The Integration of Mexico in Global Value Chains: Opportunities and Challenges

Tasks

The study provides a deep analysis of the integration of Mexico’s global value chains (GVCs) in the world economy and highlights the main opportunities and challenges the country will face in the next years in this area. Thereby, the focus is on four aspects:

1. What are the recent developments that have shaped the global economy and Mexico in particular?
2. What is Mexico’s role in the global economy? Hereby, the study highlights the role of trade with the US, China and the EU. The study sheds light on the structure of Mexico’s trade within the country and globally.
3. What is Mexico like as a place for business? The focus is in particular on local conditions for doing business in Mexico and on potential obstacles firms face.
4. What are the risks for the Mexican economy, given that Mexican trade is closely intertwined with the US? What are potential solutions?

In addition, the study provides policy recommendations suited for governments, companies, and institutions.

Methods

The study includes several literature reviews on global trade dynamics and the role of Mexico, to give support and introduce our main analysis. The latter is largely based on descriptive statistics using numerous data sources to study GVCs, which mainly revolves around the study of trade and investment flows. We use panel data at the aggregate level for several countries, but also micro trade data at the industry- region- product- and partner country-level for Mexico. In addition, various econometric calculations based on trade data were conducted and predictions were made using the ifo trade model to establish the effect reshoring would have on Mexico’s GDP.

Data and other sources

Democracy Index 2021, Outwards FATS by Eurostat, Global Trade Alert database, Freedom House Index, Global Organized Crime Index, Export data by INEGI, Global Peace Index 2020, Global Rights Index 2021, Worldwide Governance Indicators, OEC Trade data, OECD FDI data, OECD Inter-Country Input-Output data, OECD FDI Restrictiveness Index, Corruption Perceptions Index 2021, 2020 Environmental Performance Index, World Bank COVID-19 Business Pulse Survey, World Bank LPI, World Bank Doing Business Survey 2020, World Bank World Development Indicators, World Bank Trade (% of GDP), WTO World Trade Report 2019, WTO Regional Trade Agreements Database and BACI trade data.

Results

The report sheds light on recent global value chain evolutions and its interaction with Mexico.

First, two periods of globalization can be identified: an era of “hyperglobalization” followed by a “slowbalization” starting in 2008. Meanwhile, global trade liberalization policies have decreased the costs of trade. Yet, the US-China trade war, Brexit and most recently the COVID-19 pandemic, have disrupted international trade and the number of protectionist measures imposed globally has increased.

In contrast, Mexico has strengthened its role in the global economy—with trade making up 82% of its GDP in 2021—although it mainly depends on one trading partner, the US. It represents 65% of total Mexican trade, and creates large interdependencies and vulnerability to a potential downturn in the US economy. Moreover, Mexico is highly dependent on merely a few suppliers for 22% of its goods, creating large dependencies at the product-level. Mexico mostly imports intermediate goods and services used for domestic production, implying a crucial position in downstream production activities within GVCs. Thereby, 82% of the critical goods are imported from the US, disclosing Mexico’s major dependency on the US.

Potential suppliers to diversify these risks are the EU and China, as well as other Asian countries. Indeed, trade with China and other countries of the “Factory Asia” has increased in recent years. Further, in light of the US-China trade war and the COVID-19 pandemic, many MNEs have already or plan to relocate from China to Mexico to diversify their risk of trade disruptions.

In terms of foreign direct investment in Mexico, while the US is the main investor, its weight has been decreasing over time for the benefit of some European countries. Considering differences in trade within Mexico, the proximity to the US seems to drive exports in Mexico’s northern states, as well as in the region Centro Bajío.

Conducting business in Mexico is largely hindered by weak institutions and widespread criminality. Moreover, Mexico’s infrastructure and trade logistics are still underdeveloped with large potential for improvements in the ability to track and trace consignments and the quality of trade and transport infrastructure.

Important policy recommendations include the diversification away from the US and increases in trade with the EU as well as Asian countries. Furthermore, investments in infrastructure and secondary education offer great potential for further economic growth, especially if combined with a reduction of criminality and improvements in Mexico’s institutions.