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The reorientation of the Mexican Global Value Chain: Opportunities in the face of the COVID-19

The reorientation of the Mexican Global Value Chain: Opportunities in the face of the COVID-19

The current challenges faced by the world economy that have been caused by the novel coronavirus will have profound consequences on issues of health, geopolitics, trade, and society in general in the coming years.  Among the things that will experience significant change is the Mexican global value chain.

Global outlook

The world faces economic challenges that have arisen, in great part, as a result of supply-driven downward pressure on international oil prices.   This reduction of global energy consumption that is a direct result of the coronavirus pandemic has been exacerbated by a lack of production level agreements between oil exporting nations.  As a result, some of the world’s leading stock exchanges have experienced a certain degree of recent volatility.

In this context, Mexico is no stranger to globalization and the financial volatility that it sometimes creates.  As a recent example, this has been represented by a notable increase in the exchange rate on peso-dollar parity, as well as a contraction of domestic trade.  This, of course, has been, in great measure, the result of quarantine restrictions that have been put in place to combat the coronavirus. In spite of this, there is still reason to be optimistic as regards economic opportunities related to a possible expansion of the Mexican global value chain.

An Expansion of the Mexican global value chain

China continues to be the world’s factory.  Chinese-made products are still exported to virtually every continent on the globe. In light of this, however, it is important to consider the recent “trade war” between the United States and China.  This dispute among the world’s foremost economic powers has resulted in a decline in the production and sale of a wide range of Chinese-origin goods.  This reality represents an opportunity for the Mexican global value chain to expand its reach.

Moreover, in addition to factors related to production, the cost of Chinese labor has risen due to several factors, but mainly because of a government move to raise the minimum wage.  An additional factor that negatively impacts Chinese productivity is its demographics.   As its population gradually grays, the number of working-age available for the intense labor of manufacturing industries decreases.

Global product manufacturers are constantly looking for favorable conditions that can increase their productivity, competitiveness, and access to the most attractive international markets. For this reason, foreign direct investment (FDI) takes all macroeconomic factors into account.

Opportunities to grow the Mexican value chain in the face of COVID-19

A diligent effort to seek opportunities for Mexico in a post-COVID-19 scenario is essential to ensuring the health of its economy, as well as the preservation of its commercial and financial position. Achieving these goals will require a quick redoubling of efforts but it is undeniable that the country still is in a position to be attractive in global value chains.

1. Free Trade Agreements including the USMCA:

Over the last several decades, Mexico has demonstrated that it is a country open to the world in terms of a free flow of international trade.  Now, more than ever, it is necessary to strengthen, disseminate, and take advantage of the benefits of the plethora of commercial treaties that it has negotiated. In the specific case of the USMCA Free Trade Agreement that has been implemented between Mexico, the United States, and Canada, it is clear that there is a general consensus in the three countries on the need to strengthen North America as a high value-added logistics platform for business and investment. Achieving this will serve to strengthen the Mexican global value chain as well as that of its neighbor countries.

For these reasons, Mexico offers the advantages that are tied to its privileged geographical position to potential foreign investors, as well as its other attributes such as its port infrastructure and preferential access to the world’s largest consumer market: the United States.

2. A Demographic Bonus Impacts the Mexican Global Value Chain

For the foreseeable future, Mexico offers an attractive economically active demographic to potential international investors. The country’s skilled human capital and educated workforce are important assets that serve to create a business environment that is attractive on an global scale.

The average age of a worker in Mexico is approximately 27 years.  This compares with China which has an average age of 36 years, or Japan, for instance, with an average age of 46.  Companies that have opted to take advantage of the growing Mexican global value chain understand the strategic importance of a young and capable workforce.

3. A Dual Education Model: University /Company:

In the face of the new scenario that Mexico’s global value chain will experience in post-coronavirus world, universities and technological institutes will play an extremely important role in the creation and maintenance of an advanced knowledge society that can convert innovations into economic gain.

Mexico must accustom its students to the concepts of virtual reality, the responsible use of natural resources, think tanks, sustainable development and “Big Data” in order to turn them into practical tools that can promote economic gains in international trade. This will only be possible if Mexico strives to create functioning partnerships in the form of University-Business collaborative models.

4. Reorientation of global value chains to Mexico:

The current global pandemic can also be the catalyst for national introspection that can cause Mexico to explore a variety of alternatives to the challenges that it faces. The success of many regions of the country has been largely due to the attraction of foreign direct investment, which is linked to global value chains and, therefore, to competitive export markets.

The experience of specific and developed industry sectors in states such as Querétaro, Aguascalientes, and Guanajuato and, in general, the Mexican region of the Bajío have demonstrated the highly positive effects of economic “clustering” and the linking of these industries to global markets.

It is notable to mention that almost 40% of the Mexican national GDP is linked to export activities.  The diversification of the country’s industrial base has enabled it to be competitive in a wide variety of areas that include, but are not limited to, the manufacture of automotive parts, medical devices and products that are used by the international aerospace industry.

Seeking to reorient the Mexican global value chain and that of North America as a whole will continue to be a valuable strategy to pursue. Achieving this ambitious objective will only be possible through consistent effort and collective action.

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