Economic View

On emerging from a crisis in a position of strength

To what extent is Mexico’s industrial sector well positioned to withstand the global economic challenges that have resulted from the Covid-19 pandemic?

MARTIN TOSCANO: Immediately after the effects and extent of the Covid-19 pandemic became apparent, and when it became clear that restrictions on economic activity would need to be introduced, industries across the country began to make preparations to adapt to the new normal. While some key sectors such as the automotive, construction and mining industries were temporarily halted, under the federal government’s phase-two regulations, the chemicals industry was permitted to continue operations, as it was deemed essential due to its central role in the supply chain. The continued and strong demand from key clients – such as those in personal and household care, animal nutrition and agriculture, among others – has helped maintain healthy activity along these value chains. 

That being said, the chemicals industry has not been immune to the challenges that have emerged, including those surrounding logistics, the importation of raw materials or bottlenecks from hydrocarbons production. One indirect effect of the pandemic has been the sharp fall of the Mexican peso in response to the challenging macroeconomic circumstances. The depreciation has created significant cost challenges related to the acquisition of necessary materials for the many companies that placed orders in early March 2020, before the decline in value. As these issues may be more prevalent in the coming months due to market volatility, a transparent and honest dialogue is essential to ensuring a clear way forward for all stakeholders. 

How could the Covid-19 pandemic affect the relative attractiveness of Mexico’s industrial sector for multinational firms? 

TOSCANO: Despite the Covid-19 pandemic, more broadly Mexico’s innovative potential remains high, and its central position in global value chains and proximity – in both geographical and manufacturing terms – continues to be a draw. Some immediate short-term effects have been seen, such as the initiative to relocate some automotive supply chains from China to Mexico to ensure that producers of essential parts continue to have access to key consumer markets such as Mexico and the US. As recent examples, Mazda and Jeep are two such companies that moved quickly to reduce their dependence on Chinese supply chains, opting for a higher-cost but more local supply of key components. 

Going forward, there will be an opportunity for Mexico to improve its capability to attract investment in industry. In 2019 Mexico was the top investment destination in the whole of Latin America, despite being the second-largest economy. As such, Mexico’s ability to position itself after the crisis will be key to the ongoing evolution of its industrial base. This will require a common agenda, with comprehensive collaboration among all stakeholders. 

In what ways could the Covid-19 pandemic permanently change perceptions about trading relationships on both a regional and global scale?

TOSCANO: On a regional basis, we will likely see more cooperation and integration between firms based in the US and Mexico in order to consolidate a stronger regional bloc within the industrial sector. It is likely that North America-based firms will begin to see companies from Asia or Europe as competition, rather than those based in the US, Mexico and Canada. The US-Mexico-Canada Agreement is set to come into effect on July 1, 2020, and the pact will likely solidify the notion of regional integration. In addition, a newly revamped trade agreement with the EU – negotiations over which were finalised in May 2020 – will be beneficial to the Mexican industry in the long term, as it provides Mexico with privileged access to one of the world’s largest markets under renewed terms that better reflect changes in global value chains. 

What changes in the agriculture sector are likely to be accelerated by the Covid-19 pandemic?

TOSCANO: Before the Covid-19 pandemic took hold, agriculture was a highly dynamic sector in Mexico that had grown in recent years in terms of both productivity and sophistication. From improved technology in milk production, to better designed animal nutrition products and agrochemicals, the optimisation of inputs allowed Mexico to become a world leader in agricultural production. The country’s largest export market, the US, is highly dependent on Mexican agriculture, and it is likely that there will be demand for new products such as organic produce in the future. To ensure that produce meets the highest standards and comply with US Department of Agriculture regulations, 16 pesticides are now banned in Mexico, aligning the country with stricter environmental regulations. 

Agriculture shows high potential for growth post-Covid-19, largely due to the increasing importance of food and a projected increase in demand over the next three decades as the global population surpasses 9bn people by 2050. Although food chains have been under pressure as a result of the pandemic, they are likely to emerge stronger, with greater importance placed on sustainability throughout the food chain.