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International Location Report: Mexico Maintaining a Place in Global Manufacturing

Despite dealing with a collapse in oil prices and threats of new tariffs to be imposed by the incoming Trump administration, Mexico retains significant economic advantages.

Directory 2017
The moment Donald Trump declared that the United States is going to slap tariffs on Mexican manufactured goods imported to the United States, all discussion of the future of the Mexican economy became dominated by the prospect of a Trump presidential-election victory and its potential effects on the North American Free Trade Agreement. And now that there's a new Trump administration in Washington, D.C., everyone has been trying to predict exactly how President Trump will make good on his promise to American voters and how the southern member of NAFTA will respond.

It may have been telling that Trump's biggest gambit after the election was to persuade United Technologies' Carrier air-conditioning division to reverse its earlier plan to move 2,200 jobs from Indiana to its operations in Mexico, and instead to retain about half of those jobs in America.

"Mexico is in deep trouble," Alan Blinder, head of the Economics department at Princeton University, told Area Development. "Even if Trump can't outright abrogate NAFTA, there are many things he can do on his own authority that will throw a huge monkey wrench into trade between the U.S. and Mexico."

Yet Mexico can rely on a significant counterweight to any such plans: its established, significant place in global manufacturing and logistical networks that have been built with the appeal of Mexican factories at the center.

"It's not as simple as someone deciding just to bring all components manufactured back to the United States and have them put into cars in the United States," says Dan Sandberg, president and CEO of Brembo North America, a major supplier of brake components to automakers worldwide. "One reason is the ramifications for consumers: Do Americans really want to pay $70,000 for a car that now costs them $35,000?"

Strong Advantages
In any event, Mexico retains a number of strong economic advantages that will continue to buttress its economy and draw job-creating investments in the years ahead.

One of them is the sheer and growing size of a manufacturing base that has been powering the economy for several years now, in large part because Mexico enjoys lower labor costs than the United States and has become a preferred option for American and European manufacturers that want a low-cost option but have grown wary of the rising wage rates and logistical vulnerabilities of sourcing their goods in China or other Asian countries.

Latin America's second-largest economy, and No. 15 in the world in nominal terms, Mexico also enjoys more than 40 free-trade agreements with countries around the world, significantly lower labor costs than the United States, a younger population, and a reform-minded federal government that has made it increasingly attractive for companies to invest in the expansion of manufacturing there.

The country also continues to benefit from growth in its agricultural and services sectors. For example, avocado imports from Mexico now enjoy more than a 70 percent share of a $2 billion-plus annual market in the United States. Bolstered by a marketing arm called Avocados From Mexico that plans to advertise in February in its third consecutive Super Bowl telecast, the Mexican avocado industry has benefited as U.S. consumption of avocados reached an estimated record of 2.5 billion pounds, compared with 1.9 billion pounds in 2014.

All of these factors have helped Mexico surge into pole position among Latin American economies seeking further investment, especially as the economic woes of Brazil — yesterday's emerging-market star — have deepened. That's not to say that President Enrique Peña Nieto and the Mexican economy haven't been encountering some recent difficulties even before Trump's threats to pull out of NAFTA clouded their prospects. GDP growth in 2016 ratcheted down to the range of around 2 percent growth, after having come in at 2.3 percent in 2014 and 2.5 percent in 2015. In the second quarter of 2016, in fact, the Mexican economy shrank for the first time in three years, contracting by 0.2 percent year-over-year. Still, Mexico's 2016 performance was much better than that of the U.S. economy, which could produce growth of only about 1 percent for most of the year, but it represented a setback for Mexico.

Meeting Challenges
The biggest reason for Mexico's recent struggles has been the two-year-long collapse in oil prices, which came just after the Peña Nieto presidency had opened the country's energy industry to private and foreign players in 2012 and 2013. The administration had to cut back spending by Pemex, the Mexican national oil company.

"It's fair to say that Mexico has weathered the collapse of global commodity prices better than most in Latin America, but its star has faded — and it doesn't look likely to return in the next couple of years," Neil Shearing, Capital Economics' emerging-markets expert, said in late 2016.

Mexico has been offsetting oil-price woes with a huge and growing industrial base that is making cars, clothes, and food for the United States and markets all over the world. Peña Nieto added to the appeal of Mexico for job creation with a wave of measures beginning in 2012 that reformed the minimum wage, women's worker rights, and union transparency. He also took moves to bust up anti-competitive Mexican monopolies. While in total these moves clearly increased the future cost of doing business in Mexico, they continued the country's move toward western commercial norms and were considered harbingers of future economic stability. One of the biggest examples is the investment by Audi in a new plant in San José Chiapa, Mexico, to build a new version of its popular Q5 crossover-utility vehicle. Audi's parent company, Volkswagen AG, chose the site over construction of the plant next to VW's existing factory in Chattanooga, Tenn., to serve as the single source for Q5 vehicles around the globe. Audi was attracted not only by Mexican labor costs and free-trade agreements but also by its conviction that the local work force indeed could meet the exacting quality standards that Audi upholds at its plants in Germany and elsewhere — and which are crucial to the brand in a highly competitive luxury automotive market. More than 3,000 hourly workers have begun churning out Q5s at the plant.

Mexico also continues to roll out blockbuster infrastructure projects that will attract foreign investors, such as Mexico City's huge, symbolic new airport, which is scheduled to begin operations in 2020. The new airport in the federal capital will require an investment of more than $13 billion to complete, including a $3.5 billion new passenger terminal. The futuristic airport building was designed by British architect Norman Foster and Fernando Romero, son-in-law of Mexican tycoon Carlos Slim.

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