors.”17

A Matter of Convenience
Beyond economic slowdowns, leadership transitions, labor costs, safety concerns and energy sources, some decisions comedown to what is easiest for a company and its executives. When choosing between Mexico and China as an outsourcing partner, American business leaders may decide that all else being equal, Mexico is simply more convenient. Travel times and expenses are markedly lower, work visas are easier to obtain, and the language and cultural barriers are not as high. Currency is also in Mexico’s favor, as the peso floats along with the U.S. dollar, while China’s currency manipulation has been a sore spot in international trade talks. Mexico also operates on similar time zones and holiday schedules as the U.S., meaning fewer overnight conference calls and better-aligned availability.

Investment Implications
As outlined above, China’s comparative advantage versus Mexico has eroded on multiple fronts. This change in competitive positioning is resulting in global investment implications, with potential winners and losers dynamically emerging.We believe multiple industries are positioned to benefit from this shift, including:ƒƒ

  • North American resource companies. As Mexican manufacturing expands, factories there will consume more natural resources. To meet this rising demand, North American shale oil and gas may represent a material portion of Mexico’s energy supply, which would boost both infrastructure suppliers and hydrocarbon producers.
  • North American retailers and manufacturers. They can capitalize on both the cost savings of manufacturing in Mexico and shorter lead times in the supply chain. In particular, shorter lead times can be crucially important in helping companies respond to their customers’ needs in this increasingly competitive world.ƒƒ
  • Industrial automation companies. China needs to find ways to reduce its labor costs, and one proven method of doing so is by automating factory processing. The penetration of automated factories in China is low compared with the developed world.

Meanwhile, other industries will feel a negative impact from the change, including:

  • The ocean-transportation industry. As China loses market share to Mexico, fewer goods will be shipped from the Asia-Pacific region to the U.S. and other countries in the Western Hemisphere. As this industry has high fixed costs, any loss of volume will pressure margins.ƒƒ
  • Chinese retail plays. For years, Chinese consumer wages have grown at double-digit rates, fueling the retail industry. As wage growth slows, the risk is that Chinese retailers will expand too fast, leading to an oversupply of retail space.

Conclusion
We believe that U.S. and multinational manufacturers will continue to evaluate Mexico’s potential as a manufacturing center and likely come away with favorable conclusions. The country’s costs and wages remain reasonable, and its proximity to the U.S. offers numerous benefits. In addition, Mexico’s renewed reform efforts, if ultimately implemented, could significantly boost its economic growth. At the same time, China’s wages and real estate prices continue to rise, making it a less attractive alternative for American outsourcing. However, economic growth in both countries is rather tenuous, and safety is still a concern. As these dynamics evolve, we expect an ongoing shift in manufacturing from China to Mexico, with winners and losers emerging across the global landscape.

References
1Statement by the Honorable Zhou Xiaochuan, Governor of the IMFfor China, at the 27th meeting of the International Monetary and Financial Committee, Washington, D.C., April 20, 2013.
2Ian Chua and Pete Sweeney, “Moody’s lowers China outlook after Fitch downgrade,” Reuters, April 16, 2013.
3Jane Cai, “China tightens rules for local government debt sales,” South China Morning Post, May 8, 2013.
4Charles Roth, “Mexico’s First Quarter GDP Down, but Far From Out,”The Wall Street Journal, May 17, 2013.
5Alexandra Alper, “Mexico March industrial output contracts most in 3 yrs,” Reuters, May 10, 2013.
6Michael O’Boyle and Krista Hughes, “Fitch upgrades Mexico to BBB-plus on reform momentum,” Reuters, May 8, 2013.
7For information on the Ease of Doing Business Index methodology, please click here: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-Chapters/Ease-of-doing-business-and-distance-to-frontier.pdf
8“The end of cheap China,” The Economist, March 10, 2012.
9Krista Hughes, “Mexican manufacturing: from sweatshops to high-tech motors,” Reuters, April 9, 2013.
10“US Manufacturing Renaissance: Is It a Masterpiece or a (Head)Fake?” Morgan Stanley Research, April 29, 2013.
11Carlos Manuel Rodriguez, “U.S. shale glut means gas shortage for Mexican industry: Energy,” Bloomberg, Sept. 4, 2012.
12Mexico analysis, U.S. Energy Information Administration, last updated Oct. 17, 2012.
13“Travel Warning: Mexico,” U.S. Department of State, Bureau of Consular Affairs, Nov. 20, 2012.
14Deborah Caldwell, “Crime explodes — but an economy booms,” CNBC.com, Sept. 18, 2012.
15Charles Duhigg and David Barboza, “In China, human costs are built into an iPad,” The New York Times, January 25, 2012.
16Te-Ping Chen, “Threat to rice fuels latest Chinese uproar,” The Wall Street Journal, May 21, 2013.
17“US Manufacturing Renaissance: Is It a Masterpiece or a (Head) Fake?” Morgan Stanley Research, April 29, 2013.
Disclosure
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President’s proposed tax reform is huge threat to Maquiladoras and border economy

October 7th, 2013

Mexico’s President Enrique Pena Nieto recently presented to Congress the executive’s fiscal reform initiative which will be evaluated by the House of Representatives first and then by the Senate.

The highly controversial proposal, originally expected to structurally reform Mexico’s budget model, turned out to be a general tax increase on businesses, higher income earners and international firms manufacturing in Mexico, among other already “captive” tax payers.

The proposal does not include any provisions for the reduction or transparency of public spending, and does not properly provide for the incorporation of informal, unregistered businesses to the taxpaying base.

According to Alfredo Coutino, Moody’s Latin America Director: “The proposal is short of the expectations originally outlined by the President and it does not reach the objective of balancing the budget.

The proposal is based on hiking current taxes and creating new ones for the current tax payers; it does not propose to improve the efficiency of the tax authority by increasing the number of tax payers.”

The proposition is a political social initiative as it seeks to dedicate a large portion of the tax proceeds to support unemployment insurance and universal health coverage in Mexico. It also waives to impose IVA (value added tax, VAT, or sales tax) on food and medicines (The possibility of taxing food and medicines was highly unpopular and was strongly opposed by the left parties).

Selective social programs are certainly needed in Mexico, but not at the sole expense of businesses.

Although rather unlikely, some hope that the government controlled House of Representatives is able to produced a more balanced proposal that includes spending cuts, transparency and accountability by state and federal entities and the expansion of the tax payers base.

Mexico’s legislators were setting an example so far through the “Pact for Mexico”, blitzing through reforms in education, telecom and anti-trust among others. Although the heat of recent elections seems to have dented the process, Mexico’s legislators are not yet ready to “join the club” of their U.S. colleagues where Congress is practically paralyzed.

The resulting tax reform legislation in Mexico, if passed, is expected to be announced during this coming week of October 20.

THE EFFECT ON MAQUILADORAS

Maquiladoras’ oldest cry in Mexico is the need for permanent and clear tax rules so that they can adequately make their typical 5-year financial and production plans. But the treasury department frequently changes the rules defying Mexico’s competitiveness to attract foreign investment. This time around, the resilience of maquiladoras may be pushed over the cliff.

In a nutshell, the new tax reform proposal includes the elimination of the preferential tax treatment that the maquiladoras currently have, taking them from a preferential corporate income tax rate of 17.5% to a rate of 30%.

In addition, the proposal will also impose a new 10% tax on corporate dividends and it will also expand the taxable income base by eliminating deductions and changing the “price-transfer” rules between parent company and maquiladora subsidiaries.

Also, the tax proposal practically eliminates the highly successful maquiladora regime that grants a tax free treatment on temporary importations of industrial inputs, by charging IVA in such imports. Although this IVA is subject to a drawback, it would take a huge amount of funds to finance its 6-month cycle from the time of payment until the eventual reimbursement.

Also, under the new rules, maquiladoras’ parent companies would be required to pay 16% IVA tax on the value of buy/sell transactions on the production supply chain or maquila to maquila transfers.

Unless they make profound changes to their global corporate structure, the IVA would directly impact the cost of doing business, because they would not be able to recover it. This would directly affect many Mexican businesses that are involved in the supply chain structure.

Carlos Angulo, PAN Congressman and member of the Maquiladora Committee and Secretary of the Constitutional Reform Committee of the lower house said: “We can summarize the effects of the proposed tax reform on the maquiladora industry in one word: Catastrophic.”

“For example, under the new rules, if implemented, the annual income tax bill of a typical 500-workers maquiladora operation would go from a current level of about $24 Million Pesos to over $230 Million”, explained Angulo, “..and the maquiladora industry as a whole would need to increase its working capital by US$17.5 Billion at an annual financial cost of about US$750 Million just to keep up with the IVA requirements on temporary imports.”

“Supply chain operations between maquiladoras, a current common practice, would be interrupted if faced with cascading IVA impositions. The tax reform proposal would be like a catastrophic knock-out blow to the maquiladora industry global competitiveness” said Angulo.

Luis Aguirre Lang, President of the Maquiladora National Council (INDEX) expressed his frustration as follows: “The tax reform has created panic among the international firms operating in Mexico. We could lose up to two million, three hundred thousand manufacturing jobs if this reform is approved as proposed.”

THE EFFECT ON THE BORDER ECONOMY

The tax reform includes a generalized consumption increase of the IVA rate within the border region from 11% to 16%.

Any housewife living in Ciudad Juarez knows what this means: More trips to El Paso to buy clothing, house items, school supplies, etc., anything that will be taxed in Mexico at 16%, she can get in El Paso at a sales tax rate of 8.25%, which with a little effort she can get refunded.

And the flow of visitors from El Paso to Juarez, which had recently started to pick-up as the security improved, will certainly suffer as restaurants, bars and other IVA taxed purchases will automatically increase their prices by 5% if the tax reform gets approved by Congress.

The reduction of consumer purchases in Juarez as a result of the IVA increase, will weigh in to increase the closing of commercial businesses, unemployment and violence.

The combination of reduced consumption and pulling the rug from under the maquiladoras will have a multiplying, significant negative effect on Mexican border cities’ economies and their quality of life.

CONCLUSION

Carlos Angulo summed it up as follows: “The tax reform proposal appears to be designed by a freshman student with a total ignorance of border commerce and international production sharing practices.”

It is expected that industry associations, state and city governments and everybody else with a stake in the maquiladora industry and the border economy will lobby heavily in the weeks to come to mitigate the negative effects of the tax reform on the 43 year-old successful maquiladora program.

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Juarez-El Paso NOW Staff report

 

For Migrants, New Land of Opportunity Is Mexico

September 22nd, 2013

The New York Times

 


September 21, 2013
By

MEXICO CITY — Mexico, whose economic woes have pushed millions of people north, is increasingly becoming an immigrant destination. The country’s documented foreign-born population nearly doubled between 2000 and 2010, and officials now say the pace is accelerating as broad changes in the global economy create new dynamics of migration.

Rising wages in China and higher transportation costs have made Mexican manufacturing highly competitive again, with some projections suggesting it is already cheaper than China for many industries serving the American market. Europe is sputtering, pushing workers away. And while Mexico’s economy is far from trouble free, its growth easily outpaced the giants of the hemisphere — the United States, Canada and Brazil — in 2011 and 2012, according to International Monetary Fund data, making the country more attractive to fortune seekers worldwide.

The new arrivals range in class from executives to laborers; Mexican officials said Friday that residency requests had grown by 10 percent since November, when a new law meant to streamline the process took effect. And they are coming from nearly everywhere.

Guillaume Pace saw his native France wilting economically, so with his new degree in finance, he moved to Mexico City.

Lee Hwan-hee made the same move from South Korea for an internship, while Spanish filmmakers, Japanese automotive executives and entrepreneurs from the United States and Latin America arrive practically daily — pursuing dreams, living well and frequently succeeding.

“There is this energy here, this feeling that anything can happen,” said Lesley Téllez, a Californian whose three-year-old business running culinary tours served hundreds of clients here last year. “It’s hard to find that in the U.S.”

The shift with Mexico’s northern neighbor is especially stark. Americans now make up more than three-quarters of Mexico’s roughly one million documented foreigners, up from around two-thirds in 2000, leading to a historic milestone: more Americans have been added to the population of Mexico over the past few years than Mexicans have been added to the population of the United States, according to government data in both nations.

Mexican migration to the United States has reached an equilibrium, with about as many Mexicans moving north from 2005 to 2010 as those returning south. The number of Americans legally living and working in Mexico grew to more than 70,000 in 2012 from 60,000 in 2009, a number that does not include many students and retirees, those on tourist visas or the roughly 350,000 American children who have arrived since 2005 with their Mexican parents.

“Mexico is changing; all the numbers point in that direction,” said Ernesto Rodríguez Chávez, the former director of migration policy at Mexico’s Interior Ministry. He added: “There’s been an opening to the world in every way — culturally, socially and economically.”

But the effect of that opening varies widely. Many economists, demographers and Mexican officials see the growing foreign presence as an indicator that global trends have been breaking Mexico’s way — or as President Enrique Peña Nieto often puts it, “the stars are aligning” — but there are plenty of obstacles threatening to scuttle Mexico’s moment.

Inequality remains a huge problem, and in many Mexican states education is still a mess and criminals rule. Many local companies that could be benefiting from Mexico’s rise also remain isolated from the export economy and its benefits, with credit hard to come by and little confidence that the country’s window of opportunity will stay open for long. Indeed, over the past year, as projections for growth have been trimmed by Mexico’s central bank, it has become increasingly clear to officials and experts that the country cannot expect its new competitiveness to single-handedly move it forward.

“The fact that there is a Mexican moment does not mean by itself it’s going to change our future,” said Ildefonso Guajardo Villarreal, Mexico’s economy minister. “We have to take advantage of the Mexican moment to do what is required of us.” The challenge, he said, is making sure that the growing interest in his country benefits all Mexicans, not just newcomers, investors and a privileged few.

Mexico has failed to live up to its economic potential before. “They really blew a moment in 1994 when their currency was at rock bottom and they’d just signed Nafta,” said Kevin P. Gallagher, a professor of international relations at Boston University, adding that those conditions created a big opportunity for Mexican exports.

But now, he and others contend, Mexico has another shot. If the country of 112 million people can harness the energy of foreigners and newly educated Mexicans, become partners with the slew of American firms seeking alternatives to China, and get them to do more than just hire cheap labor, economists and officials say Mexico could finally become a more equal partner for the United States and the first-world country its presidents have promised for decades.

“This is their second chance,” Professor Gallagher said. “And this time, they really have to capitalize on it.”

Protection to Openness

For most the 20th century, Mexico kept the world at arm’s length. The 1917 Constitution guaranteed Mexicans would be given priority over foreigners for various jobs, and until the 1980s the country favored policies that protected domestic industry from imports.

Mexico was never totally closed — midcentury wars in Europe and the Middle East sent ripples of immigrants to Mexico, while Americans and Central Americans have always maintained a presence. But it was not a country that welcomed outsiders; the Constitution even prohibited non-Mexicans from directly owning land within 31 miles of the coast and 62 miles of the nation’s borders.

Attitudes began to soften, however, as Mexico’s relationship with the United States began to change. Many economists and social scientists say that closer ties with Mexico’s beloved and hated neighbor to the north, through immigration and trade, have made many Mexicans feel less insular. Millions of emigrants send money earned abroad to relatives in Mexico, who then rush out to Costco for more affordable food and electronics. Even the national soccer team, after decades of resistance, now includes two Argentine-born midfielders.

“It’s a new era in terms of our perspective,” said Francisco Alba Hernández, a scholar at the Colegio de México’s Center for the Study of Urban and Environmental Demographics. “We are now more certain about the value of sharing certain things.”

Like immigrants the world over, many of Mexico’s newcomers are landing where earlier arrivals can be found. Some of the growth is appearing in border towns where foreign companies and binational families are common. American retirees are showing up in new developments from San Miguel de Allende to other sunny spots around Cancún and Puerto Vallarta. Government figures show that more Canadians are also joining their ranks.

But the most significant changes can be found in central Mexico. More and more American consultants helping businesses move production from China are crisscrossing the region from San Luis Potosí to Guadalajara, where Silicon Valley veterans like Andy Kieffer, the founder of Agave Lab, are developing smartphone applications and financing new start-ups. In Guanajuato, Germans are moving in and car-pooling with Mexicans heading to a new Volkswagen factory that opened a year ago, and sushi can now be found at hotel breakfasts because of all the Japanese executives preparing for a new Honda plant opening nearby.

Here in the capital, too, immigrants are becoming a larger proportion of the population and a growing part of the economy and culture, opening new restaurants, designing new buildings, financing new cultural offerings and filling a number of schools with their children. Economics has been the primary motivator for members of all classes: laborers from Central America; middle-class migrants like Manuel Sánchez, who moved here from Venezuela two years ago and found a job selling hair products within 15 days of his arrival; and the global crème de la crème in finance and technology, like Mr. Pace, 26, whose first job in Mexico was with a major French bank just after graduating from the University of Reims.

Mr. Pace, bearded and as slim as a Gauloises, said he moved to Mexico in 2011 because college graduates in France were struggling to find work. He has stayed here, he said, because the affordable quality of life beats living in Europe — and because Mexico offers more opportunity for entrepreneurship.

Sitting at a Belgian cafe with a laptop this spring, speaking Spanish with a lilt, he said he recently opened a communications business that was off to a blazing start. One of his partners was French, the other Mexican, and in their first few months of operation, they got more than 30 clients, including VivaAerobus, a discount airline aimed at Mexico’s emerging middle class.

More recently, as Mexico’s economy has slowed, Mr. Pace said a few clients had canceled planned promotions, but over all his business has grown this year to include work for international brands like Doritos and the beer Dos Equis.

“We’re not going back to France,” Mr. Pace said. “The business is doing well and we’re very happy in Mexico.”

Some Mexicans and foreigners say Europeans are given special treatment because they are perceived to be of a higher class, a legacy of colonialism when lighter skin led to greater privileges. But like many other entrepreneurs from foreign lands, Mr. Pace and his partners are both benefiting from and helping to shape how Mexico works. Mr. Rodríguez, the former Interior Ministry official, Cuban by birth, said that foreigners had helped make Mexico City more socially liberal.

And with so many Mexicans working in the informal economy, foreigners have little trouble starting new ventures. Many immigrants say Mexico is attractive because it feels disorderly, like a work in progress, with the blueprints of success, hierarchy and legality still being drawn. “Not everyone follows the rules here, so if you really want to make something happen you can make it happen,” said Ms. Téllez, 34, whose food business served more than 500 visitors last year. “No one is going to fault you for not following all the rules.”

Mr. Lee said that compared with South Korea, where career options were limited by test scores and universities attended, Mexico allowed for more rapid advancement. As an intern at the Korea Trade-Investment Promotion Agency here, he said he learned up close how Samsung and other Korean exporters worked. “Here,” he said, “the doors are more open for all Koreans.” He added that among his friends back home, learning Spanish was now second only to learning English.

The results of that interest are becoming increasingly clear. There were 10 times as many Koreans living in Mexico in 2010 as in 2000. Officials at a newly opened Korean cultural center here say at least 12,000 Koreans now call Mexico home, and young Mexicans in particular are welcoming them with open arms: there are now 70 fan clubs for Korean pop music in Mexico, with at least 60,000 members.

A Creative Magnet

Europe, dying; Mexico, coming to life. The United States, closed and materialistic; Mexico, open and creative. Perceptions are what drive migration worldwide, and in interviews with dozens of new arrivals to Mexico City — including architects, artists and entrepreneurs — it became clear that the country’s attractiveness extended beyond economics.

Artists like Marc Vigil, a well-known Spanish television director who moved to Mexico City in October, said that compared with Spain, Mexico was teeming with life and an eagerness to experiment. Like India in relation to England, Mexico has an audience that is larger and younger than the population of its former colonial overlord. Mr. Vigil said that allowed for clever programming, adding that he already had several projects in the final stages of negotiation.

“In Spain, everything is a problem,” he said. “Here in Mexico, everything is possible. There is more work and in the attitude here, there is more of a spirit of struggle and creativity.”

Diego Quemada-Díez, another Spanish director who said he was the first person in his family to leave Spain since at least the 1400s, moved to Mexico in 2008 after working as a camera operator in Hollywood. He went to film school at the American Film Institute and completed a short film that won several awards, but he said he moved to Mexico because the United States had become creatively restrictive. He wanted to make a film without famous actors, about Central American immigrants. In Los Angeles, no producers would bite. Here, the government provided more than $1 million in financing. The film, La Jaula de Oro, had its premiere at Cannes this year, with its young actors winning an award.

“Europe feels spiritually dead and so does the United States,” Mr. Quemada-Díez said. “You end up wanting something else.”

He struggled to make sense of Mexico at first. Many foreigners do, complaining that the country is still a place of paradox, delays and promises never fulfilled for reasons never explained — a cultural clash that affects business of all kinds. “In California, there was one layer of subtext,” Mr. Quemada-Díez said. “Here there are 40 layers.”

Mexico’s immigrant population is still relatively small. Some officials estimate that four million foreigners have lived in Mexico over the past few years, but the 2010 census counted about one million, making around 1 percent of the country foreign-born compared with 13 percent in the United States. Many Mexicans, especially among the poor, see foreigners as novel and unfamiliar invaders.

Race, ethnicity and nationality matter. Most of the immigrants who have the resources or corporate sponsorship to gain legal residency here come from the United States and Europe. The thousands of Central American immigrants coming to Mexico without visas — to work on farms or in cities, or to get to the United States — are often greeted with beatings by the Mexican police or intense pressure to work for drug cartels. Koreans also say they often hear the xenophobic refrain, “Go back to your own country.”

Mr. Sánchez, the hair products salesman from Venezuela, said Mexicans who had not been able to rise above their economic class mostly seemed to resent the mobility of immigrants. In a country still scarred by the Spanish conquistadors, he said many of his Mexican neighbors responded with shock when they discovered that his younger sister was studying medicine at Mexico’s national university. Not that the quiet scorn is enough to deter him. “I earn more here in a year than I would in 10 years in my own country,” he said. “Mexicans don’t realize how great their country is.”

Many do, of course, especially those with experience elsewhere. Mexico has allowed dual nationality for more than a decade, and among the growing group of foreigners moving here are also young men and women born in Mexico to foreign parents, or who grew up abroad as the children of Mexicans. A globalized generation, they could live just about anywhere, but they are increasingly choosing Mexico.

Some are passionate idealists, like Luna Mancini, 27, a human rights lawyer working for the Supreme Court who was born in Mexico to Italian parents. After growing up in Barcelona, Spain, she returned to Mexico in 2009 because she felt that more could be done in Latin America, with law and with new tools of communication — digital video, social media — that encouraged grass-roots dialogue. Some, especially Mexican-Americans working in Mexico City’s hip culinary scene, have come here to reconnect with their roots. Others simply see Mexico as their best option, as an incubator for personal, professional and artistic growth.

Domingo Delaroiere, an architect whose father is French and mother is Mexican, said Mexico’s appeal — especially in the capital — was becoming harder to miss. When he came back here last year for a visit, after two and a half years in Paris, he said he was surprised. “Art, culture, fashion, architecture, design — the city was filling up with new spaces, things that are interesting, daring,” he said.

He soon decided it was time to move. Compared with Mexico, he said, “Nothing is happening in Paris.”

How Mexico Got Back in the Game

February 25th, 2013

The New York Times

 

February 23, 2013
By

MONTERREY, Mexico

IN India, people ask you about China, and, in China, people ask you about India: Which country will become the more dominant economic power in the 21st century? I now have the answer: Mexico.

Impossible, you say? Well, yes, Mexico with only about 110 million people could never rival China or India in total economic clout. But here’s what I’ve learned from this visit to Mexico’s industrial/innovation center in Monterrey. Everything you’ve read about Mexico is true: drug cartels, crime syndicates, government corruption and weak rule of law hobble the nation. But that’s half the story. The reality is that Mexico today is more like a crazy blend of the movies “No Country for Old Men” and “The Social Network.”

Something happened here. It’s as if Mexicans subconsciously decided that their drug-related violence is a condition to be lived with and combated but not something to define them any longer. Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil. Mexico has also greatly increased the number of engineers and skilled laborers graduating from its schools. Put all that together with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia and attracting more global investment than ever in autos, aerospace and household goods.

“Today, Mexico exports more manufactured products than the rest of Latin America put together,” The Financial Times reported on Sept. 19, 2012. “Chrysler, for example, is using Mexico as a base to supply some of its Fiat 500s to the Chinese market.” What struck me most here in Monterrey, though, is the number of tech start-ups that are emerging from Mexico’s young population — 50 percent of the country is under 29 — thanks to cheap, open source innovation tools and cloud computing.

“Mexico did not waste its crisis,” remarked Patrick Kane Zambrano, director of the Center for Citizen Integration, referring to the fact that when Mexican companies lost out to China in the 1990s, they had no choice but to get more productive. Zambrano’s Web site embodies the youthful zest here for using technology to both innovate and stimulate social activism. The center aggregates Twitter messages from citizens about everything from broken streetlights to “situations of risk” and plots them in real-time on a phone app map of Monterrey that warns residents what streets to avoid, alerts the police to shootings and counts in days or hours how quickly public officials fix the problems.

“It sets pressure points to force change,” the center’s president, Bernardo Bichara, told me. “Once a citizen feels he is not powerless, he can aspire for more change. … First, the Web democratized commerce, and then it democratized media, and now it is democratizing democracy.”

If Secretary of State John Kerry is looking for a new agenda, he might want to focus on forging closer integration with Mexico rather than beating his head against the rocks of Israel, Palestine, Afghanistan or Syria. Better integration of Mexico’s manufacturing and innovation prowess into America’s is a win-win. It makes U.S. companies more profitable and competitive, so they can expand at home and abroad, and it gives Mexicans a reason to stay home and reduces violence. We do $1.5 billion a day in trade with Mexico, and have been spending $300 million a day in Afghanistan. Not smart.

We need a more nuanced view of Mexico. While touring the Center for Agrobiotechnology at Monterrey Tech, Mexico’s M.I.T., its director, Guy Cardineau, an American scientist from Arizona, remarked to me that, in 2011, “my son-in-law returned from a tour of duty in Afghanistan and we talked about having him come down and visit for Christmas. But he told me the U.S. military said he couldn’t come because of the [State Department] travel advisory here. I thought that was very ironic.”

Especially when U.S. companies are expanding here, which is one reason Mexico grew last year at 3.9 percent, and foreign direct investment in Monterrey hit record highs.

“Twenty years ago, most Mexican companies were not global,” explained Blanca Treviño, the president and founder of Softtek, one of Mexico’s leading I.T. service providers. They focused on the domestic market and cheap labor for the U.S. “Today, we understand that we have to compete globally” and that means “becoming efficient. We have a [software] development center in Wuxi, China. But we are more efficient now in doing the same business from our center in Aguascalientes, [Mexico], than we are from our center in Wuxi.”

Mexico still has huge governance problems to fix, but what’s interesting is that, after 15 years of political paralysis, Mexico’s three major political parties have just signed “a grand bargain,” a k a “Pact for Mexico,” under the new president, Enrique Peña Nieto, to work together to fight the big energy, telecom and teacher monopolies that have held Mexico back. If they succeed, maybe Mexico will teach us something about democracy. Mexicans have started to wonder about America lately, said Bichara from the Center for Citizen Integration. “We always thought we should have our parties behave like the United States’ — no longer. We always thought we should have the government work like the United States’ — no longer.”

Juarez Crime and Homicides Decline Notably – Really.

February 5th, 2013

Ciudad Juarez Homicides per 100000 Inhabitants

For the last few years, the people of Juarez lived in a warlike collective trauma that reached its peak in January-February, 2011 when, on average, almost ten lives were taken per day in the belligerent streets of the battered border city. In retrospect, the reality of a leading community the size of Juarez stroked simultaneously by the great economic recession and the security crisis seems implausible even for a movie script.

The toll has been high and widespread. A drought of new manufacturing projects, the emigration of talent, the closing of businesses, the constant mantra claiming for peace and the shroud of fear, all tested the resilience of Juarez. The only consolation is thinking that it could have been a lot worse. And yes, it is important to mention “The elephant in the room” because the violence was real and because if we don’t remember the past we might be condemned to repeat it. Fortunately, the elephant is on its way out of the room. The “Murder capital of the world”- no more.

According to data from the trustworthy source Ciudad Juarez “Mesa de Seguridad” (Security council), a group that includes the three levels of government (Federal, State, City) and private citizens (persons without public or government positions) from the local academic, business and social institutions, the incidence of crime and homicides in Juarez has declined significantly. The graph in the Exhibit shows the number of homicides in Juarez per 100,000 inhabitants for the last three years. Note that since the peak in early 2011 when murders/100k were at a mindboggling 240, they have had a constant decline.

The lowest figure of 24/100k was recorded in November 2012, an arithmetical drop of 900%…! The 12-month average of homicides/100k for 2012 was 57, and the last 6-month’s average was 31. Statistically, the data series for the three years in record can be regarded as a significant trend. But other important indicators are also receding as explained in The Mesa de Seguridad’s report which may be found at www.mesadeseguridad.org

For example, auto thefts with violence have gone from over 500 per month in the first quarter of 2011 to about 65 per month in Q4-2012, presenting a much safer panorama in the streets. For the general public, businesspersons and tourists driving, this is probably the most important security indicator of all.

The report also shows large and important drops in auto theft without violence, convenience stores assaults, kidnappings and extortions. Where do we want to be to be able to say that Ciudad Juarez is safe? According to the Mesa de Seguridad objectives for 2013, the target for homicides/100k per month is 15, kidnappings and extortions should be at zero. The report doesn’t show an objective for auto theft with violence, but reaching a level of 30 or under per month seems reasonable.

Now, border regions and ports everywhere in the world are by nature less safe than most interior cities, so it is hard for Juarez to aspire to be level with the likes of Seville, Little Rock or San Jose, Costa Rica. But as shown in the graph, Juarez is becoming a lot safer, and if measured by the homicides/100k yardstick, it is safer than other cities in the U.S. and abroad. But by that token, any city is dangerous if you are with the wrong company, at the wrong place and time. The most important things for the inhabitants of a city and visitors to remain safe are to be careful, avoid risk and keep your eyes and ears open.

The task in Juarez for now is to finish getting rid of the elephant and making sure that it doesn’t come back.

What Should the Top Priority be for U.S.-Mexico Relations?

December 4th, 2012

by Shannon K. O’Neil
December 4, 2012

Mexico's new President Enrique Pena Nieto waves after taking oath in congress in Mexico City (Stringer/Courtesy of Reuters).
Mexico’s new President Enrique Pena Nieto waves after taking oath in congress in Mexico City (Stringer/Courtesy of Reuters).

To commemorate Enrique Peña Nieto’s inauguration, the Americas Society/Council of the Americas asked many avid Mexico watchers what should be the top priority for U.S.-Mexico relations going forward. Here was my response:

Mexico and the United States should focus on deepening economic ties. Commercial interdependence is already substantial, with nearly a half trillion dollars’ worth of goods crossing the border each year. Some 80 percent of Mexico’s exports go north, and for nearly half of U.S. states, Mexico is the number one or two destination for exports— supporting an estimated 6 million American jobs today.

These exports are more often than not pieces and parts—not finished goods—evidence of the regional supply chains developing in North America. In fact, 40 percent (on average) of every product imported from Mexico is really “made in America.” This compares to just 4 percent in goods from China.

Facilitating and expanding these production links will require making cross-border trade more efficient through investments in border infrastructure, standardized regulations (so that countries do not need fulfill similar requirements in both countries), and common customs forms, among other efforts. But they will also enable companies to become more globally competitive, benefiting businesses, workers, and ultimately the economies of both nations.

The rise of Mexico: America needs to look again at its increasingly important neighbor

November 26th, 2012

 

The Economist

Mexico and the United States

Nov 24th 2012

NEXT week the leaders of North America’s two most populous countries are due to meet for a neighbourly chat in Washington, DC. The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise.

The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor his vice-president mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population). And Mexico itself is more than the bloody appendix of American imaginations. In terms of GDP it ranks just ahead of South Korea. In 2011 the Mexican economy grew faster than Brazil’s—and will do so again in 2012.

Yet Americans are gloomy about Mexico, and so is their government: three years ago Pentagon analysts warned that Mexico risked becoming a “failed state”. As our special report in this issue explains, that is wildly wrong. In fact, Mexico’s economy and society are doing pretty well. Even the violence, concentrated in a few areas, looks as if it is starting to abate.

Mañana in Mexico

The first place where Americans will notice these changes is in their shopping malls. China (with more than 60 mentions in the presidential debates) is by far the biggest source of America’s imports. But wages in Chinese factories have quintupled in the past ten years and the oil price has trebled, inducing manufacturers focused on the American market to set up closer to home. Mexico is already the world’s biggest exporter of flat-screen televisions, BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México”.

The doorway for those imports is a 2,000-mile border, the world’s busiest. Yet some American politicians are doing their best to block it, out of fear of being swamped by immigrants. They could hardly be more wrong. Fewer Mexicans now move to the United States than come back south. America’s fragile economy (with an unemployment rate nearly twice as high as Mexico’s) has dampened arrivals and hastened departures. Meanwhile, the make-up of Mexican migration is changing. North of the border, legal Mexican residents probably now outnumber undocumented ones. The human tide may turn along with the American economy, but the supply of potential border-hoppers has plunged: whereas in the 1960s the average Mexican woman had seven children, she now has two. Within a decade Mexico’s fertility rate will fall below America’s.

Undervaluing trade and overestimating immigration has led to bad policies. Since September 11th 2001, crossing the border has taken hours where it once took minutes, raising costs for Mexican manufacturers (and thus for American consumers). Daytrips have fallen by almost half. More crossing-points and fewer onerous checks would speed things up on the American side; pre-clearance of containers and passengers could be improved if Mexico were less touchy about having American officers on its soil (something which Canada does not mind). After an election in which 70% of Latinos voted for Mr Obama, even America’s “wetback”-bashing Republicans should now see the need for immigration-law reform.

No time for a siesta

The least certain part of Mexico’s brighter mañana concerns security. This year has seen a small drop in murders. Some hotspots, such as Ciudad Juárez, have improved dramatically. A third of Mexico has a lower murder rate than Louisiana, America’s most murderous state. Nevertheless, the “cartels” will remain strong while two conditions hold. The first is that America imports drugs—on which its citizens spend billions—which it insists must remain illegal, while continuing to allow the traffickers to buy assault weapons freely. American politicians should heed the words of Felipe Calderón, Mexico’s outgoing president, who after six years and 60,000 deaths says it is “impossible” to stop the drug trade.

The second black spot is that Mexican policing remains weak. If Mr Peña is to keep his promise to halve the murder rate, he must be more effective than his predecessor in expanding the federal police and improving their counterparts at state level. That is just one of several issues that will test Mr Peña. He cannot achieve his ambition to raise Mexico’s annual growth rate to 6% by relying solely on export manufacturing. Upping the tempo requires liberalising or scrapping state-run energy monopolies, which fail to exploit potentially vast oil and gas reserves. Boosting Mexico’s poor productivity means forcing competition on a cosy bunch of private near-monopolies—starting with telecoms, television, cement and food and drink. That means upsetting the tycoons who backed his campaign.

This newspaper gave Mr Peña a lukewarm endorsement before July’s election, praising his economic plans but warning that his Institutional Revolutionary Party (PRI), which ran Mexico in an authoritarian and sometimes corrupt manner for most of the 20th century, has not changed much. Facing down interests within his own party may be Mr Peña’s hardest task. The head of the oil workers’ union is a PRI senator. The teachers’ union, which is friendly with the party, is blocking progress in education. A new labour reform has been diluted by PRI congressmen with union links.

Mr Peña, a good performer on the stump, should appeal beyond the PRI to a broad consensus for change among Mexicans. Time will tell if he measures up to the task. But the changes in Mexico go beyond the new occupant of Los Pinos. The country is poised to become America’s new workshop. If the neighbours want to make the most of that, it is time for them to take another look over the border.

Mexico’s Strategy

August 22nd, 2012

August 21, 2012 | 0900 GMT

Stratfor

By George Friedman

A few years ago, I wrote about Mexico possibly becoming a failed state because of the effect of the cartels on the country. Mexico may have come close to that, but it stabilized itself and took a different course instead — one of impressive economic growth in the face of instability.

Mexican Economics

Discussion of national strategy normally begins with the question of national security. But a discussion of Mexico’s strategy must begin with economics. This is because Mexico’s neighbor is the United States, whose military power in North America denies Mexico military options that other nations might have. But proximity to the United States does not deny Mexico economic options. Indeed, while the United States overwhelms Mexico from a national security standpoint, it offers possibilities for economic growth.

Mexico is now the world’s 14th-largest economy, just above South Korea and just below Australia. Its gross domestic product was $1.16 trillion in 2011. It grew by 3.8 percent in 2011 and 5.5 percent in 2010. Before a major contraction of 6.9 percent in 2009 following the 2008 crisis, Mexico’s GDP grew by an average of 3.3 percent in the five years between 2004 and 2008. When looked at in terms of purchasing power parity, a measure of GDP in terms of actual purchasing power, Mexico is the 11th-largest economy in the world, just behind France and Italy. It is also forecast to grow at just below 4 percent again this year, despite slowing global economic trends, thanks in part to rising U.S. consumption.

Total economic size and growth is extremely important to total national power. But Mexico has a single profound economic problem: According to the Organization for Economic Co-operation and Development, Mexico has the second-highest level of inequality among member nations. More than 50 percent of Mexico’s population lives in poverty, and some 14.9 percent of its people live in intense poverty, meaning they have difficulty securing the necessities of life. At the same time, Mexico is home to the richest man in the world, telecommunications mogul Carlos Slim.

Mexico ranked only 62nd in per capita GDP in 2011; China, on the other hand, ranked 91st. No one would dispute that China is a significant national power. Few would dispute that China suffers from social instability. This means that in terms of evaluating Mexico’s role in the international system, we must look at the aggregate numbers. Given those numbers, Mexico has entered the ranks of the leading economic powers and is growing more quickly than nations ahead of it. When we look at the distribution of wealth, the internal reality is that, like China, Mexico has deep weaknesses.

The primary strategic problem for Mexico is the potential for internal instability driven by inequality. Northern and central Mexico have the highest human development index, nearly on the European level, while the mountainous, southernmost states are well below that level. Mexican inequality is geographically defined, though even the wealthiest regions have significant pockets of inequality. We must remember that this is not Western-style gradient inequality, but cliff inequality where the poor live utterly different lives from even the middle class.

Mexico is using classic tools for managing this problem. Since poverty imposes limits to domestic consumption, Mexico is an exporter. It exported $349.6 billion in 2011, which means it derives just under 30 percent of its GDP from exports. This is just above the Chinese level and creates a serious vulnerability in Mexico’s economy, since it becomes dependent on other countries’ appetite for Mexican goods.

This is compounded by the fact that 78.5 percent of Mexico’s exports go to the United States. That means that 23.8 percent of Mexico’s export revenue depends on the appetite of the American markets. On the flip side, 48.8 percent of its imports come from the United States, making it an asymmetric relationship. Although both sides need the exports, Mexico must have them. The United States benefits from them but not on the same order.

Relations With the United States

This leads to Mexico’s second strategic problem: its relationship with the United States. When we look back to the early 19th century, it was not clear that the United States would be the dominant power in North America. The United States was a small, poorly integrated country hugging the East Coast. Mexico was much more developed, with a more substantial military and economy. At first glance, Mexico ought to have been the dominant power in North America.

But Mexico had two problems. The first was internal instability caused by the social factors that remain in place, namely Mexico’s massive, regionally focused inequality. The second was that the lands north of the Rio Grande line (referred to as Rio Bravo del Norte by the Mexicans) were sparsely settled and difficult to defend. The terrain between the Mexican heartland and the northern territories from Texas to California were difficult to reach from the south. The cost of maintaining a military force able to protect this area was prohibitive.

From the American point of view, Mexico — and particularly the Mexican presence in Texas — represented a strategic threat to American interests. The development of the Louisiana Purchase into the breadbasket of the United States depended on the Ohio-Mississippi-Missouri river system, which was navigable and the primary mode of export. Mexico, with its border on the Sabine River separating it from Louisiana, was positioned to cut the Mississippi. The strategic need to secure sea approaches through the Caribbean to the vulnerable Mexican east coast put Mexico in direct conflict with U.S. interests.

The decision by U.S. President Andrew Jackson to send Sam Houston on a covert mission into Texas to foment a rising of American settlers there was based in part on his obsession with New Orleans and the Mississippi River, which Jackson had fought for in 1815. The Texas rising was countered by a Mexican army moving north into Texas. Its problem was that the Mexican army, drawn to a great extent from the poorest elements of Mexican society in that country’s south, had to pass through the desert and mountains of the region and suffered from extremely cold and snowy weather. The Mexican soldiers arrived at San Antonio exhausted, and while they defeated the garrison there, they were not able to defeat the force at San Jacinto (near present-day Houston) and were themselves defeated.

The region that separated the heart of Texas from the heart of Mexico was a barrier for military movement that undermined Mexico’s ability to hold its northern territory. The geographic weakness of Mexico — this hostile region coupled with long and difficult-to-defend coastlines and no navy — extended west to the Pacific. It created a borderland that had two characteristics. It was of little economic value, and it was inherently difficult to police due to the terrain. It separated the two countries, but it became a low-level friction point throughout history, with smuggling and banditry on both sides at various times. It was a perfect border in the sense that it created a buffer, but it was an ongoing problem because it could not be easily controlled.

The defeat in Texas and during the Mexican-American War cost Mexico its northern territories. It created a permanent political issue between the two countries, one that Mexico could not effectively remedy. The defeat in the wars continued to destabilize Mexico. Although the northern territories were not central to Mexico’s national interest, their loss created a crisis of confidence in successive regimes that further irritated the core social problem of massive inequality. For the past century and a half, Mexico has lived with an ongoing inferiority complex toward and resentment of the United States.

The war created another reality between the two countries: a borderland that was a unique entity, part of both countries and part of neither country. The borderland’s geography had defeated the Mexican army. It now became a frontier that neither side could control. During the ongoing unrest surrounding the Mexican Revolution, it became a refuge for figures such as Pancho Villa, pursued by U.S. Gen. John J. Pershing after Villa raided American towns. It would not be fair to call it a no-man’s-land. It was an every-man’s-land, with its own rules, frequently violent, never suppressed.

The drug trade has replaced the cattle rustling of the 19th century, but the essential principle remains the same. Cocaine, marijuana and a number of other drugs are being shipped to the United States. All are imported or produced in Mexico at a low cost and then re-exported or exported into the United States. The price in the United States, where the products are illegal and in great demand, is substantially higher than in Mexico. That means that the price differential between drugs in Mexico and drugs in the United States creates an attractive market. This typically happens when one country prohibits a widely desired product readily available in a neighboring country.

This creates a substantial inflow of wealth into Mexico, though the precise size of this inflow is difficult to gauge. The precise amount of cross-border trade is uncertain, but one number frequently used is $40 billion a year. This would mean narcotic sales represent an 11.4 percent addition to total exports. But this underestimates the importance of narcotics, because profit margins would tend to be much higher on drugs than on industrial products. Assuming that the profit margin on legal exports is 10 percent (a very high estimate), legal exports would generate about $35 billion a year in profits. Assuming the margin on drugs is 80 percent, then the profit on them is $32 billion a year, almost matching profits on legal exports.

These numbers are all guesses, of course. The amount of money returned to Mexico as opposed to kept in U.S. or other banks is unknown. The precise amount of the trade is uncertain and profit margins are difficult to calculate. What can be known is that the trade is likely an off-the-books stimulant to the Mexican economy, generated by the price differential created by drug prohibition.

The advantage to Mexico also creates a strategic problem for Mexico. Given the money at stake and that the legal system is unable to suppress or regulate the trade, the borderland has again become — perhaps now more than ever — a region of ongoing warfare between groups competing to control the movement of narcotics into the United States. To a great extent, the Mexicans have lost control of this borderland.

From the Mexican point of view, this is a manageable situation. The borderland is distinct from the Mexican heartland. So long as the violence does not overwhelm the heartland, it is tolerable. The inflow of money does not offend the Mexican government. More precisely, the Mexican government has limited resources to suppress the trade and violence, and there are financial benefits to its existence. The Mexican strategy is to try to block the spread of lawlessness into Mexico proper but to accept the lawlessness in a region that historically has been lawless.

The American position is to demand that the Mexicans deploy forces to suppress the trade. But neither side has sufficient force to control the border, and the demand is more one of gestures than significant actions or threats. The Mexicans have already weakened their military by trying to come to grips with the problem, but they are not going to break their military by trying to control a region that broke them in the past. The United States is not going to provide a force sufficient to control the border, since the cost would be staggering. Each will thus live with the violence. The Mexicans argue the problem is that the United States can’t suppress demand and is unwilling to destroy incentives by lowering prices through legalization. The Americans say the Mexicans must root out the corruption among Mexican officials and law enforcement. Both have interesting arguments, but neither argument has anything to do with reality. Controlling that terrain is impossible with reasonable effort, and no one is prepared to make an unreasonable effort.

Another aspect is the movement of migrants. For Mexicans, the movement of migrants has been part of their social policy: It shifts the poor out of Mexico and generates remittances. For the United States, this has provided a consistent source of low-cost labor. The borderland has been the uncontrollable venue through which the migrants pass. The Mexicans don’t want to stop it, and neither, in the end, do the Americans.

Dueling rhetoric between the United States and Mexico hides the underlying facts. Mexico is now one of the largest economies in the world and a major economic partner with the United States. The inequality in the relationship comes from military inequality. The U.S. military dominates North America, and the Mexicans are in no position to challenge this. The borderland poses problems and some benefits for each, but neither is in a position to control the region regardless of rhetoric.

Mexico still has to deal with its core issue, which is maintaining its internal social stability. It is, however, beginning to develop foreign policy issues beyond the United States. In particular, it is developing an interest in managing Central America, possibly in collaboration with Colombia. Its purpose, ironically, is the control of illegal immigrants and drug smuggling. These are not trivial moves. Were it not for the United States, Mexico would be a great regional power. Given the United States, it must manage that relationship before any other.

Given Mexico’s dramatic economic growth and given time, this equation will change. Over time, we expect there will be two significant powers in North America. But in the short run, the traditional strategic problems of Mexico remain: how to deal with the United States, how to contain the northern borderland and how to maintain national unity in the face of potential social unrest.

Country report: Mexico

April 7th, 2012

David Agren | Mar 30, 2012 | Comments 0

Calderon’s rough ride and what still lies ahead.

Macroeconomic stability has become Mexico’s calling card in business circles.

 

Guanajuato, Mexico.

MEXICO CITY – Jose Avalos grows gourmet lettuce hydroponically in greenhouses covering 12.5 acres near Leon in Mexico’s west-central state of Guanajuato, near the presidential library opened by former leader Vicente Fox, who ended 71 years of Institutional Revolutionary Party rule in 2000.
The latter part of PRI rule was marked by self-inflicted economic injuries: recurring peso crises, soaring inflation and sky-high interest rates, to name three. But during the Fox administration, from 2000 to 2006, and the subsequent first five years of President Felipe Calderon’s term, Mexico has become  a model of good economic management, with a stable business environment and, in recent years, a boom in manufacturing products for export.

For a businessman such as Avalos – whose company, Next Vegetales, grows, markets and exports high-end lettuce varieties under the EVA brand – the change has been welcome.

“From a macroeconomic point of view, it couldn’t have been better,” Avalos says. “The finances of the country are outstanding.”

Macroeconomic stability has become Mexico’s calling card in business circles – even if media outlets have focused on the Calderon administration’s ongoing crackdown on drug cartels and organized crime, which has claimed more than 47,000 lives over the past five years. Inflation and interest rates have been low in Mexico, and foreign reserves reached a record $134 bi-llion in early 2012

“We have been most impressed with President Calderon and his team,” Leonardo A.  Rodriguez, president of Latin American operations for Emerson and Emerson Process Management, tells Latin Trade.

U.S.-based Emerson, a diversified global technology company, is one of the largest private multinational investors and employers in Mexico, with 17,000 employees and 37 plants that provide high-technology products and solutions to the world. Rodriguez has met Calderon several times.

“President Calderon and his Economy and Finance team have always come fully prepared to our meetings,” Rodriguez says. “Always. They have been proactive in their listening to our suggestions and recommendations. Additionally, there has been superior follow-up to outstanding items, with a strong bias for action.”

Rodriguez adds that Calderon’s cabinet and administrative team have understood that companies such as Emerson have many options of where to invest their assets. “They are ‘business-friendly,’ ” he says. “Thus the reason why we, as Emerson, continue and will continue to invest in Mexico.”

Improvements in the business climate have not gone unnoticed. Mexico has climbed steadily in the World Bank’s “Doing Business” surveys, ranking No. 53 in the most recent edition –up 20 places from 2006 – in part because of simplifications in the way taxes are paid and the removal of governmental red tape.

“There’s no doubt that the business climate in Mexico conti-nues being attractive,” says Johannes Hauser, managing director of the German-Mexican Chamber of Commerce, which has 530 members. “The proof of this is the foreign companies that continue investing in the country.”

One thing has been lacking, however: robust economic growth, leaving many people discontented as Mexico prepares for elections. This has put the PRI in a position to take back the presidency by positioning itself as a party that presided over past periods of security and prosperity – however fleeting they were.

Other shortcomings of the past six years include an inability to pass key structural reforms as opposition parties in the lower house of Congress – mainly the PRI – have refused to address the topic over the latter half of the Calderon administration. Reforms to Mexico’s inflexible labor markets are still pending, and fiscal and energy reforms approved in 2007 need to be expanded upon and deepened, according to proponents such as Gerardo Gutierrez Candiani, president of the business group Coparmex, the Mexican business owners’ confederation. Coparmex has 36,000 members throughout the country, represented by companies of all sizes.

Still, growth has been respectable in recent years, reaching 5.5 percent in 2010 and nearly 4 percent in 2011. The Finance Ministry projects growth of 3.5 percent in 2012, a solid figure given the world economic situation. Analysts attribute the Mexican situation to solid governance from the Finance Ministry and Central Bank.

“There’s been a great deal of continuity,” says Deborah Rinner, chief economist for the American Chamber of Commerce of Mexico. “What we’ve seen is a lot of consistency on what should be government macroeconomic policy.”

Members of the U.S. chamber are responsible for 70 percent of the direct investment that flows from the United States to Mexico.

In another change from past years, Rinner says, the economic shocks rocking the Mexican economy have come from abroad: the 2008 world economic crisis and the H1N1 influenza outbreak, which caused Mexico’s GDP to contract nearly 7 percent in 2009.

The manufacturing-for-export sector showed its sensitivity to external factors in 2008, when activity from the “maquiladoras” along Mexico’s northern border slowed production and triggered employee layoffs because of the U.S. slowdown and the global crisis. But activity bounced back nicely in places such as Ciudad Juarez – where, despite the worst of the cartel violence, cross-border trade between the city and neighboring El Paso, Texas, increased 47 percent in 2010, to $71 billion. That rate increased further by 13 percent over the first 10 months of 2011, Bob Cook, director of the El Paso Regional Economic Development Corporation, tells Latin Trade.

Places such as Ciudad Juarez demonstrate the ongoing challenges for Mexico and its economy. The city has suffered the closures of small businesses because of crime and extortion while nationwide internal demand has lagged, with a rebound starting only in 2010. Large, export-oriented businesses have thrived, however.

“We have to differentiate between businesses attending to exports and businesses attending to the internal markets,” says Adolfo Albo, chief economist at BBVA Bancomer, Mexico’s largest bank by assets.

Successful sectors in recent years, Albo says, include automobile and auto-parts manufacturing: Mexico produced a record 2.56 million vehicles in 2011, and exports increased 15 percent as the country gained market share in other Latin American countries. Notwithstanding, 2.14 million cars were exported in 2011, mainly to the United States. High-end consumer electronics and appliance manufacturing also increased, and an aerospace industry has been fomented. Activity also moved back from China because of rising wages overseas, currency issues and transportation costs, Albo says, allowing some Mexican products to gain market share in the United States.

“The breach has been practically closed between (the cost) of qualified manufacturing in the south of China and Mexico,” Albo tells Latin Trade.

Challenges remain in Mexico, however, and the Calderon administration has faced difficult security and political situations from the outset.

Calderon began his administration by winning reforms to the state workers’ pensions and the judicial and tax systems, along with a limited opening of the petroleum sector to increased private investment. But deeper reforms have been elusive. These include changing labor laws to make the hiring and firing of employees more flexible, increasing tax collection to allow the government to depend less on revenues from Pemex (another institution requiring reforms to offset dwindling reserves), and overhauling an education system in which students perform poorly on standardized tests and the country’s powerful teachers’ union wields enormous control.

Albo cited another area in which Mexico has fallen short in recent years: improving the rule of law. Courts remain slow, and judicial certainty can be lacking. Corruption remains proble-matic, too. The 2011 Corruption Perceptions Index by Transparency International ranked Mexico at No. 100, below Colombia, Peru and Brazil.

Then there is insecurity: BBVA Bancomer estimates that insecurity holds back economic growth by about 1 percent.

Still, the business sentiment remains strong in Mexico. The German-Mexico Chamber of Commerce reports that 70 percent of its members have investment plans for Mexico in 2012. Avalos, who boasts that his lettuce now sells in supermarkets in California’s Salinas Valley – known as “The Salad Bowl of the World” – has complaints about some water, power and agricultural issues, but he still feels bullish about Mexico’s economic future – especially considering where it has come from.

“This was unimaginable” a generation ago, Avalos says.

2011: the Year that Mexico Opens its Economy?

September 13th, 2011
Council on Foreign Relations Shannon K. O’Neil: Latin America’s Moment

Posted on August 16, 2011 10:00 am
by Shannon K. O’Neil

Mexico's stock exchange employees work at their desks in Mexico City (Henry Romero/Courtesy Reuters).Mexico’s stock exchange employees work at their desks in Mexico City (Henry Romero/Courtesy Reuters).

It is becoming increasingly possible that 2011 will be the year that Mexico truly began opening its closed economy. Though political reform seems to have failed and efforts to centralize Mexico’s many police forces stalled, the political system has taken important steps in the last several months that could establish a more open and level economic playing field. What is most interesting, and perhaps hopeful, about these developments is that all three branches of government are throwing their weight behind freer markets.

First, in mid-April, the executive branch through the regulatory Federal Competition Commission, or CFC issued the largest fine for monopolistic behavior in Mexico’s history. As I discussed in an earlier post, Telcel was slapped with a $1 billion penalty for inordinately high interconnection fees. What’s more, the fine marked the second sanction against the telecommunication giant – one more strike, and the government is legally allowed to break up Telcel for good.

The legislature was the next to flex its muscles against domestic conglomerates. Following on the heels of the Telcel ruling, both houses of the senate unanimously approved a number of changes to anti-trust laws designed to foster competition. The reform put in place harsher punishments for those found guilty of monopolistic practices, who can now be fined up to 10 percent of their profits and in the most serious cases (price fixing falls under this umbrella) face 10 years in jail. They also awarded more power to the CFC, including the right to conduct unannounced raids of companies under investigation.

Now the judiciary is jumping into the fray. Pushed by business groups, the public prosecutor’s office launched last month a criminal investigation into Héctor Osuna, former vice-president of the telecom regulator COFETEL, and his colleagues. Investigators suspect that COFETEL executives engaged in back door legal maneuvering to grant Telmex (owned by Carlos Slim) access to the television market on unfair grounds. Specifically, they believe that Osuna intentionally delayed ruling on Telmex’s request for a television concession past the specified deadline – despite his own admission that “for us there was never evidence that [Telmex] had complied with its requirements” — which technically counted as a tacit approval of the request. The result of the investigation is not just vital for Telmex, which would gain substantially by entering the television market, but also for the judicial branch, whose scorecard against national giants hangs in the balance (though the courts have defended more open markets before, notably in 2007 when the Supreme Court struck down a media law that stifled competition).

To be sure, these recent actions are mostly directed at the business interests of just one individual — Carlos Slim. On the other hand, if used more broadly, the new legislation and legal precedents could be real game changers for the Mexican economy. Either way, this is the first time we have seen such a serious full court press for more open markets and sectors in Mexico — and all three branches of government deserve credit for that.