NAFTA agreement to boost investment in Mexico by 25% in some sectors

11 September 2018

If the United States, Canada and Mexico come to an agreement in the coming days, weeks or months over the revised North American Free Trade Deal, Mexico stands to benefit significantly from increased investment. The stakes however are high, as 30% of Mexican exports could be subject to US tariffs according to Lyman Daniels, president of CBRE Mexico.

The trilateral NAFTA agreement has been a source of contention and mystery within North America since the election of President Donald Trump. The US President took the free trade agreement off the chopping board last month, agreeing to renegotiate rather than drop the axe. However, the President’s initiative is to have the deal signed and sealed by the time ALMO steps into office in Mexico DF. 

The US position has been aggressive from the start. Demanding that the Mexicans and the Canadians fall into line, Trump said that an agreement will only be reached if its “totally on our terms”. For the Mexicans, this means giving concessions on the auto-industry in terms of parts, manufacturing and wages – all intending to increase trade for the US. 

A deal was reached last week between Mexico and the US with the threat of leaving Canada out in the cold. The revamped trade deal – if it goes ahead without the US’s northern neighbour – would see the US keep its initial FTA with Canada whilst establishing a new bilateral trade agreement with Mexico. For the Mexicans, this would mean tariffs being established on roughly 10% of their trade with Canada. 

“There are things that we don’t control, particularly the political relationship between Canada and the U.S., and we definitely don’t want to expose Mexico to the uncertainty of not having a deal,” said Luis Videgaray Caso, Mexico’s foreign minister in response to the dispute. “Not having a trade agreement with the U.S., that’s a substantial risk to the Mexican economy. Literally millions of jobs in Mexico depend on access to the U.S. market.”

On the other hand, if the trilateral agreement is reached then there will be an air of clarity surrounding Mexico, including a period of reactive planning and investments driven by the stability of a trade agenda. The policies of the incoming Mexican government will not be juxtaposed by, but driven through the renegotiation. 

NAFTA agreement to boost investment in Mexico by 25% in some sectors

“It will be more a moment of planning than of caution, since we remember how the investments which were stopped were those made in a medium to long term horizon, and of course, a greater certainty and clarity of the new policies of the new government. They would encourage investment,” said Lyman Daniels, president of CBRE Mexico.

CBRE Mexico is a real estate and investment consulting firm which is headquartered in Los Angeles but operates globally. The firm has offices scattered across Latin America and the Caribbean including in Mexico City. The consulting firm featured in Expansión Magazine’s 500 Most Important Mexican Businesses last year. 

Daniels said that the economic impact of a favorable treaty is very positive and sends a message of optimism between Mexico and the United States to the market. In a sense, when the world is grappling with an impending trade war, it makes good business sense for all. “We could see in the following year an increase of up to 25% in the number of companies making new expansions and investments,” said Daniels in reference to the real estate market. 

In the north of the country – where projects stopped due to market volatility and uncertainty over the deal – Daniels contends that investment could boom by up to 40%. He states that this is an enormous opportunity which will need government investment as well as support for innovation and development. He argues that Mexico must play its cards right to ensure stability in its own economy and of the benefits of a returning manufacturing industry.

“Another key aspect of the signal change in the market is that the manufacturing industry could resume its role as an engine of industrial real estate demand the following year, a place that the logistics industry took over the entire period of NAFTA negotiation. Distribution as well, without doubt, confidence is renewed and that drives the two segments that were most affected by the uncertainty,” concludes Daniels. 

Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.