31 October 2015

Where the 'Sweet Spots' Are in Mexico, Part 1

Trade between Canada and Mexico has more than quintupled in the 20 years since NAFTA became law.

In this article, we'll look at the state of trade between those two nations today --some 20 years after the passing of the North American Free Trade Agreement (NAFTA) --as the rules of free trade appear poised for change, and Canada's economy moves through a challenging time.

Trade between Canada and Mexico has more than quintupled in the 20 years since NAFTA became law. That surge created extraordinary opportunities for Canadian companies that occupied the “sweet spots" in Mexico, industries where what was possible in global trade overlapped with what had become legal.

Now, the stage is being set for a second surge of Canadian-Mexican business opportunities.

Research1 shows that Canadian companies can break through in numerous industries in Mexico where the facts on the ground are meshing with the lofty ambitions of NAFTA, as well as Canada's maturing expertise in international business. Notably, and counter-intuitively, these new opportunities are emerging at a time when the political climate between Canada and Mexico is just starting to defrost, Canada's economy isn't at its healthiest, and the global debate over free trade has entered a new realm with a proposed agreement spanning the Pacific Ocean.

Perhaps the starting point for years of less-than-perfect relations between Canada and Mexico was Canada's 2009 decision to impose visa requirements on visitors from Mexico. The move was not popular among Mexican executives. And although both Canadian and Mexican businesses have protested vigorously, the visa requirement remains in place. But recent changes in Mexico's political leadership and the global trade environment may be replacing that ill will with goodwill.

Separately and with much bigger implications, falling oil prices in recent months have done considerable damage to Canada's economy. The emerging consensus is that the country slipped into a recession2 earlier this year. Meanwhile, Mexican GDP has been in positive territory for the past five years3 and it is forecast to continue growing at a rate of around 2%.

Recent figures suggest that economic growth in Asia is in danger4, too, given China's recent troubles, and so the Mexican opportunity for Canadian businesses is relatively strong.

It's a brand new world

Although the global trade scene is, undoubtedly, growing more complex, there are opportunities hidden within those complexities. Canadian companies that are willing to wade into unchartered waters in the coming months may find more-than-average opportunity in Mexico in the coming years. That's because there are extraordinary, once-in-a-lifetime political events happening now that will set the stage for Canada-Mexico trade for decades.

First, negotiations for a new global trade agreement --the so-called Trans-Pacific Partnership --are reaching their final stages. The proposed free-trade region involves 11 nations, including Canada and Mexico. That, in essence, means that NAFTA is being replaced by a sort of super-Nafta involving roughly 40 percent of world GDP5.

The talks have been somewhat acrimonious, but heated discussions that impact the auto industry --leading to a debate on how much of a vehicle must be made within each of the 11 nations for it to avoid tariffs --has united Canadian and Mexican negotiators6. This shared outlook on the goals of the talks have the potential to build a lot of goodwill between the two nations, to say nothing of creating personal and business relationships among the major players in both countries.

Nonetheless, with the likely eventual passage of TPP opening up new opportunities in Asia, Canadian businesses must assess whether Mexico is the wisest choice as they look to establish or expand their global footprints.

There are reasons to think so. Chief among those reasons is the chief executive officer of Mexico, President Enrique Peña-Nieto.

In less than two years, the reform-minded Peña-Nieto has pushed through changes to Mexico's economic and business structure that would have been unimaginable prior to his election. Industry segments that have long been plagued by cronyism, corruption, and protectionism are suddenly opening to competition and foreign participation. Perhaps most remarkably, Peña-Nieto has succeeded in winning support for his reforms from the previously intractable political powers in his nation7. Mexico today is much closer to Canada in terms of business environment than ever before.

Whenever a company ventures beyond its borders, of course, there are risks as well as opportunities. In Mexico, those opportunities appear to be particularly ripe in areas such as agriculture, auto manufacturing, finance and electrical generation where Canada has a history of performing well on the global stage.

Trade between Canada and Mexico has more than quintupled in the 20 years since NAFTA became law.

Source (English only):
  1. “Sweet Spots” for Canadian Businesses in Mexico, The Conference Board of Canada, October 14, 2014
    http://www.conferenceboard.ca/e-library/abstract.aspx?did=6433 Accessed on Aug 24, 2015
  2. http://business.financialpost.com/news/economy/bank-of-canada-interest-rate-decision Accessed on Aug 24, 2015
  3. http://www.tradingeconomics.com/mexico/gdp-growth-annual Accessed on Aug 24, 2015
  4. http://www.cnbc.com/2015/07/15/adb-cuts-asia-china-2015-16-growth-forecasts.html Accessed on Aug 24, 2015
  5. http://www.theglobeandmail.com/news/politics/everything-you-need-to-know-about-the-trans-pacific-partnership/article25769342/ Accessed on Aug 24, 2015
  6. http://www.theglobeandmail.com/news/politics/conservatives-were-sure-trans-pacific-partnership-deal-would-be-signed/article25856504/ Accessed on Aug 24, 2015
  7. http://www.economist.com/news/leaders/21611069-enrique-pe-nieto-has-achieved-lot-now-his-government-needs-maintain-momentum-keep-it Accessed on Aug 24, 2015

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