The contradictory signals from the Mexican government 

Foreign Affairs Secretary, Alicia Bárcena, believes that in Mexico they are not understanding the implications of nearshoring. During her participation in the Congress of the Mexican Foreign Trade Council (Comce) she warned that “if we (the Mexicans) do not get our act together quickly, Vietnam, which offers incentives, can become one of the most competitive countries.” 

To whom did the chancellor address the message? Clearly it was not for the businessmen present at the Comce congress… 

Today, Mexico has competitive advantages to become the ideal destination for companies that operate in Asian countries, given its proximity to the United States and as a partner of the USMCA. The relocation of value chains or nearshoring is a golden opportunity for the country, but things change from one moment to another, from government to government, from NAFTA to USMCA, and from one national or international issue to another. 

Mexico faces critical issues that can prevent the consolidation of nearshoring: insecurity, water scarcity, energy, public investment, industrial clusters and qualified labor. Given this panorama, the big question is whether Mexico has a strategy to solve them and take advantage of nearshoring. 

With the signing of the USMCA, which was negotiated since the last administration, and the emergence of the Covid pandemic that forced the need for geographically integrated value chains to be raised, the conditions were met for Mexico to take advantage of nearshoring. The current government is also doing its job, it has undertaken some actions to consolidate Mexico as a ideal country for this type of investment. However, these efforts seem to be isolated, are not sufficient, not properly planned, and are not part of a comprehensive strategy. Even in recent weeks, contradictory signals from the Mexican government have been sent, such as the following: 

The problem of tax benefits 

On October 11, the Mexican Finance Secretariat published the decree establishing tax benefits for companies in 10 key sectors of the Mexican economy that are interested in relocating their work centers anywhere in the country. It allows companies to deduct a maximum percentage of new investments in fixed assets in the first year, as well as a fiscal stimulus of additional deductions for technical training expenses. 

The decree represents violations of the USMCA because it could be interpreted as prohibited export subsidies that focus on specific sectors. It implies that public policies that condition investments on exports could conflict with the USMCA. This could motivate the creation of a controversy panel within the treaty, where Mexico would have the possibility of losing, causing damage to companies that already operate in the country or future investments. 

Days after the publication of the decree, the US government reacted, and the Mexican government had to rectify it. The Economy Secretary, Raquel Buenrostro, reported that she is working with the Finance Secretariat to review and modify “the wording” of this decree, so we will have to wait for the addendum. 

Government Expenditure Budget 2024, less vital public investment for nearshoring 

The 2024 Government Expenditure Budget was approved by the Chamber of Deputies on November 9, with more debt, more social spending and less public investment. 

The amount allocated for public investment will be 1.11 trillion pesos, 11.1% lower in real terms than the amount approved in 2023 (1.19 trillion). According to the Mexican Institute for Competitiveness (IMCO), this budget cut occurs at a critical moment, since it coincides with the trend of relocation of value chains. 

The Mexican states that will receive the largest public investment programs and projects are located in the southeast; a region where fewer investments attracted by nearshoring are currently received. 

Furthermore, the 2024 Government Expenditure Budget appears to have not taken into account the two main critical issues that the government has to resolve to attract and consolidate nearshoring: energy and water. The budget for electrical energy will decrease 18% and water will fall 6.3% in real terms compared to 2023. 

Energy policy, 180° turn? 

Current energy policy is a factor that prevents Mexico from taking advantage of nearshoring opportunities. 

The current administration is committed to fossil energies (the Dos Bocas refinery case) and little is known about investments in clean or renewable energies. Currently, there are around 150 clean energy projects worth more than 40 billion dollars of investment stopped by current energy policy. However, recently President López Obrador announced a Danish investment of $10 billion to develop green hydrogen and replace the use of fossil fuels in ships. The project will be installed in one of the 10 industrial parks of the Interoceanic Corridor of the Isth of Tehuantepec and would be the largest investment by a foreign company in Mexico (larger than Tesla), which would mark a 180° turn in energy policy of the current government. 

Today, global companies require the certainty of having access to electricity without interruptions and at competitive prices, and non-polluting because there is increasing pressure from corporate governments for companies to produce using clean energy. 

According to the IMCO, to take advantage of energy, public and private investment is required in electrical infrastructure with a low carbon footprint, in electrical networks (transmission and distribution), and in the expansion of the gas pipeline network, in addition to a natural gas storage policy. 

Railway Decree 

The Mexican government intends for nearshoring opportunities to be distributed throughout the country, not only in the northern states, such as Nuevo León, where investments are concentrated, but also for investments to grow in the center, Bajío, south and southeast. For this reason, it is working on the consolidation of the Interoceanic Corridor of the Isth of Tehuantepec, which will connect the Gulf of Mexico with the Pacific Ocean through railways, highways, industrial parks and interconnections with ports. 

On November 20, the Mexican government published a decree concessioning seven passenger train routes that will run through freight rail routes. According to railway sector specialists, using the more than 20 thousand kilometers of tracks for passenger trains is “out of proportion” and is not competitive, because dedicated infrastructure (for passengers) would have to be built when the government must guarantee the movement of goods due to the growth of nearshoring. 

According to the Infrastructure, Communications and Transportation Secretariat, the volume of rail freight grew by a minimum of 0.3 percent between 2018 and 2022. This data exposes the need to modernize rail freight transportation. With the railway decree, the government is putting pressure on the sector in the opposite direction, giving priority to passenger transport. The current concessionaires, Canadian Pacific Kansas City de México and Grupo México Transportes (Ferromex-Ferrosur), will have until January 15, 2024, to present a plan to reactivate passenger transportation, which would imply modifying their operations, or otherwise, would be left in the hands of the armed forces. 

There is less than a year until the end of the current administration, very little time to think about and execute a comprehensive strategy to take advantage of the opportunities of nearshoring. That will be up to the next administration, but as several experts pointed out in the last Nearshoring Talks 2023 forum in Mexico City, the window of opportunity is only approximately 5 years. 

Perhaps, the chancellor is right in what she says. 

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