Lessons from Mexico

Mexico stands to be the greatest beneficiary as the trade war between the United States and China escalates. It is well on its way to becoming one of the ten largest economies in the world. As a brother-country once tied at the hip, the Philippines proudly watches from the sidelines as Mexico rallies to high income status.

Let me pre-empt this story by first narrating the key lessons the Philippines can learn from the Mexican experience. These lessons will make more sense as the story unfolds.

National and local leadership must be intelligent, strategic and agenda-driven. Low caliber leaders whose experience lies in fields other than law, organizational management and public governance will most often fall short. They are simply not equipped for the job. A president who is more concerned about populism rather than doing what is economically sensible will always lead to economic reversals. Conditions for doing business in a country may be imperfect but an economy can still flourish if the right policies are in place (it’s all about the policies).

The entire country need not be highly competitive to attract investments. An efficient, well-governed enclave will suffice. (We have that in PEZA but space, infrastructure bottlenecks and high power costs stand in the way of its further success.) A poorly educated workforce will attract low-value investments. The reverse is true. Clustering within industrial zones to achieve integrated supply chains is a boon to attracting investments. The more free trade agreements a country is engaged in, the better it is for attracting investments.

The Mexican story

The year was 2018 and the gaping trade deficits of America against China turned intolerable, as was China’s persistent intellectual property infringements on American technologies. To this, President Trump imposed several rounds of tariff hikes on Chinese-made goods. By 2021, President Biden not only retained the high tariff regime, he doubled down on it by imposing even more trade barriers. President Biden subsequently declared an economic de-coupling from China, the objective of which was to safeguard American technologies from Beijing’s sticky hands.

China’s declaration of “no limits” friendship with Russia amid the Ukraine war only heightened the risk of granting China access to American technologies. Thus, American companies from a cross-section of industries were encourage to exit China at the soonest. The increasingly repressive and unpredictable working environment perpetuated by the Chinese Communist Party accelerated the exodus.

Mexico was the greatest beneficiary of these events. Not only is Mexico renowned for its skilled, productive and affordable workforce, its geographical location made it the ideal investment destination. Its stone’s-throw distance to America translates to cheaper landed costs. Too, Mexico’s shared culture with the west and respect for intellectual property rights worked to its favor. Relocating to Mexico is what Americans refer to as “near-shoring.”

Mexico’s tax-free privilege for exports to America and Canada as well as to a host of countries with whom it shares Free Trade Agreements made it an ideal manufacturing destination for American, European and Asian companies alike. In fact, numerous Chinese brands manufacture out of Mexico to circumvent American tariffs on Chinese-made goods.

The Mexican state of Nuevo León, a mere 130 miles from the American border, is a state perfectly positioned for near-shoring. Nuevo León, with more than five million inhabitants, stands out as a national foreign investment magnet, educational hub and innovation champion. It boasts a highly skilled workforce, a science-based educational system, a culture of innovation and good quality of life for expats.

Its industrial zones are divided into 12 clusters representing strategic sectors. Among them are the automotive, domestic appliances, software, energy and aerospace sectors, among others. This clustering system has made each sector self sufficient in its supply chains.

Nuevo León is the regional headquarters to leading global manufacturers such as Siemens, Daimler, General Electric, Liebherr, Kia and Carrier and 3,500 other companies.

Nuevo León is led by a young governor named Samuel Garcia. At only 35, Garcia has a master’s degree in Law and a doctorate in public governance. His well-considered policies are what makes Nuevo León the industrial success it is today.

Nuevo León contributes eight percent to Mexico’s $1.81-trillion gross national product. Mexico, as a whole, attracted $35.29 billion worth of foreign investments in 2022, which does not even count Tesla’s intended factory worth $10 billion. The country is an export powerhouse that raked-in $578 billion last year. Mexico displaced China as America’s biggest source of imports.

But the Mexico’s society is by no means perfect.

Notwithstanding its newfound wealth, its road, rail and port infrastructure has much to be desired. Corruption is rife. It is ranked 128th among 180 countries in Corruption Perception Index (the Philippines is ranked 116th). Criminality remains high with five out of 10 Mexican cities being among the most dangerous in the world.

The greatest challenge, however, is President Andres Miguel Obrador’s inward-looking policies. Obrador has gained the reputation for being anti-business. He tried to nationalize the country’s railway systems and curtailed the role of foreigners in the energy sector. This is why foreign investors stay away from Mexican infrastructure projects. He is also known to name and shame multinationals.

But not withstanding these challenges, Mexico remains solid and growing faster than G-7 countries, thanks to well managed enclaves like Nueva Leon. The country is well on track to become the 7th largest economy in the world by 2050.

Conditions in the Philippines are imperfect, like Mexico. But if our special economic zones like Clark and Subic can become as competitive as Nuevo León in terms of good governance and its policy regime, it can pull the rest of the country up towards becoming an investment and export powerhouse in its own right.

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Email: [email protected]. Follow him on Twitter @aj_masigan