By Kenneth Smith, partner at Agon and Mexico’s chief negotiator for the U.S.-MexicoCanada Agreement (USMCA)
Many analysts will agree that the U.S.-Mexico-Canada Agreement (USMCA) is just what the North American region needs to face the challenges posed by a postpandemic world where supply chain disruptions, inflation, and slow economic growth are wreaking havoc in many countries. Its predecessor, the North American Free Trade Agreement (NAFTA) changed the economic landscape in Mexico, turning it into one of the most open economies in the world. Thanks to NAFTA, Mexico became one of the world´s top exporters, and today, the value of Mexican trade with the world is equivalent to 70 percent of the country´s GDP. The USMCA has been in operation for just over two years, and the trade numbers have been very positive, as total trade between Mexico and the U.S. reached $661 billion in 2021 and could go as high as $750 billion in 2022.
The three USMCA partners understand that a top priority for the region is to strengthen supply chains in order to reduce the dependency on other regions for key inputs for manufacturing. One of the key lessons from the COVID pandemic is that companies are looking to shorten their supply chains, bringing them closer to home to reduce the risk of potential lockdowns in production processes in Asia due
to health emergencies.
This adjustment, known as “nearshoring,” is also being fueled by the extreme increase in TransPacific shipping fees, where the lack of available containers, coupled with an insufficient supply of key inputs such as semiconductors, are raising the costs of producing in other regions of the world.
This opens up important opportunities to attract investment into the USMCA region, and Mexico is in a very strong position to benefit from the relocation of top manufacturing firms back to North America. The average age of the Mexican population is 29, which means that, thanks to NAFTA, Mexico has been able to develop a young workforce with strong manufacturing skills in sectors such as automotive, aerospace, and electronics, among many others.
In addition, Mexico´s wide network of free trade agreements allows companies to access U.S. and Canadian markets, as well as 48 other countries, turning Mexico into a springboard to the world.
In order to take advantage of these opportunities, the USMCA partners must work together to further integrate their economies and engage in coordinated efforts to facilitate linkages between manufacturing hubs in Mexico, Canada and the U.S. Positive steps have been taken through the re-launching of the HighLevel Economic Dialogue (HLED) between Mexico and the U.S., and the North American Leaders Summit (NALS), where strengthening supply chains has been placed at the top of the agenda. The recent approval in the U.S. of legislation that will allow the government to invest billions of dollars for the development of semiconductor capabilities and provide incentives for the production of electrical vehicles in North America, is a big step in the right direction.
In the case of Mexico, trade liberalization alone will not be enough to attract the investment that it needs to develop the sectors of the future. The negotiation of trade agreements must go hand-in-hand with the implementation of transparent and predictable domestic economic policies that create a positive business environment and reduce country risk. Currently, foreign direct investment (FDI) continues to flow into Mexico because international investors are betting that the USMCA will remain in place for decades to come. That is why FDI in 2021 reached $29 billion, despite the economic downturn caused by the COVID pandemic.
However, these figures could be much higher, and should be above the levels of FDI that were flowing into Mexico at the end of the President Enrique Peña Nieto’s administration in 2018 ($34 billion).
Mexico has the potential to attract $40 billion in FDI every year and develop key sectors such as pharmaceuticals, advanced medical equipment, and the digital economy. To do so will require the establishment of an industrial development program with the following priorities:
- Workforce development so that Mexican workers can develop the skills needed to thrive in a world of advanced manufacturing where information technologies play a vital role.
- Prioritize innovation and R&D in order for Mexico to increase the number of patents that are registered every year, and thus lay the groundwork for the country to develop its own technological capabilities in the future.
- Make the transition to clean energies a national priority.
- Integrate Mexican SMEs into international supply chains.
- Ensure transparency and predictability in regulations that affect economic activity.
The North American region is very fortunate to have in place a free trade environment which offers Mexico, Canada, and the United States, the opportunity to build the most competitive region in the world. Achieving North America´s full potential, however, will require even greater cooperation and, most importantly, a shared view that economic integration is the answer to the challenges of the future.
