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Mexico’s reform agenda is good news for Canada

It was yet another example of how Canada fails to think of itself as a NAFTA nation. Instead of celebrating Mexican President Enrique Pena Nieto's proposal this month to open his country's energy sector to foreign investment, the reaction in Canada focused on the risk to the oil sands.

Yet, if ever there was a win-win situation for Mexicans and Canadians alike, it lies in Mr. Pena Nieto's visionary reform agenda. It promises to accelerate Mexico's rise from an emerging but troubled country with vast income inequality into a modern economy with a vibrant middle class. As Mexico's partner in the North American Free Trade Agreement, Canada can only benefit.

Opening up the energy sector is just the tip of the iceberg, albeit a rather massive tip in a reform agenda that includes bringing Mexico's education, telecommunications and tax systems into the modern era. For Mr. Pena Nieto, it means taking on vested interests in the country's bloated state-run energy sector, corrupt trade unionists in education, gridlock in Congress and – perhaps most daunting of all – regional kingpins in his own Institutional Revolutionary Party (PRI).

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Previous Mexican leaders did not get very far with reform agendas that weren't half as ambitious as the one Mr. Pena Nieto, 47, has articulated since taking office in December. (His election victory marked the PRI's return to power after its only stint in opposition – from 2000 to 2012 – since 1929.) But by showing he is serious about cracking down on corruption both inside and outside the party, the Mr. Pena Nieto may yet succeed where his predecessors failed.

It all depends on whether Mr. Pena Nieto – who is limited to a single six-year term – can can persuade Mexicans to back his plan to open the country's energy sector to foreigners. If this taboo falls, it will kick start growth and trade and empower the youthful President to pursue his plan to raise taxes and fund much-needed physical and social infrastructure. The latter is the key to social mobility.

Mr. Pena Nieto has garnered global attention with his energy plan, which would allow foreign companies to invest alongside the state oil monopoly Pemex in new production in exchange for a share of the profits. The President has deftly positioned his reform as a reasonable compromise that maintains public ownership of the country's oil reserves – a source of nationalist pride – while enabling investment- and technology-starved Pemex to up its game.

A proposal to break the state's electricity monopoly has made fewer headlines outside Mexico, but is critically important to the competitiveness of the country's manufacturers. They currently pay even higher rates for electricity than manufacturers in Ontario, sometimes twice as much. Lower rates would help Mexico lure more manufacturers back from Asia.

That would be good news for Canada and the United States. Integrated supply chains between the three NAFTA nations present opportunities for each partner to benefit from another's success. Increasingly, so-called "trade in tasks" – from product assembly and design, to engineering, logistics and financial services – is the rising tide that lifts all boats.

"Trade in tasks expands Canadians' opportunities to specialize in activities within an industry, a production network, or a global firm that best suit their talents or resources," notes a new C.D. Howe Institute study. "Such specialization is far more suited to sustaining high incomes for Canadians than are vertical, value-added strategies involving uneconomical natural-resources transformation at home."

The study was referring to the potential benefits of free trade between Canada and Europe. But the same logic applies to our relationship with Mexico. Indeed, since continental flows already dwarf the business we do with the rest of the world, even an incremental increase in North American trade can yield big gains. But it requires thinking of ourselves as a NAFTA nation.

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"In the past, Mexico has been seen as the poor cousin and this has limited our vision of the potential of a strong North America," former trade minister Michael Wilson, who oversaw the NAFTA negotiations two decades ago, said in a recent speech. "The sooner we understand the benefits of being a distinct economic region and act that way, the easier it will be to take the policy decisions to help bring that vision to reality."

It is rarely a good idea for one trading partner to take sides in the internal politics of another. But Canadians should be quietly hoping Mr. Pena Nieto succeeds.

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