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The Mexico-Japan Strategic Global Partnership for the 21st Century is already pushing back economic and trade frontiers. Backed by financial assistance mechanisms put in place in 2014, the bilateral relationship of the “automotive era” offers a glimpse of new areas of opportunity in cooperation, investment and trade.
The victory of the republican party’s presidential candidate Donald Trump in November 2016 marks a change in direction for the United States as regards its trade policy, which will now veer more toward bilateral agreements and wax less willing to cede ground in multilateral negotiations on topics that, from the very singular viewpoint of the country’s new president, could potentially affect the economic interests of the American people.
This assault on multilateral trade directly affects Mexico—because of the possibility the United States will request a revision of the North American Free Trade Agreement (NAFTA), among other things—, but it also affects Japan. As trading partners and members of the Transpacific Partnership Agreement (TPP), Mexico and Japan have invested enormous political capital in negotiations that lasted years until the treaty was finally signed in late 2015. The absence of the United States from this global agreement that will potentially integrate 12 Pacific Basin nations has forced Mexico and Japan to rethink their regional economic integration strategy and seek out and consolidate fresh avenues of exchange and cooperation in bilateral trade.
At this point, the Mexican government, business sector and society at large should be aware of the need to diversify the country’s global economic interests and strengthen ties with all its trading partners.
The Asia-Pacific region, the most dynamic in the world, needs to be reassessed now that the shadows of isolationism and protectionism have emerged to threaten global economic integration processes and multilateralism as mechanisms for reducing poverty and stimulating economic growth. The excellent work of the Mexican embassy in Japan and the ProMéxico representation in this legation have been key to exploiting trade and investment opportunities between Mexico and Asia-Pacific economies, particularly Japan.
Mexico-Japan Free Trade Proposal
In the 1990s, Mexico began focusing on free trade as a pillar of economic growth. Since NAFTA came into force, the country has entered into a series of free trade and economic partnership agreements, as well as partial agreements to consolidate its trade policy and facilitate its participation in regional integration processes. Today Mexico has free trade agreements in place with 46 countries, a framework agreement with Mercosur, nine partial scope economic complementation agreements within the framework of the Latin American Integration Association (ALADI- LAIA), and 32 agreements for the reciprocal promotion and protection of investments. In the Asia-Pacific region, Mexico committed to regional integration and cooperation when it joined the Asia-Pacific Economic Cooperation (APEC) forum in 1993. With Japan in particular, Mexico has strengthened its economic and trade ties since the coming into force of the Japan-Mexico Economic Partnership Agreement (JMEPA) in 2005.
While the TPP economic integration model would appear virtually inoperable, the path the Mexican government has taken toward structural reform and the liberalization of trade is clearly marked out, as is the country’s interest in fostering stronger ties with the main powers in the Asia-Pacific region. It is a path on which there seems to be no viable alternative.
Meanwhile, the Japanese government has turned its gaze to Latin America, particularly Mexico, with a view to consolidating an expansionist trade policy led by private companies as one of the “spearheads” of Japanese Premier Shinz Abe’s economic policy. Abenomics, as these policies have been dubbed, is based on tax incentive packages, monetary liquidity and a series of structural reforms that involve the active promotion of private Japanese companies abroad. Ties between Japan and Mexico date back over 400 years, but it has only been during the last five decades that Japan’s economic interests have really started becoming evident in Mexico, namely in the automotive sector. Since the JMEPA came into force, trade has benefited, and since 2010, the bulk of the bilateral relationship has entered a new phase referred to as the Mexico-Japan Strategic Global Partnership for the 21st Century. Trade between Mexico and Japan has doubled in just over ten years, from 11.77 billion usd in 2004 to 20.38 billion usd in 2015, while over 1,000 Japanese companies were operating in Mexico by year-end 2016. Just to highlight how important Mexico is to Japanese companies, it’s worth mentioning that the number of Japanese citizens residing in the country rose from 6,046 in 2008 to 9,437 by late 2015, most of whom are concentrated in the Bajío region. The vast majority of these companies and the Japanese that have arrived with them to live in Mexico have connections to the automotive industry and its supply chains, although some work for firms operating in the food, financial, insurance and many other sectors.
As regards the presence of Mexico’s business sector in Japan, results have been promising, albeit moderate. Leading companies like Aeroméxico, Altex, Kidzania, Bocar, Mexichem and Sukarne have managed to position themselves well on the Japanese market, but the real potential lies in opening the floodgates to small and mid-sized Mexican companies.
The Japanese government has turned its gaze to Latin America, particularly Mexico, with a view to consolidating an expansionist trade policy led by private companies as one of the “spearheads” of Japanese Premier Shinz Abe’s economic policy. Abenomics, as these policies have been dubbed, is based on tax incentive packages, monetary liquidity and a series of structural reforms that involve the active promotion of private Japanese companies abroad.
Business Opportunities and Hemispherical Regionalism
One way to bolster Mexico’s trade presence in Japan and attract Japanese investment to Mexico is via hemispherical integration mechanisms and negotiations with Japan through the regional bloc.
Mexico currently participates in the Pacific Alliance, which, in the five years it has existed, has come to account for 39% of Latin America and the Caribbean’s GDP and 50% of total trade in the region, not to mention attracting 44% of total foreign direct investment.
Among the immediate benefits of this mechanism have been the integration of capital markets, embassies and joint international trade missions, and the setting up of an Entrepreneur Capital Fund to support small and mid-sized companies with export potential in the fishing, agribusiness, manufacturing, biotechnology, services, digital animation and video game industries.
Although financial markets need time to fully integrate and while there are still some major obstacles to the free flow of capital for the joint financing of development projects that promote greater integration, especially in the energy sector (including consistent regulatory frameworks and greater private investment), Japan views the Pacific Alliance as a viable option in its trade diversification policy. Compared to the South American trade bloc Mercosur, to Tokyo the Pacific Alliance poses a lower risk to the presence of Japanese companies and investors in particular. Japan is currently an observer state to the Pacific Alliance and, as such, watches with interest the new working mechanisms that have evolved among member and other observer countries—mechanisms that have fostered cooperation vis-à-vis the internationalization of small and mid-sized companies, in the education sector and in terms of innovation and the facilitation of trade. Future areas of cooperation between Japan and the Pacific Alliance will indubitably include the energy sector, which will surely benefit from Japanese investment.
The Role of Small and Mid-sized Mexican Enterprises on the Japanese Market
Japan and Mexico enjoy a solid relationship in the automotive industry. All the main Japanese carmakers like Nissan, Mazda, Toyota and Honda already have operations in the country, so perhaps now is the time to look to the post-automotive era and the opportunities it holds for Mexican companies. In the meantime, Mexico needs to do something about its trade deficit with Japan, which grew from 9.39 billion usd in 2004 to 14.35 billion in 2015, and diversify its exports, which consist primarily of foodstuffs and raw materials, i.e. low value-added products.
As regards the presence of Mexico’s business sector in Japan, results have been promising, albeit moderate. Leading companies like Aeroméxico, Altex, Kidzania, Bocar, Mexichem and Sukarne have managed to position themselves well on the Japanese market, but the real potential lies in opening the floodgates to small and mid-sized Mexican companies.To achieve this, the government of Mexico and Japan are cooperating closely.
On his visit to Mexico in July 2014, Japanese Premier Shinz Abe reiterated his country’s continued commitment to supporting the small and mid-sized enterprises and secondary industries that supply Japanese companies in the automotive and electronic-electric sectors. Premier Abe also committed to supporting small and mid-sized companies operating in other industrial areas via technical cooperation agreements.
As for the Mexican government and companies interested in making an incursion on the Japanese market and attracting more Japanese investment, they will have to make use of existing mechanisms.In February 2011, when Mexico and Japan signed a Modifying Protocol to improve the conditions under which Japan has access to Mexican agricultural products within the JMEPA framework, the two nations agreed to strengthen flows of Japanese investment to Mexico. What’s more, during Premier Abe’s aforementioned visit to Mexico in 2014, important trade, financial and technical cooperation agreements were signed, including a cooperation agreement between Mexico’s Ministry of the Economy and Japan’s Foreign Trade Organization (JETRO) and a memorandum of understanding and cooperation between Petróleos Mexicanos, Pemex Exploración y Producción, Pemex Gas y Petroquímica Básica and Japan Oil, Gas and Metals National Corporation (JOGMEC). Likewise, Mexico’s Ministry of Agriculture (Sagarpa) and Japan’s International Agricultural Sciences Research Center signed a memorandum of cooperation in agricultural research, while Bancomext entered into a memorandum of understanding on long-term cooperation for the support of renewable energy industries and import-export companies in Mexico with the Bank of Tokyo-Mitsubishi UFJ, Ltd. The two country’s respective health and transportation ministries also signed memorandums of cooperation.
Thus, the Mexico-Japan Strategic Global Partnership for the 21st Century is already pushing back economic and trade frontiers. Backed by financial assistance mechanisms put in place in 2014, the bilateral relationship of the “automotive era” offers a glimpse of new areas of opportunity in cooperation, investment and trade that Mexican companies would do well to explore in the future. Mexico is the new mecca for investors in the oil, gas natural, electricity, aerospace, aeronautical, medical, pharmaceutical and cosmetic industries, among others.Success, however, will hinge on the extent to which the agreements reached in 2010 and 2014 are implemented, so Mexico’s business sector can find its own niches of opportunity, giving the country more options to choose from in a prosperous region with reliable partners to shield it from the black clouds of isolationist and protectionist that have formed in other parts of the world.
Japan and Mexico enjoy a solid relationship in the automotive industry. All the main Japanese carmakers like Nissan, Mazda, Toyota and Honda already have operations in the country, so perhaps now is the time to look to the post-automotive era and the opportunities it holds for Mexican companies.
*This article is published on "Negocios Promexico (November-October 2016)"