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Employees work on the assembly line at the Volkswagen factory in Puebla in this 2010 file photo. Mexico has become the preferred centre of manufacturing for multinational companies looking to supply the Americas and, increasingly, beyond. (STR/REUTERS)
Employees work on the assembly line at the Volkswagen factory in Puebla in this 2010 file photo. Mexico has become the preferred centre of manufacturing for multinational companies looking to supply the Americas and, increasingly, beyond. (STR/REUTERS)

Made in Mexico: China’s unlikely challenger Add to ...

Its free-trade agreements with 44 countries – more than twice as many as China and four times more than Brazil – have given companies based in Mexico the ability to source parts and inputs from a wide range of nations, often without paying duty.

Partly as a result, the sum of Mexico’s imports and exports as a percentage of its gross domestic product, a strong indicator of openness, rose to 58.6 per cent in 2010. In the case of China, it was 47.9 per cent, and just 18.5 per cent in the case of Brazil. HSBC in Mexico City estimated recently that the figure for Mexico could increase to as much as 69 per cent this year.

There is also an increased confidence inspired by agreements, particularly the 1994 North American Free Trade Agreement, which binds Mexico with the U.S. and Canada. “Nafta creates a rule of law, which is not perceived to be a particularly Mexican concept … it forces you to do what is right, and to do it for ever, “ says Luis de la Calle, an economist and trade expert who helped negotiate NAFTA for Mexico.

As if to prove the point, Mr. de la Calle devised an unorthodox index based on how many alphabetical letters appear about a given country in the U.S. Trade Representative’s annual report on barriers to U.S. exports and investment, divided by U.S. exports to that same country. Last year, from a list of 22 countries, Mexico beat Canada to the top place of best-behaved countries. Pakistan was the worst offender and China was 10th worst.

Of course, Mexico is not without its problems. While the country is making strides in its attempts to diversify, it is still heavily beholden to the ups and downs in the U.S.

But perhaps the most alarming concern of foreign investors and the general population alike is the deterioration in security.

The murder rate has almost tripled to about 22 per 100,000 inhabitants from just over eight when Mr Calderon declared an all-out offensive against the country’s drug cartels at the end of 2006. The war, which has claimed at least 55,000 lives over the past six years, has dominated headlines about Mexico as the press reports on a seemingly endless flow of horror stories involving beheadings, kidnappings and massacres.

This year, it also prompted the U.S. state department to issue a travel advisory telling U.S. citizens to put off “non-essential travel” to many areas of Mexico, warning that nearly half of the country’s 31 states are so dangerous that travellers should avoid them if possible.

So far, the violence has had little impact on multinationals, which generally operate in safe industrial parks around the country. But there are no guarantees that organized crime will not try to extort large foreign companies in the future – in the same way it has been doing with smaller, domestic companies.

Until that happens, foreign companies continue to eye Mexico – in part because China has not turned out to be quite the manufacturing nirvana that it once appeared. While executives long complained of Chinese red tape and the threat to intellectual property there, they were willing to balance those risks against cheap labour and transport.

But rising wages and higher fuel prices have made it increasingly expensive to export from China to the U.S. market. This is all to Mexico’s advantage. In 2009, Mexico overtook South Korea and China to became the world’s leading producer of flat-screen television sets. The bulkier the item, the more Mexico makes sense. According to Global Trade Atlas, the country is also the leading manufacturer of two-door refrigerators.

Thanks to a 3,200-kilometre border with the U.S., and extensive rail and road links, it is not only cheap but fast and easy to ship goods north. Shipments from China to the U.S. typically take between 20 days and two months. From Mexico, they take a week at most and usually just two days.

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