Source: The Vancouver Sun
For years after the North American Free Trade Agreement came into force, the main road to riches for many Mexican entrepreneurs was across the border. Now they are increasingly likely to cross an ocean instead.
Mexico’s foreign trade with the United States soared after the North American Free Trade Agreement (NAFTA), which also includes Canada, kicked off in 1994, almost tripling in six years.
But having then become dependent on U.S. demand for 88 percent of exports, Mexican firms were heavily exposed to economic shocks across the frontier, and the economy was battered by the financial crash that hit Wall Street in 2008.
Since the crisis, Mexico has stepped up efforts to limit its reliance on the world’s biggest economy, ratcheting up trade with Latin America, Asia and Europe, aided by a depreciation in the peso against a range of currencies.
After pulling out of recession, Mexico managed to cut its share of exports bound for the United States late last year to less than 80 percent for the first time since NAFTA, and the figure is expected to dip to around 78 percent in 2011.
“Being able to diversify Mexican exports is a priority for us,” said Gerardo Gutierrez, president of Mexican employers’ association Coparmex. “We have 12 free trade deals with 44 countries that we really don’t make enough of.”
With Europe mired in a debt crisis, worries have surfaced that the United States could slip back into recession next year. But economists at HSBC say Mexico’s drive to diversify its export base should make it more resilient this time.
Mexico said this month it wants to join talks to create a free trade area in the Asia-Pacific region, and Economy Minister Bruno Ferrari has stressed how important it is to reduce the degree of reliance on the United States.
“Every percentage point means a lot to us,” Ferrari said earlier this year as Mexico and Britain pledged to double their bilateral trade to 4.2 billion pounds by 2015.
Car makers in Mexico have led the charge to capture new markets. Surging vehicle sales to Latin America have made a big dent in the U.S. dominance of Mexico’s export business.
In the first 10 months of this year, vehicle sales to the region were up 56 percent on the year to some 255,000, 2-1/2 times the volume sold in the whole of 2009. Latin America now buys more than one of every seven cars shipped out of Mexico.
“Before the end of the 1990s, we only exported to North America from Mexico,” said Thomas Karig, spokesman in Mexico for German car maker Volkswagen.
The United States bought 61.7 percent of Mexico’s car exports in October. A year earlier it was 68.9 percent.
Nearly 30 percent of Mexican export growth in the first nine months of this year was powered by demand in countries outside the United States, notably China, Colombia and Italy.
Gabriel Casillas, an economist at JPMorgan in Mexico City, expects Mexico’s non-U.S. foreign trade to peak at about 25 percent of the total in the next five years.
“Mexico has become more competitive due to external reasons, higher transport costs, rising Chinese labor costs and the depreciation of the peso,” Casillas said.
Since the 2009 recession, Mexico’s peso has lagged the recovery in other Latin American currencies, allowing it to sell goods more cheaply to countries like Colombia and Brazil.
It has firmed by less than 14 percent against the dollar since slumping when the financial crisis deepened in September 2008 with the collapse of U.S. investment bank Lehman Brothers. Brazil’s real has risen 40 percent against the dollar since.
The peso has also lost about 20 percent against the euro since Lehman went bust, while a stronger Chinese yuan has also helped Mexican exporters become more competitive.
Mexico’s exports hit a record $298 billion last year and two of its fastest growing markets, China and Brazil, do not even have bilateral free trade deals with Mexico.
Exports to Brazil quadrupled between 2005 and 2010. The surge has been boosted by demand for Mexican cell phones and telecoms components, exports of which rose five-fold last year, according to the Mexican-Brazilian chamber of commerce.
“This is mainly due to Carlos Slim’s investment in Brazil,” said Marco Ramirez, commercial manager at the chamber.
Slim, the world’s richest man, has poured billions of dollars into Brazil to strengthen his hand in the telecoms sector, a market he already rules in Mexico.
If progress is made on reaching a bilateral free trade deal, Brazil could be the destination for around 4 percent of Mexico’s exports in the next 5-10 years, Ramirez estimated.
China’s share of Mexican exports now nears 2 percent, making it the biggest market outside North America. When NAFTA began, exports to China were worth less than 0.1 percent of the U.S. total. Portugal bought goods more from Mexico.
Driven by demand for raw materials like copper and oil, exports to China have risen by over 47 percent annually since 1994. At that rate they would surpass the U.S. total by 2024.
Enrique Dussel, director of China-Mexico studies at the National Autonomous University of Mexico (UNAM), said Mexican firms had barely scratched the surface of their potential to export goods like auto parts and chemicals to the Asian giant.
“Today it’s only happened in a very limited way,” he said.