Focus: Pacific Alliance

Gazing East

Gazing East

Jul. 10, 2013

Mexico is a major exporter of goods to the US and the second largest economy in Latin America, just behind Brazil. In the past, Mexico has been ambivalent about trade with Asia, but change is imminent. The country is increasingly recognized as a global player, and its recent success is often mentioned in the same breath as its many free trade agreements. The President of Bosch Mexico, Rene Schlegel, described the country's trade strategy directly with TBY, “Mexico is moving in a very modern direction, and that should be maintained. Mexico should be very proud of its free trade agreements (FTAs) and expand them as much as possible."

It seems that Mexico is doing just that, as many of its 12 FTAs were designed to ease the export of goods to the North, but in recent years the center of global trade has begun to shift toward the Pacific, and Mexico is keeping pace. The Pacific Alliance balances the protectionism of South America's five-nation MERCOSUR and has goals similar to those of the US-led Trans-Pacific Strategic Economic Partnership, or TPP. These include liberalizing trade between Latin America and the Pacific region. However, while the TPP's member nations have convened 15 times without an agreement, the Pacific Alliance has already made significant headway.

Its members have already opened joint overseas trade offices and lifted tariff and visa requirements, and Chile, Colombia, and Peru have merged their stock markets with the Integrated Latin American Market (MILA). Chile, Peru, and Colombia are three of the fastest-growing economies in Latin America, whereas Brazil, once the darling of the international community, has gone from a growth rate of over 7% to under 1% in only three years. Together, the four countries are responsible for close to one-third of Latin America's trade and nearly a third of its population. This leaves Mexico and the Pacific Alliance in a unique position, as there are few entities to challenge their negotiation of FTAs with Asia. If these negotiations are successful, Mexico and its Pacific Alliance partners will be well positioned to supply a global economy transformed by demand from Asia.

These new trading partnership routes were highlighted in HSBC's Global Connections Report in February 2013, which states that emerging economies will radically alter global trade flows in the coming decades. According to the report, “Trade between emerging markets (so-called 'south-south' trade) will increase in importance as these economies grow wealthier, entailing a shift toward higher domestic demand." The report predicts that as China's economy moves toward higher value-added production, opportunities for countries with supplies of low-cost labor will develop.

Mexico is currently competitive with China in terms of labor costs, manufacturing more flat-panel televisions and laptop computers than any other country. As demand for electronics increases in emerging markets around the world, Mexico's power and reach as an exporter will increase, and its economy will diversify while remaining cost effective.

This model of growth, which moves from manufacturing to high-value added exports, echoes one that has been successful in transforming eastern markets but has not yet transformed Mexico to the same degree. As a result, the country is still equipped with affordable labor, and FTAs with Asia are one way to ensure that the members of the Pacific Alliance will supply the region's future demand.

The combination of Brazil's recent protectionism, the Pacific Alliance's increasing competitiveness with China's manufacturing industry, and the US government's pivot toward Asia could fuel Mexico's continued emergence as a manufacturing force in the coming decades. However, such growth depends on unpredictable factors such as global trade flows. There is strong evidence that Mexico has a bright future if the country can reach out to developing Asian economies while remaining a manufacturing stalwart for the US and Canada.