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2 December 2012, Gateway House

Made in Mexico

Ambassador R. Vishwanathan blogs about the current trajectory of the Mexican economy, and explains why it's likely that Mexican-made products will overtake Chinese-made products in the U.S. market, by 2018.

Former Distinguished Fellow, India-Latin America

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Hecho en Mexico (Made in Mexico) is the title of a musical documentary film released on 30 November. It takes the viewers through an odyssey of Mexican music featuring performances by rockers, rappers, folk artists and pop stars and narrates the diverse and colourful history, culture, poetry, philosophy, ethnicity and tradition of Mexico.

According to the projections of Economist (24 November issue), Made in Mexico products are going to overtake Made in China in the U.S. market by 2018. Accounting for 16 % of the U.S. imports as against 15.8 % projected for China, Mexico will become the top supplier to the Unitd States. In 2012, Mexican share stands at 12.3% while that of China is 17%. The Mexican ascendancy has become possible thanks to the bridging of the wage gap with China. The average manufacturing wage of China has risen to $1.6 per hour in 2011 (from $0.3 in 2000) while the Mexican wage was $2.1 an hour in 2011, increasing from $1.5 in 2000. The minimum wage in Shanghai is now more than that of Mexico City and Monterrey. This new wage situation combined with the increased cost of freight due to high oil prices have given a competitive edge to Mexico, from whose border towns goods reach cities in the U.S. in a matter of hours or days while it takes several weeks from China. The businesses which had fled to China in the past have now started returning to Mexico.

Today Mexico is the fourth largest exporter of vehicles. With several new plants being set up, the production capacity is set to go up to four million vehicles. The country has become the world’s largest exporter of flat-screen TVs, Blackberries and fridge-freezers. A number of foreign companies including Chinese, are setting up plants in Mexico to supply to the U.S. market.

As a member of NAFTA, Mexico has free access to the markets of the U.S. and Canada, while China’s access is being limited by growing protectionism. Besides, Mexican products have access to the markets of 42 countries with which it has signed FTAs.

The Mexican industry and economy are going to benefit from the opening up of the energy sector, expected in the near future. Mexico, which is among the top ten oil producers in the world with 2.5 million barrels per day of production, is set to increase exports with new investment in exploration and production. Last month, Pemex, the Mexican oil company announced discovery (the largest in the last ten years) of a new field with reserves of 500 million barrels. The shale gas/oil revolution, which has transformed the U.S. energy situation, is also likely to spread to Mexico, which has large shale reserves.

It is creditable that, despite the proximity and exposure to the epicentre of the crisis, the Mexican economy has withstood the global financial crisis without any major damage. This is attributed to the prudent macroeconomic management of the Mexican policymakers who have learnt lessons from the previous crises. The inflation has been kept under control and it is estimated at 4.6% in 2012. International reserves exceed $160 billion which is a record. Interest rates and external debt are relatively low. Though the growth has been modest in the recent years, it is expected to pick up.

Encouraged by the new trajectory of the economy and industry, some Mexicans even talk about overtaking Brazil – the largest economy of Latin America. They highlight the fact that their manufacturing boom is more sustainable than the commodity boom of Brazil driven by China. In trade, Mexico at $700 billion was way ahead of Brazil, whose trade was at $484 billion in 2011. While Mexico is gaining edge in manufacturing, Brazil suffers from high cost of production, interest rates, wages and antiquated labour laws as well as strong currency and is losing its competitive edge in industry. Recently, the Brazilians had to wriggle out of a bilateral automobile accord after the huge increase in import of ‘Made in Mexico’ cars. While the Brazilians are protectionist, the Mexicans have become more outward-looking. Earlier this year, they signed up as member of yet another grouping called as the Pacific Alliance (with Chile, Peru and Colombia).

Although Mexico has been ruled by the centre-right Partido Acción Nacional (PAN) party for the last ten years, inclusive development has been the priority of the governments. The PAN administration, led by Felipe Calderón brought 50 million Mexicans (unaffiliated to any health insurance) under the Seguro Popular programme. Six years ago, the number was around 15 million. His administration has built 21,000 kilometres of new roads and bridges. Unfortunately, Calderón got bogged down in the futile war against the drug gangs. While, the drug war and mindless violence of the drug cartels have given a bad image, it is believed that the violence has started declining. In any case, the fundamental cause for the drug trafficking and gun violence comes from the U.S., which needs to change its policies.

The manufacturing and export boom of Mexico is coinciding with a good news. On 1 December, Mexico got a 46-year old dynamic and energetic new President in Enrique Peña Nieto, who won a comfortable victory in the July elections. He promises to take Mexico to greater heights and prosperity. His party, Partido Revolucionario Institucional (PRI), shares some common agendas with PAN. The two parties collaborated in passing the labour reform legislation recently. In a gesture of goodwill, he has included members of the PAN as well as the leftist Partido de la Revolución Democrática (PRD) in his cabinet.

While Peña Nieto is a fresh face, his party PRI had ruled Mexico for 71 years uninterruptedly till 2000 as a one-party dictatorship. Having been out of power in the last ten years, the party has learnt lessons to adapt to the new realities of Mexican democracy. Conscious of the criticism that his administration will be old wine in a new bottle, Pena Nieto has a low-key sober inauguration today, without the usual Latino pomp and show.

The Mexicans are, understandably, upbeat and optimistic about the future. They have started dreaming (like the Brazilians and Indians) that their time too has come.

R. Visawanathan is the former Ambassador of India to Argentina, Uruguay and Paraguay (2007-12), Venezuela (2000-03) and the first Consul General in Sao Paulo (1996-2000).

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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