News Article

What Can the Renegotiation of NAFTA Mean for Mexico?

Fri, 09/01/2017 - 09:46

NAFTA gave everybody a political and economic playing field that, at the moment, is shattered. But Mexico is wellprepared for renegotiations and the country will benefit long-term from this.

A good example of how the Mexican automotive industry has developed is in Juarez City. Juarez is a popular industrial destination and the second-busiest crossing between Mexico and the US after Tijuana. I always find it a bit surreal that a big part of the Mexican automotive industry calls this dry and desert-like environment home. Many US auto part companies established in the region and they are still there despite the tweets and comments from President Trump.

Another good example of success for the Mexican industry is the German investment coming to the country. With the Germany-Mexico Dual Year finished, Germany is the main commercial partner for Mexico in Europe, representing 1.1 percent of all Mexican exports as of 2016 and 3.6 percent of Mexican imports. Germany could find the full cancellation of NAFTA beneficial as the US still represents 81 percent of Mexican exports. However, for the European automotive industry Mexico is the platform to reach the US market competitively, which means that a fine-tuning of NAFTA would be even more beneficial.

German direct investments in Mexico have increased by US$2.2 billion in 2016, representing 9 percent of all foreign direct investment, while the US leads the list with around 39 percent. Yet, a qualified workforce is crucial to deliver products with a quality standard similar to the “Made in Germany” brand. Discussions regarding the dual-education program after the German success model are intensifying. Education is being enhanced by including technical skills and knowledge into standard education programs. More companies are implementing the dual-education scheme and graduates are in high demand.

NAFTA is being renegotiated at the request of the US but in Mexico, it is business as usual. The main issue the country still faces is the lack of a qualified workforce, which is high in demand by all companies present here. This shortage creates one of the main challenges for the industry. This is true not only for automotive but for all other industry sectors in Mexico and solving this issue will be one of the main roadblocks for Mexico’s future economic development.

In the case of a fundamental renegotiation of NAFTA that would lead to a decrease in foreign direct investment, Mexico will need to create further incentives for companies to invest in the country, while focusing on further training and development of the Mexican workforce.

Regardless, Mexico is still the most attractive emerging market with almost US$27 billion of foreign direct investment in 2016 and will be for some time due to its geopolitical position and the advantages it brings even with a renegotiated NAFTA. But Mexico, and even the US, will lose some momentum as uncertainty is not a word that companies need while deciding on multimillion and even billion-dollar investments with a five to 10-year timeframe. HSBC Mexico’s conservative estimate for total foreign direct investment coming to the country in 2017 is US$16 billion.

Mexico’s track record and expertise in arranging trade agreements will help in negotiations. Negative migration numbers between Mexico and the US are a result, among other factors, of the job opportunities NAFTA has created. In the end, the underlying trade flows and dependencies between the US and Mexico are beneficial for both countries and will remain.

HSBC is uniquely positioned in the NAFTA market and North America is at the heart of our core strategy. Our network and knowledge within the region and our ability to deliver our expertise to clients are among the main attractors for companies in Germany and other countries alike. We are a global bank, founded to support trade flows. We still believe in the opportunities of cross-border trade flows and our strategy is designed to facilitate our clients’ access to the US, Mexico and Canada markets.