The topic of peace among nations through trade agreements has been discussed at times, as these agreements define the rules of trade and, in turn, prevent future conflicts that could lead to major events. These treaties include sanctions and rules in case of non-compliance.
We should also consider that if, in a parallel world, some of us were the president of a country, our role would be to bring the best possible outcomes to our citizens. So, when we hear that one government speaks ill of another country, although it may upset us, we must accept that this person is simply doing their job.
Promoting Peace Through Prosperity
Based on this idea, we can say that trade agreements foster peace among countries. Now, let’s analyze that treaties are sought with countries that are prosperous, ensure prosperity, and have the fewest global conflicts, so as not to jeopardize supply chains. As a reference, in 2023, Mexico was the main trading partner of the U.S.; in that same year, Vietnam increased its trade with China and the U.S. Also in 2023, European countries stopped consuming between 6% and 10% of Russian gas. In the case of Germany, it reduced its consumption of Russian gas from 75% in 2022 to zero in 2023. The message from these numbers goes beyond the war between Russia and Ukraine: each country is a business and should do what is best for its economy, so trade agreements can quickly put a country in an economically uncertain situation.
The Reconfiguration of Trade Agreements
The new configuration after globalization leads us to view trade agreements from several angles, with various consequences and determined periods of duration. We can see treaties in the following ways:
- Friction between distant economies: Which fosters market fragmentation.
- Diversification of trade agreements: As a key strategy to mitigate risks.
Friction is, in essence, disagreement. In this last quarter, unofficial comments have suggested that if Mexico allows the entry of Chinese cars, a 100% tariff will be imposed on cars, although it is not specified whether these would be Chinese cars only. This friction is real and could cause us to lose what we have gained over several decades.
Impact of Treaties on Mexico’s Economy
According to the Ministry of Foreign Affairs, Mexico has managed to export to the U.S. nine times more since the inception of NAFTA. To put this in perspective, trade between the U.S. and Mexico is greater than the sum of the U.S.’s trade relationships with Japan, Germany, South Korea, and Great Britain.
I have often mentioned a statistic presented in 2023 at the trilateral meeting in Mexico City between Mexico, Canada, and the United States: the trade between the TMEC countries is valued at $3,000 million per minute, a figure that grows as the markets of the three countries expand. This treaty is the most economically beneficial, not only for Mexico but for the three countries involved.
Among manufacturing companies in the southern United States and northern Mexico, more than 4 million direct jobs in the sector are generated, highlighting the importance of trade agreements, which are now being signed on geopolitical bases and respond more to regional interests.
Now, let’s analyze Mexico’s relationship within the TMEC with a third element: the reduction of dependence on imports or the concentration of imports from a single country. While it is exciting to know that Mexico is the U.S.‘s top trading partner, it is important to note that between 2022 and 2023, U.S. Foreign Direct Investment in Vietnam increased by 36.1%, while in Mexico it only grew by 10%. Although the U.S. has more investment in Mexico currently, it is relevant to consider that 20 percentage points more were invested in Vietnam, specifically in the electronics market, which represents 17% of Mexico’s exports. This 17% may potentially reduce to 10% by 2030, with its sharpest decline in 2025 and 2026.
As an example, in August 2024, the U.S. and Peru met to review an economic cooperation agreement, which includes two specific markets: clean energy and sustainable agriculture. While these markets may not have much impact on our environment, it is important to note that during that meeting, the U.S. expressed interest in exploring three additional value chains in that country: semiconductors, medical devices, and minerals.
It is important to accelerate our thinking in terms of capacity and profitability. Although Mexico and its states currently have a capacity utilization that ranges from 73% to 89%, we should understand this as having between 27% and 11% available capacity to generate more output. In terms of capacity, no company wants to operate at 100% capacity if investment conditions are uncertain; this leads us to think about profitability. The profits generated by companies in our mega-region are becoming increasingly important in terms of the quality of profitability. That is, is the company more profitable because of its continuous improvement or due to external conditions? Continuous improvement in profitability is where the U.S., China, and also India are seeking the most financially sound equation that can be sustained in the long term.
I share with you a very brief statistic on the influence of the dollar in the world: it is the currency that represents 59% of the reserves of countries, 64% of loans between countries, 58% of payments between countries, and 54% of foreign trade. The treaty that Mexico has with the U.S. and Canada is, and will continue to be, the greatest opportunity Mexico has if it knows how to use it, or the greatest threat if it does not.
Luis Manuel Hernandez, PhD, Coordinator of the Nearshoring and USMCA Compliance Dialogue Table
LI. https://www.linkedin.com/in/lmhg/
X. @LuisMHernandezG
