Look Southward

After a bruising 2009, Mexico’s economy should return to positive growth of around 3% this year, but the path to sustainable development remains uncertain. Reforming state-owned industries risks massive political backlash, but improving Mexico’s trade regime offers promise without the peril.

What trade strategies can boost Mexico’s growth? Several prospects have been bandied about. Talk of “deepening” Mexico’s commitment to the North American market was common before the recession, but diversification, not concentration, has proven more popular of late. To this end, President Calderon recently called for Mexico to “diversify its trade and investment (and) reduce its dependence on the United States.” His comments were made with an eye toward Europe, but he made similar statements regarding Brazil last August.

Inducing European investment, notably in the automotive industry, would surely benefit Mexico, but Europe is likely to prove a weak market for Mexican exports. Given the particular nature of its consumers Europe will offer few opportunities for Mexican cultural exports, a surging industry in Mexico. Meanwhile, Eastern Europe competes in the same class as Mexico when it comes to many goods, leaving Eastern Europe at a competitive advantage when proximity and cultural ties are taken into account, not to mention Western Europe is already saturated with most durables of Mexico’s forte.

Cozying ties to Brazil, on the other hand, offers significant economic—and strategic—potential for Mexico. Mexico’s oil reserves have been declining since the 1980s because PEMEX’s gross inefficiencies and lack of deep sea drilling capacity. Petrobras not only has the capacity to aid PEMEX in tapping the estimated 30 million barrels of crude deposited below the Gulf of Mexico, it can invigorate Pemex’s refining capacity—Mexico must import 40% of its oil—and expand Mexico’s presence in the biodiesel market. Drilling is the first-step, and through the creation of a separate Brazilian-Mexican company it can be done in a way that steers clear of the legal and political protections afforded to Pemex.

Also, Brazil’s growing middle class is ripe for Mexican durable goods. Home ownership is expanding rapidly in Brazil, the number of credit card holders nearly doubled from 2002-2006, and consumer credit has grown by more than 28% annually over the last three years. Unlike Europeans or Americans, Brazilian consumers were undaunted last year. Hitching to a second large consumer market would diversify exports, and likely engender a positive cycle if FDI settles into Mexico in order to target the Brazilian market.

A pact with Brazil could also prove a strategic coup for Mexico. Brazil’s opposition to US agricultural subsidies is currently the biggest barrier to a regional free trade agreement between the Americas. Not wanting to be left out of a trade pact between Latin America’s two largest economies may entice the US to negotiate on its agricultural subsides as a means of re-launching a hemispheric trade deal (currently the US is only offering to negotiate on agricultural subsidies via the Doha talks at the WTO). Opposition by populist leaders will impede a regional free trade deal in the short-term, but if America reconsiders its subsidies Mexico stands to benefit regardless.

Trade cannot cure all ills, as NAFTA attests. With right trade strategy, one that builds on competitive advantages, Mexico can, however, boost growth and insulate its economy from undue reliance on the American market, providing the breathing room for more painful structural reforms.

World Politics Review previously published an expanded version of this post.