No can do

On August 18, 2010, the Mexican government published an updated list of U.S. products on which import duties will be applied, beginning August 19, 2010.  The duties were originally introduced in March 2009 in retaliation for the U.S. Congress’ termination of a pilot program allowing Mexican freight trucks to cross the border to complete deliveries in the United States.  Cross-border trucking, including the circulation of Mexican trucks in the United States, was intended to be implemented under the North American Free Trade Agreement (NAFTA), but is currently blocked by the United States.

The original list of 89 products affected by the Mexican duties has now been expanded to 99, by the addition of 26 items and removal of 16.  The current list includes key agricultural products in addition to processed foods, household goods and personal care items, among others.  Import duties under the scheme range from 5% to 25%.

Since the original retaliatory tariffs were implemented in 2009, the Obama administration has huffed and puffed unconvincingly about finding a solution to the trucking dispute.  As recently as last month, U.S. Secretary of Transportation Ray LaHood said that the administration was “closer than soon” (sic) to presenting a proposal to resolve the standoff.  So far nothing has been presented, as apparently the Teamsters union is unwilling to grant the President of the United States permission to comply with the negotiated terms of NAFTA.

We imagine the current situation delights Mexican President Felipe Calderón, as it gives him an opportunity to score points on two fronts at once.  On one hand, Mexico is taking advantage of a rare opportunity to use NAFTA to punish the United States, which customarily pulls Mexico around by the hair in trade disputes.  And at home, the new duties on pork and apples throw a bone to domestic producers of these products, who seem to spend far more time sobbing uncontrollably in the media over the influx of U.S. imports than they do producing pork and apples.

Our take: U.S. exporters are being held hostage by the Teamsters union.  Considering the Democrats’ fears of being flayed in the November Congressional elections, it appears highly unlikely that any action will be taken to resolve the issue in the foreseeable future.   Which is ironic, considering President Obama’s fervent entreaties to America to increase exports under his National Export Initiative.

Selected products on the current duty list include:

Source: Diario Oficial de la Federación, Secretaría de Gobernación

NOTE: Product descriptions, HTS numbers and duties are cited here unofficially for general reference only, please consult appropriate government documents for official information.

Put me in coach

In the run-up to this weekend’s G20 meeting in Huntsville, Ontario, much ink has been spilled regarding the value of the Chinese currency.  Economists, pundits and observers of all stripes have taken positions on various sides regarding the question of how much and how fast the yuan (or Renminbi, if you prefer) needs to appreciate against other major currencies.  And, of course, how willing Chinese authorities are to allow this to happen.

Hypothetical scenarios projected in some circles of a rapid appreciation of 40% have China’s export competitors salivating.  Basic trade theory holds that by hiking the value of the yuan, Chinese exports become more expensive, making competing products made in countries such as Mexico that much more cost competitive.  Gaining ground of this type is seen as critical in the hotly disputed U.S. market for goods such as appliances and electronics.  Trade data for 2009 suggests that Mexico is already gaining some overall market share from China in the United States, and we have touched on the relative cost competitiveness between Mexico and China in this space before.

Mexican observers were quick to imagine their Christmas stockings filling up with export gains as the international media flooded with projections of a dearer yuan.  A recent report in Reforma cited an academic pundit in ticking off the potential benefits to Mexico: Increased exports to the United States, a rise in world oil prices, and even a possible bump in Chinese tourism to Mexico.  Much like Mexico’s hopes of defeating Argentina in the upcoming World Cup knockout match, however, a lot of unlikely things would really have to go right for this to work out.  The yuan itself, when ostensibly released from its dollar-pegged bondage by Chinese banking authorities last week, mostly behaved like a squirrel in the middle of the road: it moved hesitantly back and forth with no clear direction as the traffic of the G20 summit loomed.

Early feedback from G20 countries on China’s claims of a free-floating yuan reflects a good measure of skepticism about the true intentions of the Asian giant with regard to their currency.  As always, only time will tell what the outcome will be.  But if there is any significant appreciation of the yuan at all over the next year, it will be more than welcome in Mexico.  As would a dignified showing against Argentina, even if our fantasies of a stunning victory, or a 40% increase in manufacturing exports, go unfulfilled in the end.

Movin' on up

Mexico rang in at number 50 out of 155 countries included in the World Bank’s Logistics Performance Index (LPI) for 2009, released last month.  OK so we’ve got some work to do, but the 2009 ranking does represent progress since coming in at number 56 on the 2007 Index.  Unfortunately, we’re not even number one in Latin America, which went to Brazil at 41, and we were also edged out by Argentina and Chile, ranked 48 and 49, respectively.  The Index awards each country points for the quality of their logistics industries in categories such as Customs, infrastructure, competence, tracking and timeliness.  Among the various categories considered, Mexico scored lowest on “Customs,” which is summarized as evaluating the “Efficiency of the clearance process (i.e. speed, simplicity and predictability of formalities) by border control agencies, including Customs.”  This comes as no surprise to those of us who have struggled with jarring arbitrariness and explanations of shipment detentions that are eyebrow-arching at best.  For what it’s worth, Mexico scored best on “Timeliness,” which either means we are embracing the service standards set by the wealthy economies, or we really have to work on those other categories.  In any case, at least we are climbing rather than dropping on the LPI.

To review the LPI in detail, go here:  World Bank LPI

The good news is that for the moment, the worst appears to have passed.  While the economy is by no means charging back, it did register positive GDP growth in the third quarter, following four straight quarters of contraction.  The damage is done, however, and central bank Banco de Mexico is projecting overall GDP growth for 2009 at approximately -7.0%.  The effect on employment has been devastating, with manufacturing chamber Coparmex estimating that some 600,000 jobs were lost during the year.  Inflation was held relatively stable at approximately 4%, although this is projected to rise in 2010 presuming a rebound in internal markets.  Mexico’s currency has hit a volatile patch at year end.  The peso depreciated from about 13.2 to a high of 15.5 in March, before stabilizing at around 13.5 for most of the year.  The dollar suddenly dived against the peso in the last week of November, reaching as low as 12.3 before creeping back up to about 12.9 at the time of this report.

Economic analysts in local media seem to be trying to will the economy back to life, and some small gains are being registered, such as department store sales in the third quarter and new jobs in certain manufacturing sectors.  A stronger recovery, however, will have to overcome some formidable obstacles.  Facing a growing budget deficit, the Mexican government recently passed a 2010 economic package that includes a raft of tax increases on items such as income and retail sales.  This, taken together with proposed hikes in Mexico City on hotel occupancy and public transportation, won’t help domestic consumers loosen the purse strings.  Credit to consumers and businesses has been extremely tight this year, with no apparent trend toward loosening on the horizon.  Ultimately, however, the biggest factor in Mexico’s economy will be the pace of recovery in the United States.  With over 80% of the country’s exports going to the United States, consumption in Mexico’s northern neighbor will have a major impact on job creation and in turn the reactivation of the domestic market.

While the story of 2009 is undoubtedly the deep recession, some sectors in Mexico have done remarkably well, and are actually thriving despite current economic conditions.  One such sector is aerospace.  Mexico has become a world-class player in this industry over the past decade, drawing over US$32 billion in aerospace manufacturing investment since 1990.   The number of companies in aerospace manufacturing, maintenance and related support services in Mexico has grown from 61 to 194 over the past four years, and export sales are projected at US$3.4 billion for 2009.

While aviation itself overall slumped in 2009 along with the economy, one subsector has become a growth industry: Private air transport for executives.  This niche is set to buck the trend and post positive growth for the year, with sector leader Aerolineas Ejecutivas (ALE) projecting 12% growth for 2009.

Mexico’s energy industry has long been restricted exclusively to the state, but steps taken in recent years have allowed increasing opportunities for participation by the private sector.  Changes in public policy combined with the global surge in interest in alternative energy sources have made this sector a focus of investment in Mexico.  On the electricity side, major wind generation plants are in development or construction in the southern Isthmus of Tehuantepec region and along Mexico’s northern border with California.  Solar equipment manufacturing and power generation has received considerable attention as well.  Japanese manufacturer Kyocera opened up a second major plant in Tijuana this year to produce solar modules, and the state of Durango presented a proposal to construct a “solar cluster” industrial site to host both equipment manufacturers and solar electricity generation plants.  Biofuels are also drawing interest in Mexico, with research and development underway on fuels produced from materials such as jatropha, sugar cane, corn, palm oil and tallow, among others.

Another industry that has thrived in Mexico despite the recession is software development.  Anchored in the city of Guadalajara and surrounding state of Jalisco, Mexican software engineers both develop their own software and provide “nearshoring” code writing services to software companies in California and elsewhere.  Jalisco boasts over 200 information technology companies, and national IT organizations are projecting 11% growth for the sector in 2009 at a time when most other industries are facing contraction for the year.

For U.S. food and food ingredients exporters, Mexico continues to represent a market of interest.  The national farmers’ confederation (CNC) reported this year that Mexico’s dependency on imported food products is growing, particularly in corn and oilseed products. In 2008 Mexico imported 9.1 million tons of corn and 4.0 million tons of oil seeds.  Corn and oil seed imports are expected to increase by 10% in 2009 due to losses in domestic production caused by a drought earlier in the planting season.

On balance, Mexico heads into 2010 facing enormous challenges, but not without cards to play.  The drug wars continue to consume a significant share of public resources, but ultimately reactivation of internal and export markets will have to drive the recovery.  If the United States is able to accomplish even moderate economic recovery in the coming year, the resulting boost to Mexican manufacturing should provide an important push toward reverting 2009’s downward trend in employment and consumer spending.  And this, in turn, can only benefit trading partners seeking to export industrial On balance, Mexico heads into 2010 facing enormous challenges, but not without cards to play.  The drug wars continue to consume a significant share of public resources, but ultimately reactivation of internal and export markets will have to drive the recovery.  If the United States is able to accomplish even moderate economic recovery in the coming year, the resulting boost to Mexican manufacturing should provide an important push toward reverting 2009’s downward trend in employment and consumer spending.  And this, in turn, can only benefit trading partners seeking to export industrial technology and consumer goods to Mexico.

Aux barricades

A recent story in Reforma cites information from the Mexican Wine Council in reporting that consumption of wine in Mexico has weathered the steep economic downturn remarkably well.  The story maintains that while wine sales in restaurants have dropped 25% so far this year, sales in wine shops and liquor stores are up 35% and supermarket wine sales are up 30%.  This has to be a testament to the yeoman-like labor of the country’s wine producers, importers and distributors over the past ten years to boost consumption of wine in the country.  Although Mexico is the oldest wine producing country in the Americas, wine has never been a traditional part of the culture here.  In recent years, however, Mexico’s wine industry has really hit the salt mines in an effort to democratize wine consumption to include the commercially attractive middle class market.  The road is long and steep: A 2005 report on world per capita wine consumption by The Wine institute ranks Mexico at number 161 out of 189 countries, far behind the hedonistic sybarites of Burkina Faso, Uzbekistan and the Faroe islands, for example.    The good news, though, is that the trend is unmistakably upward.  Although domestic wine production still serves only about one third of the market, Mexico’s wineries, concentrated in the Baja California peninsula, have made tremendous strides in quality and are gaining recognition beyond the country’s borders.  The good ones are still on the spendy side though, and this will continue to be a tough obstacle for both domestic and imported wines to overcome in the battle to gain the hearts and minds of the middle class Mexican consumer.  Anyone who buys wine on both sides of the U.S.-Mexico border will notice right away how much more expensive the same bottle is south of the Rio Bravo.  A quick price check, for example, reveals that a bottle of Ravenswood Zinfandel costs about US$8.00 at BevMo in California, while the same bottle will cost you US$18.00 at the La Naval wine shop in Mexico City, which has pretty good prices by local standards.  Likewise, a bottle of Wolf Blass Shiraz Yellow Label generally costs about US$10.00 in the United States and runs about US$22.00 in Mexico, and so on.  I haven’t seen any bottles of Two Buck Chuck on the shelves here yet, but frankly I think I’d be scared to drink any wine that costs under 30 pesos in Mexico.

There is lots of information on Mexican wine on the web, here’s one place to start:   www.bajawine.info