By José Burnes
Despite Mexico’s above-average economic performance during the Covid-19 pandemic, Mexico has not been able to take full advantage of the US-China trade war. For the last three years, the geopolitical and trade context offered a window of opportunity for Mexico to position itself as the most attractive foreign direct investment (FDI) place in the Americas. Yet, local governments across Mexico are still debating how to take advantage of US-China tensions instead of executing a well-planned, thoroughly funded bet on many companies’ nearshoring trends.
Today, Mexico lacks a coordinated, long-term investment attraction plan that prioritizes building the supply chain of the future. Given the enactment of the USMCA trade deal in 2020, Mexico as a country should be coordinating with manufacturing sectors in the US to align visions and future-proof processes.
Looking at total FDI numbers and considering the geopolitical context, Mexico’s performance during past three years is not significantly performing better as part of a well-planned strategy to attract investments from US companies considering nearshoring. Mexico has the potential to be one of the top 5 FDI destinations in the world. However, getting there requires leaders with long-term vision, close coordination with international partners, and effective execution. We do not know how long does this window of opportunity for Mexico will remain open to focus on alluring firms considering nearshoring. What strategic initiatives has Mexico enacted to take advantage of this? Is the country looking to develop the supply chain of the future linked to things like electric vehicle manufacturing or 5G technology?
Is Mexico only focusing on preserving the current, short-term supply chain? Or is the country making an effort to coordinate with US’ future needs? As the world transitions towards the so-called industries of the future, will Mexico remain a competitive destination for manufacturing? Will the country have enough tools to pivot towards becoming the supply chain powerhouse of the future?
The main problem is that at this point in time, Mexico should not be debating whether it should take advantage or not of nearshoring trends. On the contrary, Mexico should have been discussing by now how the implementation of such strategy was going. China is currently embarked in aggressively subsidizing key R&D efforts. Their goal is localizing key industrial components and supply chains.
Back in 2018 as the U.S.-China trade war broke out, Mexico’s president Andrés Manuel López Obrador opted to disband Mexico’s investment promotion agency (ProMexico). When he arrived in office, the president transferred the task of attracting foreign investment to the Ministry of Foreign Affairs, which had no previous experience on the subject. ProMexico left a vacuum that has not being filled at the national level . This has motivated Mexican state governments to open their own promotion initiatives such as Team Baja in Baja California and Invest Monterrey in Nuevo León. Also, a group of 10 Mexican states -including many of which historically have attracted significant sums of FDI- launched its own initiative: Invest in MX.
To make matters more complicated, Asian FDI in Mexico does not represent even 10% of total FDI since 1999. Today, the US remains by far Mexico’s largest source of foreign direct investment. There are more than 30,000 US companies in Mexico worth US $288 billion and representing 46.6 percent of total FDI in Mexico. Any strategy to benefit from nearshoring opportunities needs to take full advantage of Mexico’s 13 free trade agreements, including the USMCA. However, the USMCA itself put some challenges to sort out by increasing the regional value content threshold potentially limit what in reality can be manufactured in Mexico. For example, in the case of electric vehicles and battery packs, this industry is currently dominated by China. If industries are not able to reach the regional value content threshold established in the deal, Mexico will not be able to become an electric vehicle manufacturer. Mexico’s development, for better or for worse is tied to the US. With the USMCA, Mexico needs to align itself with the strategic interests of the US. At the end of the day, the key rationale behind this effort is that it would be better for the US to source from Mexico, a close US ally, rather than from China. Mexico does have the foundations in place to strengthen its position as one of the world’s manufacturing powerhouses. Yet it is important to craft a coordinated, well-funded, and aligned strategic investment attraction initiative get there.
Current FDI levels across Mexico’s 32 states is widening the gap between regions in Mexico. For example, those industrial states near the US border -like the Bajio area, Nuevo Leon, Baja California, Chihuahua, and Jalisco- driving aggregate FDI numbers up while others are struggling to keep up with their numbers. Today, Mexico does not have a coordinated investment promotion initiative and there are no significant subsidies for strategic R&D. There is no office in charge of guaranteeing foreign firms for soft landing. Also, Mexicans are still waiting to see if there would be funding available for start-ups or Mexican SMEs. The Mexican state governments are not able to award investment incentives. Mexico does not have a federal law that helps coordination. In this context, it is not surprising that there is no national initiative to“take advantage of this opportunity”. Otherwise, we will be in a tough position in the next 20 years.
* José Burnes works in bilateral trade & investment and a guest-columnist for El Norte. newspaper. Jose has a BA in Government from Dartmouth College and is a Yenching Scholar at Peking University with a MA in Economics with a concentration in Chinese Studies. José is a member of the Mexican Council on Foreign Relations (Programa Jóvenes COMEXI) and a fellow at the U.S-Mexico Foundation. The U.S.-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant.Twitter: @usmexicofound