If the Mexican government is interested in attracting foreign investments to their economy, they need to focus their attention on security. Instead, too much energy was diverted to securing a trade deal with the US.
Over 70 percent of Mexico’s exports are destined for the US. That statistic alone would make it seem that the ratification of the United States – Mexico – Canada deal (USMCA or NAFTA 2.0) by the US Senate last week is critical for the Mexican economy. President Andrés Manuel Lopes Obrador said last month that the USMCA would help Mexico “a lot, a lot, a lot.”
However, the reality is more nuanced. Policymakers and insiders know that the real value of NAFTA was in the legal framework, which laid the foundation for foreign investments into Mexico. If tariffs were suddenly placed on Mexican goods today, the result would be a commensurate depreciation in the Mexican peso (it is a free-floating currency). After a short period of adjustment, prices in USD terms would return to what they were prior to the tariffs, and trade between the two countries would remain fairly unchanged.
Mexico’s competitive advantage is cheap labor. In order to grow its global trade market share, Mexico must increase foreign investment in the country. Of the total $307 billion worth of goods exported to the US in 2017, 59 percent was imported from the US. Thus, Mexican labor increases the value of (imported) goods by almost 70 percent. Mexican labor is the golden goose. In order for that to grow, more companies need to move manufacturing operations there.
Unfortunately, many of the coveted legal provisions that NAFTA provided, such as circumventing the local legal system in the case of nationalization, has been diluted under the current USMCA. The added strength it provides to Mexican unions is also not a plus for investors. If there is concern about the legal framework for foreign investors, these can be addressed by the Mexican congress.
The angst over the ratification of this agreement is certainly valid, especially at an industry and sector level. It is not, however, the most significant obstacle to investment. Security is a significant hurdle. It is business-critical for Mexico.
— Bianca Beatriz Taylor