Jean-Dominique leraci
Deputy Head of Mission and Minister-Counsellor (Trade)
Canadian Embassy in Mexico City
View from the Top

Structural Reforms Needed to Attract Investment

Wed, 10/18/2017 - 10:26

Q: What kind of benefits does Mexico offer diplomats?

A: Despite its geographic proximity, Mexico does not feature in the minds of Canadian people enough; sadly, it is known either for its beaches or for its issues with crime. The relationship between the two countries is very rich but it has not reached anywhere near its full potential. As a diplomat and trade commissioner, it is important to realize that there is both a strong existing base of clientele and room for improvement. In Mexico, there are challenges but I believe that they can be overcome, so for me Mexico ticked all the boxes on the professional side.

Q: What would the potential renegotiation of NAFTA mean for the relationship between Canada and Mexico?

A: The “America First” policy adopted by US President Donald Trump has certainly helped bring Canada and Mexico closer together and has created an appetite for both countries to investigate further opportunities for cooperation. The relationship is by no means reliant on NAFTA but all the discussion and fear generated by the US rhetoric has exposed a certain weakness in the Canada-Mexico relationship. For example, in the early 1990s influential CEOs from both countries used to meet twice a year to discuss business opportunities and how to improve the bilateral relationship. This forum no longer exists and the Mexican community in Canada is much less visible than those of other Latin American countries like Chile. With the new presidential administration in the US, we are seeing more Mexican students coming to Canada to study and, with the lifting of the visa requirement, more tourists are arriving. It is vital that this trend continues because it is crucial to foster these interpersonal relationships.

Moreover, with the exception of Grupo Bimbo’s acquisition of Canada Bread in 2014 and a few other smaller deals, Mexican companies are not invested in Canada. The business-to-business relationship is heavily dependent on Canadian investments in Mexico. This is something that we are trying to fix because the opportunities are there for Mexican companies.

Q: Roughly 65 percent of foreign investment in Mexico’s mining sector is headquartered in Canada. What role does this industry have to play in bilateral trade between the two countries?

A: There are two recent initiatives that demonstrate the importance the extractive sector plays in the relationship. Firstly, a Mining Work Group has been created within the Canada-Mexico Partnership (CMP), which is designed to improve communication and knowledge sharing within the mining communities of the two countries. Secondly, Canada’s Minister for Natural Resources James Carr signed an MoU with Mexico’s Economy Minister Ildefonso Guajardo during his visit to Mexico City in February 2017. While both are in the early stage, these initiatives are designed to give more structure to the role mining can play in strengthening the bilateral relationship. Once all the statistics and data have been agreed from both sides, I expect a series of seminars to begin, designed to discuss important issues such as environmental mitigation measures and relations with indigenous communities. From the Canadian government’s perspective, we want to support Canadian industry and ensure that we can disseminate our experience of mining in Mexico.

Mexico is not the only country in Latin America with an abundance of natural resources but the jurisdiction has traditionally had a strong operational framework that has attracted Canadians over the years. This has eroded in the past few years, to the extent that many of the Canadian companies operating in Mexico today would not have made the same decision had they known how the sector would develop.

Q: How can the embassy contribute to increasing Canadian investment in the Mexican mining sector?

A: There is a structural issue that needs to be dealt with. We spend a large portion of our time and efforts on helping Canadian companies deal with security issues, which unfortunately have been on the rise in recent months, but also a considerable number of our clients are owed backpayments in VAT. We estimate that Canadian companies throughout the industries are owed close to US$300 million in VAT back taxes. These are long-term outstanding claims that affect both cash flow and share prices. Since Canada represents 65 percent of foreign investment in the Mexican mining industry, we would like to see the Mexican government really tackle this issue because it is hurting the entire country.

Mexico needs to embrace the fact that it is a mining country. In other jurisdictions like Chile and Canada, the governments will defend the mining industry when there is an issue but this is not the case in Mexico. We think the public sector can do a lot more to protect and promote the industry, and to recognize the contribution it makes to the national economy. We are happy to help in this process because the reputation of a Canadian mine in Mexico has an impact on the image of Canada. The creation of the position of Undersecretary of Mining within the Ministry of Economy was a good start but we would like to see a more centralized management of the sector in Mexico City because companies cannot afford to lose time running between different ministries and agencies at the local, state and federal levels. We were also encouraged to see the federal government step in to deal with the Zacatecas Ecological Tax, which could have had a disastrous effect on mining in that region and we want to see further developments of that ilk.

Security is another concern. When there is an illegal blockade, we expect the government to step in and lift it but this does not always happen in Mexico. We need the government to protect our investments from criminal forces. We know that it is a challenging situation but we do not get the sense that the Mexican federal government does all it needs to do to enforce the law on a local level.

Q: What are the embassy’s main objectives with respect to trade in Mexico?

A: The issue of NAFTA looms large on my desk. NAFTA has been tremendously beneficial for all three countries and now is the time to modernize the treaty and improve it. Although the officials that negotiated the original treaty in the 1990s did an exceptional job, the world has moved on since then and new technologies such as e-commerce could and should play a more influential role in NAFTA going forward. We want to see greater protection for our investments, with more clarity and stability in the region in general.

We also want to see more Mexican investment in Canada because we feel that many Mexican CEOs do not fully appreciate the opportunities for their businesses in Canada. Given the resources in Canada, there is no reason why Mexican miners should not be looking north of the border for investment opportunities, which could come either in the form of mergers and acquisitions or less formal strategic ventures.

The majority of the money in the mining sector raised from capital markets comes from the Toronto Stock Exchange and if the large Mexican miners have ambitions to become serious players on a global scale, they need to tap into the mining infrastructure in Toronto in one way or another. There is also scope for investment in the auto parts manufacturing sector, and many more. We see Mexico as the window for further cooperation with Latin America, and regional trade initiatives like the Pacific Alliance and the Trans-Pacific Partnership could provide the framework for us to achieve this.