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Sunday, October 1, 2023

The moment to shore up ‘friend-shoring’ in Mexico will have to wait – El Financiero

It’s Mexico’s time. Neighboring the largest economy and equipped with a large, low-cost workforce, the country is uniquely positioned to benefit from friend-shoring in a world where rivalry between the United States and China is reshaping investment decisions and supply chains.

But wait, we’ve been here before. The North American Free Trade Agreement (NAFTA) was also supposed to be Mexico’s big opportunity. And when Middle Eastern oil producers cut supplies to the United States in the 1970s, neighboring Mexico enjoyed an energy-fueled boom before sinking into the debt crisis of the 1980s.

The recent figures certainly tell a good story. Billions of dollars are pouring into Mexico, which this year replaced China as the United States’ largest trading partner. Auto shipments across its northern border grew nearly 38% in July and industrial production is comfortably exceeding expectations.

So is the hype real this time? The answer will likely depend on the results of next year’s presidential and legislative elections. Until then, it is reasonable to maintain some skepticism.

Mexico’s failure to make the most of its opportunities is best illustrated in the graph below. Its trade pact with the United States and Canada was signed around the same time as Turkey’s trade deal with the European Union. But in the decades that followed, Turkey made far more progress than Mexico, which was particularly hard hit by China’s 2001 entry into the World Trade Organization.

Still, there’s no denying that the vibe has changed in Mexico in recent years. It is clear in the tourist-filled streets of Mexico City, Americans buying second homes in Baja California, Oaxaca or the Yucatan Peninsula, and the arrival of global brands like Soho House.

Bloomberg Economics recently raised Mexico’s potential economic growth rate to 3% for the next decade. That’s well above the average annual expansion of 1.8% that Latin America’s second-largest economy recorded over the past two decades.

However, Mexico’s growth remains far behind recent projections for China (4.1%), a country whose economic slowdown has generated global concern. In fact, China’s GDP per capita is now notably above that of Mexico, whereas 40 years ago it was just over a tenth of that.

Outgoing president Andrés Manuel López Obrador gained widespread popularity by focusing on efforts to reduce poverty.

But there is still a huge amount of work to be done on the complicated long-term obstacles for Mexico to unlock its underlying potential.

It is believed that Mexico would develop faster if it had stronger public policies, including investing more in education and local security, establishing a truly independent and predictable legal system, less corruption, and more comprehensive labor and tax structures.

Felipe Hernández of Bloomberg Economics sums it up: “Better government policies would encourage stronger growth.”

Attention now focuses on the next six-year term: the single six-year term to which Mexican presidents are limited. The nation is on track to have its first female president after the June 2 general election. Claudia Sheinbaum, former Mexico City mayor and López Obrador protégé, will seek to retain power for the ruling Morena party.

His rival will be Xóchitl Gálvez, a senator from the pro-business PAN party, which won the support of a coalition of opposition parties.

Gálvez told Bloomberg News in a recent interview that the promise to shore up friends is “an opportunity we won’t have again for many decades.”

Sheinbaum also showed enthusiasm, while emphasizing the importance of translating it into better wages and well-being for workers. Like López Obrador, he is likely to prioritize the development of Mexico’s impoverished south, which is largely left out of the find-a-friend story and has long been left behind.

The presidential race promises to be controversial given its contrasting policy proposals. Tensions have already risen over the role of the private sector in Mexico’s energy industry.

The election of a new full congress will also be of great importance, especially if a clear majority does not emerge. Investors accustomed to low political risk in Mexico under López Obrador may need to reassess the possibility of gridlock.

Until Mexico’s political landscape becomes clearer, its ability to seize the opportunity at hand will remain an open question. Perhaps Mexico’s moment has to wait.

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