How far is the "ring time depth" from Mexico, the global manufacturing hub?

Source: Global Times

Mexico is Latin America's economic power and manufacturing center, a country with a population of 128 million and an area of 1,964,400 square kilometers that has always been one of the most open economies in the world. In recent years, Mexico seems to be on the trend to become a new global manufacturing hub. European companies are optimistic about Mexico, which is "too far from God and too close to the United States", and have invested in the country, and Asian countries have also actively used their offshoring advantages to restructure North American supply chains. Whether it is the signing of the USMCA agreement to replace the North American Free Trade Agreement during Trump's term, or the signing of the Chip and Science Act and the Inflation Reduction Act by US President Biden in August this year, objectively speaking, it has brought changes to the development of Mexico's manufacturing industry. Chinese netizens have also recently expressed concern that "American supermarkets are less and less 'Made in China', and more and more 'Made in Mexico'". However, the analysis of international public opinion and scholars who have studied the Mexican economy for a long time have noticed Mexico's "shortcomings". More importantly, if Mexico wants to become a global manufacturing center, it will need to strengthen trade with China.

Four advantages have made Latin America's manufacturing power

Many people know that Mexico is a traditional agricultural country, the origin of corn, tomatoes, sweet potatoes, and tobacco, but they ignore that Mexico is still one of the few countries in Latin America with a full range of industries. According to the Mexican National Commission for Processing and Export Manufacturing, 62% of Mexico's trade comes from manufacturing and solves one-fifth of domestic employment, involving clothing, household goods, electronics, medical equipment, aerospace parts, automobiles and auto parts.

Talking about why Mexico's industrial system is relatively complete, Liu Xuedong, a tenured professor of economics at the National Autonomous University of Mexico, told the Global Times that from the end of World War II to the end of the 70s of last century, Mexico adopted an "import substitution" strategy, and vigorously developed metallurgy, steel and petrochemical industries. As the world entered a period of free trade in the 80s, the Mexican industry shrank, but since then there has not been a serious "deindustrialization" phenomenon like other Latin American countries, thanks in large part to the North American Free Trade Agreement (NAFTA), which came into effect in the 90s.

Mexico's "VYNMSA" website recently published an article analyzing the development of the country's manufacturing industry has four major advantages: first, the government issued the "Decree on Promoting Manufacturing, Processing Plants and Export Services" in November 2006, introducing a number of tax policies conducive to the development of the manufacturing industry; Second, due to its geographical proximity, the United States has become Mexico's largest trading partner, and 76.5% of Mexico's exports are shipped to the United States first; Third, Mexico is considered to be one of the countries with the most free trade agreements (FTAs) in the world, with trade partnerships with more than 50 countries; Fourth, labor costs for Mexican manufacturing workers are relatively low, as estimated by the Federal Reserve Bank of St. Louis in the United States, Mexican workers are about $4 per hour, compared to $22.45 per hour for American workers.

On July 1, 2020, the USMCA Agreement (USMCA) entered into force, replacing NAFTA, which has been in place for more than 20 years. In the past two years, the industries that Mexico has benefited the most from the agreement are automotive, mechanical, electrical and electronic equipment manufacturing. From January 2020 to April 2022, Mexico's exports to the United States and Canada grew by 44%, significantly higher than the 28% growth rate of exports to other countries and regions, according to the Mexican Ministry of Economy.

Ana Bottin, president of Spain's Santander bank, said Mexico is a "unique" country in the world that, despite the impact of the pandemic and inflationary pressures, the fiscal policy implemented in the country has made it the most attractive place for foreign direct investment (FDI). Among them, the United States accounted for the first place in investment, and Spain ranked second. At present, there are more than 6,500 Spanish companies investing in Mexico, which is about four times the number of Chinese enterprises in Mexico. Santander's report believes that Mexico's advantages in attracting foreign investment are: as a member of the USMCA, OECD, G20 and Pacific Alliance, Mexico is well integrated into the world economic order; Occupies a strategic geographical location and is a transit platform to North America and Latin America; Have a variety of resources; Labor costs are not high and the quality is relatively good; The seventh largest tourist destination country in the world and has a large and significant industrial base.

Given Mexico's geopolitical advantages and the attractiveness of economic policies, more and more European companies have expanded their investments in the country in recent years, such as BBVA Bank, AB InBev, Nestle, Bayer, Henkel, Danone, etc. The Dutch IMCD Group has also recently acquired a major plastics manufacturing company in Mexico. According to data released by Mexico's Ministry of Economy in August, foreign investment in Mexico increased by 49.2% in the first half of 2022. By industry, manufacturing accounted for 34.3%.

Two US bills bring new changes

Some European and American media analyzed that since the trade war with China was launched during Trump's term, "Mexico is ready to accept companies that want to leave China." The United States has been using the USMCA to strengthen regional value chains and embody the "America First" concept. Among them, the "poison pill clause" that "when either party enters into a free trade agreement with a non-market economy country, it shall allow the other parties to terminate this agreement after six months' notice and replace it with an agreement between them" clearly has the intention of targeting China. Some Mexican media also said when referring to joining the USMCA that it is an opportunity for Mexico, which values the US market.

According to the New York Times, in September, the high-level economic dialogue between the United States and Mexico focused on cooperation in semiconductors and electric vehicles, while avoiding the energy differences between the two countries. According to the report, in addition to touting its huge investment in Mexico, the United States also focused on the use of the provisions and funds in the "Chip and Science Act" and "Inflation Reduction Act" to develop the semiconductor supply chain and new energy industry. The U.S. banking community is betting that "Mexico is expected to replace China as a new manufacturing center in the world." Since the beginning of this year, the number of people in the Mexican manufacturing industry has increased by 5%, exceeding the scale of pre-epidemic employment growth.

Similarly, European companies are moving to North America due to factors such as the energy crisis and the United States' efforts around supply chains, and the successive introduction of policies to promote the return of manufacturing by mandatory means. Against this backdrop, could Mexico become a new base for manufacturing?

The US "Fortune" magazine published an article on November 2: "China's 'loss' is Mexico's 'gain'. U.S. banks say the transformation of global supply chains means nearshoring investment becomes a "once-in-a-lifetime opportunity" for Mexico. As the supply chain crisis exacerbates inflation in the United States, more and more industries are choosing to move production closer to the country, and American companies such as automaker Ford and aerospace manufacturing giant Boeing have shifted relevant operations to Latin America and the Caribbean. Bank of America analysts believe that Mexico is expected to be the main beneficiary of the new wave of nearshore outsourcing sweeping the United States, and will achieve substantial economic growth in the next few years. They said the supply chain crisis, U.S.-China tensions and the two years in force of the USMCA have all set the stage for Mexico's "best growth opportunities over the next decade."

South Korea's Korea Trade and Investment Promotion Agency reported on October 20 this year that in recent years, due to the trade war launched by the United States against China, as well as the impact of the new crown pneumonia epidemic and the conflict between Russia and Ukraine, global supply chain disruptions have continued to occur, and nearshore outsourcing is in the ascendant around the world, and Mexico occupies a favorable position in this regard. Korean companies are using their nearshore production sites in Mexico to cope with the restructuring of their supply chains for North America. According to data released by the Korea Chamber of Commerce and Industry in July this year, Samsung Electronics, SK, Hyundai-Kia Motors, LG Electronics, POSCO and other companies have invested in setting up more than 450 factories in Mexico.

South Korean public opinion has mostly believed that Mexico's cheap labor is only compared with the United States and Canada, Vietnam and other Southeast Asian countries have more labor cost advantages. However, since the beginning of this year, the news of investment in Mexico by large Korean enterprises has continued to come. With the introduction of the Inflation Reduction Act in the United States, South Korean auto companies are well aware that to receive federal tax incentives, electric vehicles and their battery assembly, raw material procurement or processing, etc. must be carried out in North America, which makes Mexico a potential new electric vehicle production base.

At the end of July this year, South Korea's LG Electronics announced an increase of $100 million in its investment in the ink plant. LG Electronics' automotive lighting subsidiary plans to invest USD 102 million to expand its plant in ink. At the end of September, Hyundai-Kia Group announced that it would invest more than USD 400 million in an additional vehicle plant in Mexico mainly to produce and upgrade its electric vehicles.

"The development of Mexican manufacturing industry is inseparable from the strengthening of Sino-Mexican trade"

Mexico's investment advantages are obvious, but there are also several factors that make some foreign companies hesitate and wait and see. In 2021, the German SCHOTT Group, a special glass manufacturer, was skeptical about the potential of Mexico's manufacturing industry, believing that its investment environment was not yet ideal, mainly due to "imperfect commercial regulations, insufficient and abnormal power supply, and poor transportation." The U.S. State Department's 2021 assessment of Mexico's investment climate also noted that "uncertainty, insecurity, informality, and corruption in contract execution continue to hinder Mexico's continued economic growth." ”

Spain's Santander report also listed the main factors restricting the development of Mexico's manufacturing industry: heavy dependence on partnership with the United States, vulnerable to the wind of free trade agreements; high levels of corruption and rising crime rates; Some industries are reserved only for domestic companies and are extremely competitive; The economy is vulnerable to oil price fluctuations; Infrastructure (especially in the transport and oil industries) and education systems are not yet perfect; Violence by drug cartels continues to pose a serious social and economic threat to parts of the region, particularly along the U.S.-Mexico border.

Some international experts believe that Mexico may use the USMCA and the trade war launched by the United States against China to obtain economic dividends in the short term, but in the long run, Mexico has no possibility of long-term dividends in the world, mainly because the country's manufacturing and related products do not have competitive advantages with Southeast Asian countries such as Vietnam and Malaysia. Liu Xuedong, who has studied the Mexican economy for many years, told the Global Times that the advantages of Mexico's manufacturing industry are only compared with other Latin American countries, and this advantage is based on the large import of raw materials and intermediate products from the Asian industrial chain, especially the Chinese industrial chain. Therefore, this also highlights the weakness of Mexico's weak and incomplete industrial chain. Taking home appliances as an example, Mexico has built a large number of assembly plants, and the screens, chips and other components needed to assemble TVs need to be imported from China, Vietnam and other countries. This means that the more Mexico exports to the United States, the more it will import from countries such as China. Liu Xuedong said: "It can be said that without the support of the industrial chain of China and other countries, Mexico's manufacturing industry will have no advantages at all. China is in surplus with Latin America as a whole, and Mexico contributes 3/4 of every dollar surplus. In addition, he believes that Mexico still lacks the foundation and soil to develop high-precision manufacturing.

Mexico is the world's seventh-largest car manufacturer, with 3.15 million vehicles produced in 2021, of which 90.9% was exported, according to The Economist. Too many exports have led to Mexico having to import from India, China, Brazil and other countries to meet domestic automobile consumer demand. Mexico's main industrial exports to North America and Latin America are automobiles and electrical and electronic products. According to Liu Xuedong, most of the ink electronic and electrical products are exported after local assembly by Chinese brands; Among the car brands, there are also Beijing Motor and Jianghuai Automobile from China, but up to now, all Chinese car brands are used to meet the local market demand. According to the observation of the Global Times reporter, in recent years, China and Mexico have carried out a number of green transportation cooperation projects. In major cities such as Mexico City and Monterrey, trolleybuses, light rail vehicles, rubber-wheeled subways, electric trucks, electric taxis, etc. from China have served or will soon benefit local residents, helping Mexico to save energy and reduce emissions and build green cities.

According to Liu Xuedong, the USMCA has formulated stricter rules of origin in North America, taking Mexico's pillar industry automobile industry as an example, 75% or more of the components of cars produced in North America are produced in the region to enjoy zero tariff preferences, compared with 62.5% previously. This will force Mexico to increase imports from the United States, which in turn will weaken the global competitiveness of the Mexican automobile manufacturing industry. At the beginning of this year, an expert from the Brookings Institution wrote that the USMCA is "mixed" about Mexico at best, and Mexico has actually integrated into the "East Asian value chain" including China, which also means that it is not easy for any country to replace China as a global manufacturing center.

"The USMCA should not be seen as a threat to the development of Sino-Mexican trade, but as an opportunity." Liu Xuedong said that with the increase of Mexico's exports to the United States and the improvement of local manufacturing technology, Mexico will increase its dependence on Chinese exports, China-Mexico trade will show a development trend, and Chinese products will enter the North American market more diversified, "My personal judgment is that Mexico's manufacturing development is inseparable from the strengthening of Sino-Mexican trade."

【Global Times special correspondent in Mexico, Spain, the United States and South Korea Peng Min, Ba Runshi, Yuqing, Zhang Jing, Global Times reporter Chen Zishuai】