For more than a decade Mexico has focused its international efforts on creating the world’s most extensive network of free trade agreements (FTAs). Today Mexico’s FTAs network covers 42 countries in the Americas, Europe and the Middle East – with access to around 935 million customers – and has become an effective magnet for foreign investors.

During the past 10 years more than 60% of the total FDI in Mexico came from the US, and around 30% from the EU – both regions have FTAs in place with Mexico: the NAFTA agreement signed in 1994 that includes Mexico, the US and Canada, and the Mexico-EU FTA created in 2000.

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Now the Mexican government wants to diversify further its portfolio of foreign investors and international trade by focusing on countries such as China and Japan.

Japanese agreement

Next year, as a result of a recently signed agreement by Mexico’s President Vicente Fox and Japan’s Prime Minister Junichiro Koizumi, Japan will become the next country to have a FTA with Mexico, which will open greater investment opportunities between the two nations.

Mexico’s minister of economy, Fernando Canales Clariond, is convinced of the economic potential of the new agreement. “What we have signed is an agreement for economic partnership, which goes further than just a free trade agreement,” Mr Canales says. “We are convinced from our research and the conversations we’ve had that it will attract more Japanese investment than what we have now.”

In the past 10 years, Japan has invested an annual average of $350m in Mexico, which Mr Canales believes could double in the next few years, particularly benefiting the automotive and electronic industries.

He also explains how the relation between Mexico and China has changed. During the past few years China has managed to establish a very significant presence in the market, especially in the consumer goods arena. Chinese products have invaded not just Mexico but also the US, which was traditionally served by Mexican providers.

“The attitude of the Mexican government used to be one of commercial confrontation, although the political and diplomatic relation [with China] has always been excellent. A couple of months ago we decided to change this attitude,” says Mr Canales. A Mexican government delegation recently visited China to try to establish a strategy of co-operation between the two countries.

As an example of the current situation, the minister cites the Chinese shortage of steel, which has forced the country to import large quantities of this material from all around the world. “During the last year and a half this has resulted in an increment of more than 60% in international steel prices,” he says.

China has responded by opening additional steel plants, but these can’t operate without the iron needed for the manufacturing process. “Mexico has mineral deposits of iron, like other countries such as South Africa. We have been exporters of manufactured steel products to China, and we are now exploring the possibility of becoming providers of iron.”

With this ‘if you can’t beat them, join them’ attitude, the Mexican government is opening doors to a country that could easily become an investor in Mexico in the future.

European target

The other region that Mr Canales is currently targeting is Europe. Cultural and historical links have resulted in Spain being the largest European investor in Mexico, closely followed by the Netherlands.

 

 

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“These are decisions taken by the Spanish companies, not by the government. They invest in several sectors but there are three that have been particularly important: retail banking, energy and tourism,” he says. “However, the commercial relationship between Spain and Mexico is very small. Oil represents 80% of our exports to Spain, and the remaining 20% goes to manufactured products, which is a very poor mix. We have met with politicians and entrepreneurs with the intention of working on that.”

Lack of diversification is also obvious when looking at how FDI is split between the different Mexican regions. Around 70% of the total FDI received in 1994 went to Mexico DF, followed by the state of Nuevo León, that attracted around 10% of the total.

Mr Canales knows Nuevo León well. It is his home state, where he was governor before becoming minister of the federal government, and one of the country’s most industrialised regions. The area is mainly controlled by Mexican investors, although there is potential for growth in foreign investment.

“International investment in the state of Nuevo León has gained importance during the last few years,” he says. Foreign investors in the metropolitan area of Monterrey, where most of the industry is concentrated, have been investing in different sectors such as the automotive industry.

But there is no industry with more impact on the Mexican economy than the energy sector, and discussions regarding the future of the state owned Petróleos de Mexico (PEMEX) are attracting interest all around the world.

Simplification plan

Under the current taxation framework, PEMEX contributions to Mexico’s budget account for one-third of the total federal income, meaning the company doesn’t get to keep enough resources to fund new investment and expansion plans. As Mr Canales explains, a proposal to simplify the fiscal commitments of the company has been presented to the Congress, “to allow [PEMEX] to have a surplus to cover not just its operational costs, but also to invest more aggressively in the sector”.

The government is also considering a reform that would allow the private sector to participate in the energy industry, which national and international analysts are following with great interest.

Reforming the way PEMEX operates will be crucial for the Mexican economy. For the time being the country’s privileged location, political stability, and international approach will continue attracting foreign investment.

“Economic realities, and the reality of our international trade have resulted in 87% of our exports and around 83% of our imports going to and coming from the US,” Mr Canales says.

“We are making an effort to diversify this across Latin America, Europe and Asia proportionally, while loosening our links with the US,” he adds. This will, no doubt, attract more FDI from all these regions.