New Economic Zone Along Mexican Border Could See Nearshore Payoffs

Making Northern Mexico states more competitive is one of the key drivers behind a new initiative introduced by Mexico’s President Andrés Manuel López Obrador (AMLO).

The move, which creates a huge free economic zone along the US-Mexico border, is likely to yield several ancillary benefits, namely more job opportunities in those northern hubs and, in turn, the expansion of more skilled labor pools that can directly benefit the Nearshore outsourcing sector.

AMLO’s bold program would constitute the world’s largest free economic zone, stretching from Baja California on the Pacific coast to Tamaulipas on the Gulf of Mexico, covering as many as 43 municipalities across the Northern Mexico.

Businesses operating in the zone will enjoy a 50% break in value-added tax (VAT), and the income tax they need to pay has also been reduced to a mere 10%.

There is little doubt that the economic zone will seek to capitalize on the strengths of the US economy, by delivering more incentives for multinational firms to establish Mexican offices, analysts say.  Tax-breaks alone will give businesses more opportunities to invest, helping them draw Americans from across the border for shopping.

Larger Vision of Collaboration

The new economic zone appears to be a more tangible manifestation of existing cross-border dealings, especially in the San Diego-Baja corridor which has aimed to position itself as a region for  higher-end services, including high tech manufacturing, life sciences research and development and of course, software, IT services and call center services.

One of the most notable symbols of that collaboration came two years ago when Thermo-Fischer’s CTO drove the establishment of a dedicated software development center in Tijuana, about 50 miles south of the company’s main headquarters in Carlsbad, Calif.

Observers see the new economic zone as adding extra fuel to current collaborations, and providing existing Mexican tech firms, and others, to consider capitalizing on the new tax relief in the Northern regions. This could come in the form of creating additional development offices, but some critics say – Not so fast. 

One of the long-standing criticism of the border region is its lack of qualified talent. High capacity talent hubs such as Monterrey, Guadalajara and Mexico City cast a big shadow on the less-developed border towns.

To add to this, there is an ongoing uncertainty around the fate of thousands of migrants, mostly from Central America.

The other major challenge is the belief that Southern California business, in large part, remains clueless about the high-tech capabilities along the border.

In this essay in Nearshore Americas from 2017, our author argues that U.S. decision-makers lack to the familiarity with the Baja region necessary to imagine the kinds of partnerships that could result. “What I see is a highly complementary ecosystem (connecting Baja and San Diego), which has the potential to become much more integrated and cohesive than it is presently,” he writes.

Youth Development 

To deal with the talent crisis, AMLO has devised a program called “Youth Building the Future”, under which around 300,000 high school students will be given incentives every month. In addition, the government has agreed to spend millions of dollars on providing job training (internships) for as many as 2.3 million young people

The northern Mexican states have long been creating better economic opportunities, partly due to their proximity with the United States. Baja California, for example, saw a double-digit economic expansion in 2017, the highest growth among the Mexican states.

Until the North American Free Trade Agreement (NAFTA) came into force, the northern region was a duty-free area for high-end goods. However, in recent years, reports say, higher taxes has left many businesses struggling to compete with their counterparts in US cities such as San Diego.

However, curbing crime and building a strong educated workforce has been a challenge for successive governments. In the border town of Tijuana, for example, homicide rates increased so dramatically that the state of Baja became the second-most violent state in the country in 2018, behind Colima.