Mexico frantic to diversify export markets for some reason

He loves me, he loves me not
He loves me, he loves me not

Now that the United States is loudly breaking up with Mexico on social, Mexico is suddenly on the prowl for hot rebound trade with other markets.  This is how it looks from here anyway, with Mexican officials popping up all over the media saying some country or other is going to be a big new market for Mexican exports.  The new U.S. administration’s threats to dismantle the North American Free Trade Agreement (NAFTA) are currently stoking the flames of economic terror in Mexico, but we all know that Mexico’s dependency on the U.S. export market has been the stuff of economists’ nightmares for decades.  To put it in perspective, the share of Mexico’s annual exports shipped to the USA has not dropped below 79% since some time before 1993, if it ever has.  From 1998 to 2001, the concentration of Mexican exports destined for the U.S. market hovered near a truly bloodcurdling 89%.  So it’s not like we didn’t know we were exposed to risk from overdependence on one market, but after 25 years of trade-loving U.S. governments, we became accustomed to living in denial.

So with the Trump administration already proving to be a barn-burner in Washington, what do we know?  First of all, we know that NAFTA hasn’t been revoked yet.  So far, the Trump administration is taking off like a Cessna with a bunch of cinder blocks tied to one side of it, and promised signature policies like the Muslim ban, repeal of Obamacare and renegotiation of NAFTA are starting to look like they might take longer to come to fruition than some had hoped.  But with uncertainty the order of the day, if Mexico ever decided to make an effort to diversify its export markets, now would probably be the time.  But it’s not just a one-way street – Mexico needs partners, and with the United States apparently offering to start a trade war, other potential suppliers to the Mexican market are already lining up.  Here are some examples ripped from recent headlines in local media:

European Union: European officials have commented publicly about their desire to take advantage of any new opportunities in the Mexican market that may arise from a renegotiation of NAFTA.  Economic officials from the European Union (EU) and Mexico issued a joint statement earlier this month rejecting protectionism and pledging to remain open to trade.  Mexico and the EU have a Free Trade Agreement (FTA) in place since 2000 but began talks last year on updating the pact in areas such as public tenders, raw materials, energy, intellectual property, small enterprise and others.  The two sides reported plans for two new rounds of trade talks for the first half of 2017.

United Kingdom: The UK faces an uncertain economic future with Brexit looming, and now finds itself in a similar position as Mexico.  So why not seek solace in each other’s arms?  UK Parliamentary Under Secretary of State at the Department for International Trade Mark Garnier recently commented in the Mexican media that the door could be open to a bilateral trade pact with Mexico once the UK leaves the EU.  Garnier pointed out that Mexico accounts for only 1% of the UK’s foreign trade, leaving plenty of room for expansion.  He specified Mexican markets such as airports, automotive, defense and law enforcement, energy, retail, education and financial services among those in which UK exporters would like to increase their participation.

China: Chinese Ambassador to Mexico Qiu Xiaoqi, in his comments during the recent inauguration of the Year of Chinese Culture in Mexico, specifically addressed the departure of the United States from the Trans-Pacific Partnership (TPP) negotiations and predicted that China-Mexico trade will increase as a result.  Ambassador Qiu pointed to Chinese home electronics and automobiles for the Mexican market and Mexican beer, bread, avocados and cranberries for China as fast growing trade segments.  Elsewhere, local media reported that Mexican exports to China for November 2016 jumped 43% over the same month the previous year.

Korea:  Mexico has held FTA talks intermittently with Korea in recent years, and earlier this month South Korean Ambassador to Mexico Chun Behoo urged Mexican authorities publicly to join with South Korea to complete technical consultations in order to move forward with the agreement.  South Korea is already the fifth largest supplier of Mexican imports, led by segments such as automobiles, electronics and cosmetics, and Ambassador Chun Behoo said Korea is interested in increasing imports of Mexican beef, pork, avocado and tequila.  Media reports suggest the two sides optimistically hope to complete an FTA this year for implementation in 2018.  The authors of this blog hosted a Korean business delegation to Mexico in late 2016.

Turkey: Earlier this month, the Mexican and Turkish Foreign Relations Ministers issued a joint announcement that the two countries are presently negotiating a Free Trade Agreement.  Turkish Foreign Minister Mevlüt Cavusoglu said that the negotiations would accelerate beginning with the upcoming round, and that air travel connections between the two countries would be expanded as well.

South America: The presidents of Brazil and Argentina met in Brazil this month and issued statements in favor of increasing trade with Mexico in response to threats from Donald Trump to implement barriers to trade.  Argentinian president Mauricio Macri further proposed that the Mercosur trading bloc, composed of five South American countries including Brazil and Argentina, should seek increased trade with Mexico in light of the latter’s potential reduction of trade with the United States.  On the Mexican side, Agriculture Minister Jose Calzada announced Feb. 16 he would be leading a delegation of Mexican corn importers to Brazil and Argentina to seek new suppliers as a hedge against possible future tariffs on U.S. corn.

Mexican government officials have made comments in the media to the effect that they are actively pursuing replacement markets for agricultural exports that may be affected by a NAFTA rollback.  An Agriculture Ministry (Sagarpa) official specifically pointed to Argentina, China and the Middle East as target markets for expansion.  Based on our observations here at the Mexico Business Blog Global Compound, however, it appears that not everyone in the United States is keen on a trade war with Mexico.  Several U.S. states have trade missions to Mexico in the works for this year, probably with the foresight that they stand to lose a substantial volume of export business if import tariffs are implemented on both sides after more than 20 years of duty-free trade.  And it’s not just the short-term export volume that is at risk.  The U.S. is the source of choice for many Mexican importers, but if they are moved to develop new sources in other countries due to new tariffs on U.S. products, it may not be so easy to simply return to the former status quo if a future U.S. administration returns to a free-trade posture.  The situation may not be critical at the moment, but in the long term, the stakes could be significant for U.S. exporters.

2 thoughts on “Mexico frantic to diversify export markets for some reason

  1. Trump reminds me of my, now dead, crazy uncle; fast at demolishing and never re-building. The most amazing thing about Trump’s first month in office is how little has really been achieved, and re-negotiating NAFTA is hugely complicated. Moreover, Trump forgot about its northern neighbours — who are more than happy to re-open the NAFTA discussion. Trump was very surprised at the reception in got in Ottawa.

    The fact, that Trump is all about flash and little about substance is an indication of what will happen over the next 24 months — very little. Congress will play along as long as fundamental trading relationships are not affected. The visit by Bannon and Pence in Europe right now is further indication — the administration has at least two maybe three different power centers and none are based in the oval room.

    I agree that Mexico should open itself to the rest of the world. It has a lot to offer and as such can easily diversify away from the US. Both Canada and Mexico are for too dependent on the US as a market for their goods.

    Diversification is the only free lunch

  2. Thank you for your well considered comments Nicolas. The funny thing is that Mexico has long been among the world’s economies most open to free trade, yet the USA’s combination of market size, proximity, familiarity, quality and price has been too appealing for most Mexican importers and exporters to wean themselves away from. Perhaps Mr. Trump will be doing us a favor if he forces us to finally diversify, but the transition will be a bumpy ride for sure.

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