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Mexico's Nearshoring Boom Faces Trade Risks
Bloomberg
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14 hours ago
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00:00
The plastic comes from piping that we...
00:03
Baldwin-Britain is a manufacturer based in Monterrey,
00:06
trying to seize what some are calling the Mexican moment.
00:10
And everything comes as its pellets, and it gets melted in this machine.
00:15
As CEO of Plasti Exports, he runs several factories in northern Mexico
00:19
making plastic components and finished consumer products.
00:23
In his newest plant, kitchen containers.
00:25
So this is for consumer products that we're selling to the United States.
00:30
That basically came from near-shoring projects.
00:32
So these products were previously made in China,
00:35
and they're relocating into Mexico.
00:40
This closer integration between Mexico and the United States
00:43
was jump-started by the North American Free Trade Agreement, or NAFTA,
00:47
back in 1994, covering Canada as well as the U.S. and Mexico.
00:52
Britain is willing to bet you'll find something he makes in your home.
00:56
As a longtime supplier of parts to U.S. and European home appliance companies,
01:01
his new customers are just as likely to be Chinese multinationals you've never heard of.
01:06
30 years ago, we saw a lot of shift of business from Mexico to China.
01:12
And the last four years, we have seen the shift come back to Mexico.
01:16
Are Chinese companies coming in to compete with you?
01:20
Yes, they are coming.
01:21
They're setting up plants in Mexico.
01:23
As a matter of fact, in Nuevo León, the state of Nuevo León,
01:26
which is the industrial hub of Mexico, they're setting up.
01:29
So that basically forces companies like us to be in our A-game to compete with them.
01:35
Shannon O'Neill is senior vice president of the Council on Foreign Relations.
01:39
She sees the window of opportunity others do,
01:42
but also some troublesome risks for investors.
01:45
As you talk to investors in Mexico,
01:48
how concerned are they about some of the issues you identified,
01:50
like judicial reform, for example?
01:52
These really are front and center in investors' minds.
01:55
So the justice reform will mean that judges are now elected.
01:58
And so businesses worry that those judges could be bought
02:01
or influenced by the government in particular cases.
02:05
What about security in particular?
02:06
Because it wasn't that long ago that it felt like
02:08
some of the individual Mexican states were almost in a state of civil war with the cartels.
02:13
Security has worsened under this last government.
02:17
Homicide rates have remained at near-record highs,
02:19
but things like extortion, embezzlement, and other kidnappings have grown.
02:24
One of the things an investor tends not to like is uncertainty.
02:27
And it's building an uncertainty that happened under the last administration.
02:31
It's continuing and even deepening.
02:33
And we've seen it in the investment numbers.
02:35
You know, what Mexicans were hoping 2024 would be a record highs in terms of investment,
02:39
and most of it has been frozen, both international investment, foreign investment,
02:43
but also domestic investment.
02:45
So this is a time of uncertainty in Mexico,
02:48
even as companies are looking for alternatives to Asia.
02:53
And if that weren't enough, the USMCA itself,
02:56
that successor agreement to NAFTA underpinning the nearshoring system,
03:00
will be up for review in 2026,
03:03
with new governments in both the United States and Mexico.
03:07
I do think these are going to be pretty difficult negotiations.
03:10
The really looming issue for the review of the USMCA is China.
03:15
And where does China fit into supply chains in North America?
03:18
And where does China fit into production more broadly in North America?
03:23
Marcelo Ebrard is the new minister for the economy for President Sheinbaum,
03:27
coming to the job after serving as mayor of Mexico City
03:30
and as foreign minister under President Andres Manuel Lopez Obrador.
03:34
Ebrard's appointment itself could be a sign that President Sheinbaum
03:39
welcomes further US investment and supports more economic integration.
03:44
In the last administration, Ebrard led negotiations for the US-Mexico-Canada agreement.
03:49
Well, we are extremely linked with the United States companies and market.
03:58
So if you put tariffs on Mexico exports, for instance,
04:02
those tariffs are going to translate in high prices for consumers in the United States.
04:08
So I think we have a strong argument in order to reduce this possibility
04:15
to have tariffs in our exports to the United States
04:20
because there are American companies exporting to the United States.
04:25
You don't solve anything with tariffs between us.
04:29
It doesn't make sense because it's the same economy, practically.
04:32
I know you have some tariffs on steel, for example, from China at this point.
04:37
How do you see the role of tariffs?
04:38
When do they make sense?
04:39
When do they not make sense?
04:41
Well, it's easy to abuse about tariffs,
04:45
to put tariffs for any kind of article at the same time.
04:49
We are not especially friendly with the tariffs for several fields
04:54
because it can be costly for our economy, even for the United States economy.
05:00
So we need to have a common policy with the U.S.
05:04
Let's see what happens in the next election
05:06
in order to have a conversation about the competition with China.
05:11
Let's do something really effective
05:13
because you are not going to solve competitiveness through tariffs.
05:19
It doesn't work.
05:19
But in the end, Minister Abrard recognizes
05:23
that the real potential of the Mexican economy
05:25
and its further integration with the United States
05:28
will depend on its ability to attract private capital.
05:32
And he can see a world where that integration
05:34
transforms the world of Mexican exports.
05:38
There is no other way to do it
05:40
because we are not going to find, you know,
05:43
new resources from oil or...
05:47
No, it doesn't exist.
05:49
Everything is going to depend on our capacities
05:53
to produce better and more.
05:56
How far can you go?
05:58
How much progress can you make
06:00
building the Mexican economy
06:01
through integration with the United States?
06:04
I think that if we are agree...
06:06
If we have a common vision with,
06:09
let's say, the private capital in the United States,
06:13
this can be something near 25 percent of the imports
06:19
from North America.
06:22
So you can imagine the impact of this in Mexico.
06:26
You can change the country in 10 years.
06:29
Why not?
06:30
Since we spoke with Minister Abrard in Monterey last October,
06:34
President Trump has gone forward with tariffs on steel,
06:37
aluminum and auto imports,
06:39
though they apply only to the non-U.S. parts of vehicles
06:42
imported under the USMCA.
06:45
What this means for auto companies and their parts suppliers
06:48
is still playing out.
06:49
But Ontario-based manufacturer Martin Rea
06:52
is seeing the ramifications in Canada, Mexico and in the United States.
06:56
Martin Rea is a tier one auto supplier.
06:59
We're leaders in structural parts,
07:01
lightweight structures and propulsion systems.
07:04
We make parts for cars.
07:07
We're one of the larger suppliers in North America.
07:10
Rob Wildeboer is the executive chairman
07:12
of the auto parts company he co-founded in 1993.
07:16
He says the tariffs have been disruptive
07:18
up and down the supply chain.
07:20
Parts on average can cross the border
07:22
anywhere from six to eight times.
07:24
But certainly we make parts that go into assemblies,
07:29
that go into vehicles.
07:31
So I'd say a lot of our parts probably two or three times.
07:35
That flow has been disrupted by President Trump's
07:38
imposition of a 25% tax on foreign vehicles.
07:42
In turn, Canada announced a tariff on U.S. assembled vehicles.
07:46
Companies like Martin Rea are collateral damage
07:48
in a diplomatic feud between neighbors.
07:51
So effectively, on average, Canadian assembled vehicles
07:54
have 50% or more U.S. parts.
07:57
So effectively, you're paying half the nominal tariff.
08:00
And our argument is that we should basically move
08:02
to get rid of that.
08:04
The interesting thing between Canada and the United States
08:06
is that when you look at assembled vehicles,
08:09
Canada buys less from the United States
08:12
than the U.S. buys from Canada.
08:13
But when you look at the parts,
08:15
the U.S. actually has a surplus with Canada in auto.
08:19
So parts plus assembly.
08:21
And that's in part because vehicles assembled in Canada
08:24
that go to the U.S. have at least 50% U.S. parts.
08:27
So there's not a trade disparity in that sense
08:29
between Canada and the United States,
08:31
contrary to what you often see in the papers and so forth.
08:35
Now, for the first time in 30 years,
08:38
Canada imports more vehicles from Mexico
08:40
than from the United States.
08:42
But what sounds like a win for Mexico
08:44
might be a loss for the long-standing trade relationship
08:48
among the North American countries.
08:50
This is what works for North America.
08:52
You need a Fortress North America approach.
08:55
We shouldn't have tariffs on vehicles
08:56
because we make vehicles together.
08:58
And we shouldn't have tariffs on parts.
09:00
And for most auto parts, there are no tariffs right now.
09:03
If you put tariffs on auto parts,
09:05
you would shut down the industry
09:06
because there would be suppliers
09:07
that do not cross the border.
09:09
The second thing we need is stronger North American content,
09:14
which the U.S. wants and so the supply base wants.
09:18
The third thing is we need a penalty
09:19
for not complying with that North American content.
09:23
Right now, it's two and a half percent.
09:24
It should be higher because if you have a low penalty,
09:27
people essentially don't follow the rules.
09:29
The fourth thing is I think it's good to have a tariff
09:32
or some measure to force OEMs in Europe, Japan, and Korea
09:39
to make more vehicles here.
09:41
And the U.S. has done that with tariffs.
09:44
I think ultimately you will see more assembly in North America
09:49
because of that.
09:49
And then the fifth thing is I think you've got to keep China out
09:52
in terms of OEMs and parts as well as investment
09:55
because China doesn't play by the same rules
09:57
as the rest of the world does.
09:58
When you have that, you're going to effectively have a regime
10:02
that really works.
10:03
So our advocacy, whether it's at Martin Rea
10:06
or whether it's part of the Canadian Automotive Partnership Council
10:10
or the Auto Parts Manufacturers Association or MEMA,
10:13
all these associations that we're members of,
10:16
we basically say what really works for North America
10:19
and the competitiveness of our vehicle industry
10:22
is tariff-free movement.
10:24
And that will get cheaper vehicles to consumers,
10:28
which is what we all want,
10:30
and it will make our industry as efficient
10:32
as it can possibly be.
10:34
So I think with respect to the tariffs on Canadian-assembled vehicles
10:37
going into the U.S.
10:38
and Mexican-assembled vehicles going into the U.S.,
10:42
we've got to work towards a 0% tariff
10:44
because, quite frankly,
10:46
that's how the integrated supply chain works.
10:48
The history of the North American auto industry
10:52
is rooted in tariffs.
10:54
Canada's auto industry began in 1904
10:56
when Henry Ford went to his neighbor in Windsor, Ontario
11:00
to establish the Ford Motor Company of Canada
11:03
to avoid Canadian tariffs on U.S. autos.
11:06
As it turns out, history is repeating itself,
11:09
or at least rhyming, for the auto industry.
11:11
Canada's auto industry
11:12
is rooted in the U.S. autos.
11:13
Canada's auto industry
11:14
is rooted in the U.S. autos.
11:15
Canada's auto industry
11:16
is rooted in the U.S. autos.
11:17
Canada's auto industry
11:18
is rooted in the U.S. autos.
11:19
Canada's auto industry
11:20
is rooted in the U.S. autos.
11:21
Canada's auto industry
11:22
is rooted in the U.S. autos.
11:23
Canada's auto industry
11:24
is rooted in the U.S. autos.
11:25
Canada's auto industry
11:26
is rooted in the U.S. autos.
11:27
Canada's auto industry
11:28
is rooted in the U.S.
11:29
Canada's auto industry
11:30
is rooted in the U.S.
11:31
Canada's auto industry
11:32
is rooted in the U.S.
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