Team-Mexico-A2 Global Trade PDF

Preview

Summary

RMIT International University Vietnam OMGT 2321 Global Trade Operations – ASubject Code OMGT 2321 Subject Name Global trade Operations Campus RMIT Vietnam, Hanoi Team members and Student Number Nguyen Thanh Binh – sTran Phung Phuong Anh - s Duong Hoang Ha Anh - s Tran Quynh Ngoc - s Nguyen Duy Anh -...

Description

RMIT International University Vietnam OMGT 2321 Global Trade Operations – A2 Subject Code

OMGT 2321

Subject Name

Global trade Operations

Campus

RMIT Vietnam, Hanoi

Team members and Student Number

Nguyen Thanh Binh – s3695680 Tran Phung Phuong Anh - s3851916 Duong Hoang Ha Anh - s385895 Tran Quynh Ngoc - s3636101 Nguyen Duy Anh - s3802657 Nguyen Hoang Anh - s3877181

Lecturer

Abel Alonso

Word Count

2634

1

Executive Summary The purpose of this report is to investigate every factor of the trade of Mexico, how the trade history, geography, and the country's economy affect its characteristic in global trade. Firstly, the research will provide a detailed analysis of the country's background and comparative and competitive advantages to point out their benefits and the impact of Mexico on international counterparts. Moreover, a comprehensive investigation on Mexico's trade policy, subsidies, and quota will be discussed to infer extramural recommendations on the advantages and disadvantages of Mexico tariffs, how the country applies them, and how they should be adjusted. Furthermore, the mixed-method methodologies will be applied in order to integrate perspectives and the relationships of Mexico to global trade, and qualitative data methods will also be obtained through academic resources, journal articles, reports, and organization data sets. In terms of trade history, Mexico has strong ties with the US due to the closeness in geography. According to the statistics, half of Mexico's international investment is based on US businesses, and Mexico's biggest trading partner is also the US, indicating that this country's FTAs1 is open to the US (Figure 1). Mexico is the largest agricultural exporter from the US, being a member of both the WTO2 and the NAFTA3 (World Trade Organization n.d). On the other hand, The US continues to be Mexico's largest trading partner, accounting for 46.3 percent of total trade (Figure 2). Overall, the most valuable Mexican export items were automobiles, computers, crude oil, and automotive accessories, accounting for 32.8 percent of Mexico's expenditures in 2020 (Workman 2021). Mexico has a significant influence on commercial activities, particularly in the tourism sector and different forms of entertainment,

1 FTAs: Free Trade Agreements 2 WTO: World Trade Organization 3 NAFTA: North American Free Trade Agreement

2

which enhance their GDP and contribute to around one-fifth of advertisements (The World Bank 2021). Mexico's competitive advantage is also believed to be its strategic position. With the Gulf of Mexico, the Caribbean Sea, and the Pacific Ocean surrounded, Mexico's advantage is located between the Pacific Ocean and the Gulf of Mexico and a network of 114 ports, just 26 of which handle ocean-going shipments (Alejandro and César, 2009). In terms of offshoring, the automobile industry and significant investments made by international car manufacturers to expand their manufacturing operations have contributed to Mexico's rapid economic growth (Tetakawi 2015). Investing in Mexico is arguably the most acceptable way to increase your money, mainly because this nation is the best area for real estate investment and foreign investment, both of which are on the rise (globalsmes.org, 2021). In general, Mexican FDI4 policy follows an exclusion technique for foreign investment, which means that foreigners can freely participate and contribute without regard to capital or monetary interest, except for certain saved areas (Lovells, 2020).

4 FDI: Foreign Trade Investment

3

TABLE OF CONTENTS Executive summary

2

1, Introduction

4

II, Analysis

4

1, Definition of terms and analysis of the Purpose Statement

5

2, Country Background

6

a, Trade history

6

b, Products and Services’ exports and imports

7

3, Advantages

8

a, Comparative Advantages

9

b, Competitive Advantages

10

4, Trade Policies

12

a, Tariffs

15

b, Subsidies

17

a, Quotas

19

b, Off-shoring

20

a, FDI

21

III, Conclusion

22

IV, References list

23

V, Appendices

24

4

I, Introduction This report discusses Mexico, engaged in global trade since 1821 after achieving its independence from Spain (Sandra & Antonio 2017). Since globalization expands, the country has achieved considerable innovation and growth, significantly enhancing Mexico's economic performance. However, it all began in 1993 when the NAFTA5 began, the most significant FTAs6 globally. Furthermore, Mexico has an extensive network of FTAs7 within the ALADI8, FTA EUMX9, and Pacific Alliance. Additionally, the top 5 trading partners continue to be the US, Canada, Germany, China, and Spain (Wits, 2021). On the other hand, Mexico benefits significantly from its geopolitical situation with other emerging countries. Mexico today has 12 FTAs with 46 nations, including Japan and the majority of the Americas and Europe (Calle, 2016). Therefore, this report will discuss the global trade operation, including trading background, comparative, competitive advantages, and the trade policy. Furthermore, the contribution of Mexico to global trade will be analyzed to deliver deep recommendations to Mexico's local trade operation, tariff, subsidiary, and outsourcing. II, Analysis 1, The analysis of the Purpose Statement This report will help to understand the categories of trade policies, the comparative and competitive advantages of Mexico to eliminate trade hindrances in the context of a particular

5 NAFTA: North America Free Trade Agreement 6 FTAs: Free Trade Agreements 7 FTAs: Free Trade Agreements 8 ALADI: Latin American Integration Association 9 FTA EU-MX: European Union-Mexico Agreement

5

LCCS10. Mexico is a symbol of the LCCS; however, Mexico regularly trades with the HCC11, such as the US, Canada, and Australia (Congressional Research Service, 2020). 2, Country background a, Trade history The data has shown that Mexico has high linkages in trading with the US, Australia, and Canada, which indicates the open of FTAs12 between these countries, and half of Mexico's international investment is based on US firms' accounts (Statista, 2021). The geography of Mexico and the US are close to each other, which is beneficial for exchanging products and services (National Geographic, 2021). As a member of both the WTO13 and NAFTA14, Mexico is the primary agricultural exporter from the US (World Trade Organization, 2021). With tariff-free treatment under USMCA15, the large Mexico textile sector accounts for 2.4% of GDP according to the INEGI16 (2021), and 60% of the Mexican textile industry is concentrated in the center of the country (Figure 5), representing the potential of trading volume to the US (International Trade Administration, 2020). b, Products and Services’ exports and imports The leading export partner of Mexico is the US, with 79.8% of trading (Figure 1), followed by the total exports of up to $480 billion to 9 trade countries (OEC, 2019). The largest of Mexico’s export products based on value were vehicles, computers, crude oil, and automotive accessories, which held 32.8% of Mexico’s sales in 2020 (Workman, 2021). For the import 10 LCCS: Low-Cost Country 11 HCC: High-Cost Country 12 FTAs: Free Trade Agreement 13 WTO: World Trade Organization 14 NAFTA: North America Free Trade Agreement 15 USMCA: United States-Mexico-Canada Agreement 16 INEGI: National Institute of Statistics and Geography

6

partner of Mexico, the highest percentage in trading still belongs to the US at 46.3% (Figure 2), with the total imports up to $433 billion to 13 trade destinations worldwide and the most imported product is integrated circuits at 6.89% (OEC, 2019). The worth of Mexico’s goods shipped globally was a desirable number, around $418.1 billion (World’s Top Exports 2021). In the service sector, Mexico substantially impacts the tourism industry, which boosts their GDP by accounting for around one-fifth in commercials (The World Bank, 2021). This country attracts many US visitors and has become a significant destination for tourists; however, the high awareness of Mexico in the tourism field impacts the environment and social issues such as water pollution with higher crime rates (OECD ilibrary, 2020). The personal travel data, which is in the top services exported by Mexico, has reached $20.8 billion (Figure 3), and $35.2 billion is the number of the sea transportation - the top services imported category in Mexico (OEC, 2019). 3, Advantages a, Comparative advantages David Ricardo's theories mentioned that the division of labor and the specialization of each country's commodities are essential for each country to have a comparative advantage (Siddiqui, 2018). Including the latter in international trade allows a country with comparative advantages to supply goods and services at lower costs than competitors (Warr, 1994). Lately, Eli Heckscher and Bertil Ohlin discovered that a nation's comparative endowment is influenced by several things (Jones, 2017). Mexico is a populated country. Mexico has leveraged its young population labor into a leading comparative advantage (Figure 6). Despite its huge working-age population, Mexico has 7

a low-skilled labor force, and employers do not invest in workers' training (OECD, 2017). To prevent squandering human resources, the Mexican government has concentrated on strengthening the unskilled labor market in one area. On the other hand, Mexico's geopolitical location relative to other rising countries helps it tremendously. Mexico is now part of 12 FTAs17 with 46 countries, including Japan and most countries in the Americas and Europe (Calle, 2016) there are some only trade agreements in the world. The benefit from these trade agreements is the increasing total volume handled by Mexican ports (Figure 7). To expand, Mexico must utilize its network of FTAs and engage in bilateral, trilateral, regional, and even multilateral discussions with international organizations. b, Competitive advantages Competitive advantages sustained over time lead to higher performance and positive returns (Kakukama et al., 2017). Based on Diamond Porter Theory, success in international trade is contingent upon four primary factors: Firm Strategy, Structure, and Rivalry; Factor Conditions; Demand Conditions; and Related and Supporting Industries (Porter 1990). A strategic location is also considered as Mexico's competitive advantage. It is bordered by the Gulf of Mexico, the Caribbean Sea, and the Pacific Ocean (Figure 8). The advantage lies between the Pacific Ocean and the Gulf of Mexico, along with a system of 114 ports, of which only 26 handle ocean-going cargoes (Alejandro and César, 2009). Mexico's largest port, the Port of Manzanillo main commercial port for containerized cargo, with a throughput of 2,118,186 TEU in 2013 and the second-fastest-growing port in North America at a growth rate of 11.2% (Wiradanti et al., 2016). From this trade point, it serves as a vital port of arrivals and departures for Asian importers and exporters. 17 FTAs: Free Trade Agreements

8

In terms of demand conditions, Chinese ports accounted for 7 of the top 10 major container ports. (Andrea, 2019). Instead, China has become one of the leading trading partners with Mexico after the US (Figure 9). The trend of shifting trade to Asian countries benefits Mexico because it allows the country to buy goods cheaper with reduced transportation costs as economies of scale remain the same. In terms of supporting industry, infrastructure investment is an effective measure. Until 2014, the investment in infrastructure was 11 billion Mexican pesos, which is 50% public and 50% private (Juan, 2017) (Figure 10). Thus, a solid foundation and accessible supporting businesses have elevated Mexico's ports to a valuable port, claiming seamless transportation in the shortest possible period, which is internationally competitive. Finally, and probably most importantly, the government establishes the legal corridor and finances the port. The Mexican government plans to continue expanding port capacity using the existing funding structure with private-sector (Juan, 2017). New approaches, proper legislative rules, and effective government investment have made Mexican ports vibrant, active, and competitive. 4, Trade policies a, Tariffs Mexico is a member of the WCO18 and the IHCDCS19. Because Mexico is a member of international organizations and FTAs, its trade and customs policy is predictable. Customs and trade regulations in Mexico are mainly following global standards (M. Angeles, 2017).

18 WTO: World Custom Organization 19 IHCDCS: International Human Capital Digitalization Commision

9

Moreover, many aspects of Mexico's global trade are complicated and changing fast when new trends, dangers, or policy goals are established (VTZ, 2020). Import or export of products is subjected to a tariff, a type of tax (International Trade Administration, 2021). Moreover, tariffs relate to the "import duties" that are imposed when products are imported. In addition, tariffs provide three significant functions: Generate income, safeguard local industries, and eliminate trade imbalances. Tax rates range from 0% to 100% in Mexico, with an average WTO-bound tariff of 35% (VTZ, 2020). According to Mexico's 2017 Trade Policy Review, tariff rates on agricultural and non-agricultural products were 14.3 percent and 4.6 percent, respectively, and the IVA is 16 percent (VTZ, 2020). It is the importer's responsibility to pay for extra services, such as inland Mexico transportation and storage, as well as any relevant customs brokerage costs (KPMG, 2021). When a product is sold to a consumer, an IVA is added to the purchase price (Export.gov, 2019). Currently, Mexico has signed FTAs20 with 50 nations and is a participant of regional agreements within the framework of the ALAIA21. Some of the main FTAs and trade agreements to which Mexico is currently a party: USMCA22, FTA EU-MX23, Pacific Alliance with Colombia, Chile, and Peru (VTZ, 2020). Although they have been expanding trade with other nations since the second world war, Mexico's trade policy and Mexico's economy in general still depend much on the US. Since Mexico's economy has been heavily dependent on the US for decades, in the 21st century, 80 percent of its exports have gone to the US, while 50 percent of its imports came from the US, being the second biggest exporter to the US (NAPS, 2020). Therefore, in order to decrease the dependency, Mexico is moving toward a more significant role in international trade by engaging 20 FTAs: Free Trade Agreements 21 ALAIA: Latin America Integration Association 22 USMCA: United States-Mexico-Canada Agreement 23 FTA EU-MX: European Union-Mexico Agreement

10

in more interaction and negotiating with more nations all over the world (U.S. Department of State, 2020). b, Subsidies A service subsidy is a measure that involves a financial contribution from a government or a public entity, provides an advantage, and in particular to a company or industry or a set of firms or industries (WTO, 2021). Taking the agricultural industry in Mexico as an example, from 2006 to 2016, the average annual subsidy budget was 59.2 billion pesos, or 4.5 billion dollars (Zhengfei, 2021). It is estimated that government subsidies for protected buildings such as macro-tunnels, shade houses, and anti-hail mesh amount to 50% of the cost (Clint, 2021). Mexico's protected area has grown substantially during the past two decades, from 300 hectares in 2001 to 54,000 hectares in 2019. In addition, Mexico's imports have grown significantly thanks to government subsidies (Clint, 2021). Along with the government's support, Mexico's agricultural production and import have got many successful results. In 2000, strawberry imports from Mexico accounted for one-third of Florida's entire strawberry crop (Hayk, Feng, Suh and Zhengfei, 2016) Mexico's imports, on the other hand, surpassed Florida's production in 2019. Before 2009, blueberry imports were nonexistent, but in 2019, they topped 90 million pounds, compared to Florida's 24 million pounds. Florida's tomato production in 2000 was 20 percent higher than Mexico's. In contrast, imports are currently five times greater than output in Florida. (Clint, 2021). Hence, the data above showed that the Mexican government should continue the current plan and focus on technological improvement to adapt to the changes in the agricultural industry. c, Quotas

11

A quota is a trade restriction organized by the government that limits the number or monetary worth of merchandise that a country can import or export during a certain period. (Barone 2021). Quotas are used in international trade to manage the volume of commerce between countries. Among all other systems of controlling imports, the quota system is the most straightforward and effective technique of guaranteeing that imports do not exceed defined upper limits (Sanders 2019). Moreover, the success of the quota system is not determined by market forces. Additionally, the quota system is a powerful tool for safeguarding domestic industry (Amadeo 2021). However, there are several disadvantages. Firstly, a significant number of judgments are required under the quota system (Stuart 2017). In other words, the quota system raises the government's resource costs. Secondly, the quota system promotes the creation and maintenance of monopolistic elements (Muley 2021). Consequently, quotas discourage long-term investment and economic growth. According to Global Trade Alert, the Mexican government approved an agreement on September 7, 2020, that creates biennial tariff-rate quotas for paddy rice for 2020 to 2021. Dutyfree quotas will be distributed according to a first-come, first-served basis. The import charge on goods outside of the quota, according to WTO24, is 9%. In the long run, Mexico should engage in sustainable development, especially in agriculture, to protect both consumers' benefits and domestic industries and vulnerable producers. d, Off-shoring

24 WTO: World Trade Organization

12

Offshoring is the practice of outsourcing operations to less-developed countries, typically by companies from developed countries, intending to lower the cost of doing business (Pisani & Ricart 2015). There are numerous advantages of offshoring. Firstly, it provides access to highly skilled labor (Waehrens 2015). Corporations have the option of locating operations offshore in regions with specific expertise in their industry and be able to access and implement new technologies to improve production efficiency. Secondly, it engages the development of the business and broadens the range of services or products (Tate 2009). Lastly, offshoring helps to reach new markets. When offshoring, businesses have opportunities to collaborate closely with professionals who can assist in marketing products to new audiences (Hammon 2016). Nevertheless, there are drawbacks to offshoring, firstly, problems in quality control. Different countries may have different rules and regulations regarding the quality of products produced (Soucy 2021). Secondly, there are concerns about costs. Aside from the rising cost of labor, shipping and other duty fees are also rising (Lisondra 2017). Moreover, there is an increase in unemployment. When physical infrastructures are relocated abroad, local employees may lose jobs if they cannot work in other areas of the company (Oskow 2020). Lastly, security issues are noticeable. The risk of a security breach increases when informatio...