Why Mexico’s Economy Makes it Ideal for Business Expansion
When it comes to international business expansion, Mexico is an increasingly popular option for American business owners. This is because, despite popular belief, the Mexican economy is actually a strong and stable one that offers many advantages for businesses looking to expand south of the border. In this article, we’ll explore how the Mexican economy has been performing in recent years, some of the key reasons why Mexico is such an attractive place to do business, and what to expect in the future.
Mexico’s Economy at a Glance
Mexico’s economy has been steadily growing in recent years, making it an attractive option for businesses looking to expand internationally. In 2021, the country’s GDP reached an all-time high of $1.076 trillion, making it the 15th largest economy in the world. Mexico is also the second largest economy in Latin America, behind Brazil, and it is predicted to become the eighth largest by 2050. Mexico is part of twelve treaties with more than 45 countries, including Japan, Israel, and the European Union. This gives Mexico access to 61% of world GDP and just over 50% of world trade. Its strategic location and large amount of foreign direct investment have also contributed to a strong and growing Mexican economy.
Still, one of the key reasons for Mexico’s strong economic growth is its burgeoning manufacturing sector. In 2018, manufacturing accounted for 26% of the country’s GDP, and this sector is predicted to grow even more in the coming years. This is largely due to Mexico’s strong trade relations with both the US and Canada – under the North American Free Trade Agreement (NAFTA) in the past and, currently, under the United States-Mexico-Canada Agreement (USMCA). The new agreement is meant to help increase labor and environmental regulations and incentivize the domestic production of automobiles, as well as providing updated intellectual property protections. Thanks to both NAFTA and the USMCA, Mexico has long had preferential access to the world’s two largest economies. Among other things, NAFTA and Mexico’s other trade agreements make the cost of doing business there much lower than in the US or Canada. For example, labor costs may be around 30–40% lower than in the US, and office rental rates also can be significantly lower.
Another reason Mexico’s economy is so attractive to businesses is its highly skilled and affordable workforce. With over 128 million people, Mexico is the eleventh most populous country in the world. It’s also predicted that the population will continue to grow, reaching 138 million by 2030. This growth is largely due to Mexico’s young and rapidly urbanizing population. Over 65% of Mexicans are under the age of 35, and over 80% live in urban areas. This makes Mexico an ideal market for businesses seeking to hire talented employees at relatively affordable rates.
Mexico Welcomes Trade and Foreign Investment
Mexico has two main sources of wealth: oil and tourism. These represent almost 30% of Mexico’s gross domestic product. However, recent administrations have worked to expand competition in natural gas distribution, electricity generation, seaports, railroads, telecommunications, and airports. Still, at the moment, Mexico’s most prominent investment is in manufacturing, mining, and financial services. Within the manufacturing sector, the largest trade categories are the automobiles, auto parts, and steel.
The Mexican government is actively seeking foreign investment and offers a number of incentives and tax breaks to businesses that set up shop in Mexico. In 2018, the government launched the Mexico Investment Program, which offers a range of benefits to businesses that invest a minimum of $20 million in the country. These benefits include preferential treatment in government procurement processes, reduced taxes, and fast-tracked visa and residency applications for employees.
The Future of Mexico’s Economy
Despite some current trade tensions between the US and Mexico, the Mexican economy is predicted to continue growing steadily in the coming years. In 2021, GDP growth was just over 3%, and it is expected to continue to grow at a similar rate into the near future. This growth is being driven by a number of factors, including an increase in manufacturing output, rising oil production, and continued population growth.
Infrastructure development is also booming in Mexico, with new highways, airports, and seaports being built every year. These contribute to Mexico’s economic growth by providing new opportunities to import and export goods. The country is also working to improve its energy sector and has invested heavily in renewable energy sources, such as solar and wind power. All of this makes Mexico an increasingly attractive option for businesses looking to expand internationally.
Although Mexico offers many strategic and commercial advantages, it’s important to know as much as you can about its labor laws, payroll, and tax system, which are different from those in the US and elsewhere. Consider hiring local assistance to help you navigate Mexican law, as well as guiding you in proper business etiquette in Mexico.
An Overview of Key NAFTA Provisions for the US and Mexico
The North American Free Trade Agreement, or NAFTA, was a treaty between Canada, Mexico, and the US that was enacted in 1994. While the United States-Mexico-Canada Agreement (USMCA) replaced NAFTA as of July 1, 2020, the impact of NAFTA on US-Mexico trade continues to be a matter of importance. This is because the goal of NAFTA was to eliminate trade barriers between the two countries and create a more open market. In this article, we will discuss some key provisions of NAFTA that are important for US businesses operating in Mexico.
Review of Key NAFTA Provisions
The key provisions in NAFTA have helped to shape the development of trade between the US and Mexico over the last several decades. These provisions have encouraged trade by establishing guidelines and bilateral agreements related to tariff and nontariff trade liberalization, rules of origin, commitments on services trade and foreign investment, intellectual property rights protection, government procurement rules, and dispute resolution. Labor and environmental provisions are also an important part of NAFTA, but they are found in separate NAFTA side agreements.
Market Opening. One of the most important provisions in NAFTA is the elimination of nearly all tariffs and most non-tariff barriers, as well as quotas and import licenses, on goods produced within North America. Also, NAFTA ensured basic protections for US and Canadian investors in Mexico, which was a big change from Mexico’s previously restrictive laws. This trade and investment liberalization has helped Mexico’s economy to grow steadily, as well as encouraging more trade and more diverse trade between the countries.
Agriculture. Another key provision of NAFTA is the elimination of tariffs and tariff-rate quotas on most agricultural products. At the same time, NAFTA addresses sanitary and phytosanitary measures, the latter of which are often regarded by agricultural exporters as a barrier to agricultural trade.
Investment. Perhaps the most important set of provisions in NAFTA for US investors in Mexico are those related to foreign investment. For example, NAFTA removes significant investment barriers in Mexico, ensuring basic protections for NAFTA investors, and provides a method for settling disputes between investors and a NAFTA country. Also, NAFTA ensures “non-discriminatory treatment” for foreign investors in most sectors, with the notable exception of energy.
Services Trade. While not the largest sector in terms of trade between the US and Mexico, the services trade is a key part of relations between the two countries and also a key provision of NAFTA. In fact, NAFTA establishes a set of basic rules for all partner countries that grant service providers certain rights. These rights include access to information, non-discriminatory treatment, cross-border sales and entry, and so on. Perhaps most importantly for Mexico, NAFTA liberalized its financial services, which has opened its banking sector to investment and growth.
Telecommunications Services. A continuing critical issue for NAFTA partner countries is cooperative telecommunications development. Given the importance of these services, NAFTA grants a “bill of rights” to telecommunications providers and users, ensuring access to public telecommunications services. Also, NAFTA stipulates that connections to private lines must reflect economic costs and be available on a flat-rate basis, as well as giving businesses and consumers the right to choose thee equipment and services that best meet their needs.
Intellectual Property Rights (IPR) Protection. It is worth noting that NAFTA was the first US free trade agreement to include provisions on intellectual property rights (IPR). Building on the Uruguay Round negotiations of the time, NAFTA’s IPR protections mirror those agreed on by the World Trade Organization (WTO) and in other existing international intellectual property treaties. In brief, NAFTA sets specific, enforceable rules around the protection of copyrights, patents, trademarks, trade secrets, and so on.
Dispute Resolution. Another key aspect of NAFTA is a set of provisions designed to prevent and settle disputes among partner countries. In general, NAFTA creates a system of arbitration that provides for initial consultation, the process for taking issues to the NAFTA Trade Commission, and instructions for completing arbitral panel proceedings. There are also separate provisions in NAFTA for addressing disputes related to investment activities.
Government Procurement. On a larger scale, NAFTA has helped to open up a significant amount of federal procurement in each partner country. In basic terms, NAFTA ensures that governments can procure goods and services from other NAFTA countries on a non-discriminatory basis. At the same time, NAFTA does place limits on some types of procurement by state-owned enterprises.
Labor and Environment. Another first among US free trade agreements is the NAFTA provisions that address labor and environmental issues. In some ways, these provisions have established a new kind of relationship among NAFTA partner countries. Located in separate side agreements, the NAFTA provisions on labor and the environment outline international cooperation on these issues, as well as consequences for failing to enforce each country’s own laws. Also, NAFTA provides for sanctions and monetary assessments as a means of enforcement, a stipulation that was simply unheard of at the time.
In many ways, these key NAFTA provisions have shaped the economic relationships between the US, Mexico, and Canada for over two decades. Even as the United States-Mexico-Canada Agreement (USMCA) goes into full effect, these key NAFTA provisions will continue to be an important part of trade relations between the US and Mexico, as well as between all partner countries.