Mexico country brief
Introduction
The partnership between Australia and Mexico is strong and growing. In addition to working closely together multilaterally in fora such as APEC, the G20, the International Whaling Comission and within the UN,an increased level of cooperation in recent years has resulted in a comprehensive framework of bilateral agreements, including a Memorandum of Understanding (MOU) on Education and Training (2008), a bilateral Double Taxation Agreement (2004), an MOU on Energy (2005), an MOU on bilateral Health Cooperation (2005) and an Investment Protection and Promotion Agreement (2007). In 2009, Mexico joined the Australian led Global Carbon Capture and Storage Institute (GCCSI) as a founding member.
The final report of the Joint Experts Group (JEG) was launch by the Minister for Trade Simon Crean and the Mexican Minister of Economy Ruiz in July 2009. In launching this report, both Ministers agreed to reinvigorate the trade and investment relationship between Australia and Mexico. The JEG process commenced in 2006, when Australia and Mexico agreed to start a process to investigate ways of strengthening economic relations, including the negotiation of a possible Free Trade Agreement at some time in the future.
A Double Taxation Agreement entered into force from 1 January 2004. This gives impetus to bilateral relations by clarifying the taxation rights of the two countries, introducing measures to relieve double taxation and prevent fiscal evasion. The Investment Promotion and Protection Agreement (IPA) between Australia and Mexico, signed in Mexico City on 23 August 2005, entered into force on 21 July 2007.
Negotiations on a bilateral Air Services Agreement were finalised in March 2005, and both parties have now agreed the final text. Qantas and Mexicana Airlines signed a new code-share service agreement in July 2006.
Political overview
Mexico is a congressional democracy with a directly elected President. The President serves a six-year term and cannot be re-elected. The bicameral Congress comprises 128 Senators, each serving a six-year term, and 500 members in the Chamber of Deputies, serving a three-year term. Senators and Deputies cannot stand for re-election.
Mexico’s political climate has changed significantly over the past decade. In 2000, the political hegemony of the Institutional Revolutionary Party (PRI), which had endured in Mexico for 71 years, was broken by the election of President Vicente Fox of the National Action Party (PAN). Fox, a former Chief Executive of Coca-Cola in Mexico and Governor of Guanajuato, defeated the PRI candidate, Labastida, on a platform of democratic change, an end to corruption and wider community prosperity. During six years in office, Fox’s Government pursued macroeconomic goals focused on increasing investment and employment. Sound fiscal management promoted economic growth and moved Mexico out of recession.
The July 2006 election of Felipe Calderon of the PAN continued Fox’s economic liberalisation and stable macroeconomic policies. Calderon won the Presidency by the slimmest margin in Mexican history on 1 December 2006.
Calderon campaigned on a platform of improving employment rates, strengthening investment, and tackling growing crime rates. Calderon especially identified the need to enhance national security through police and judicial reform as a key priority. He initially received widespread public support for his campaign in the cities and states most affected by drug gang-related violence, and was praised by the US government following the extradition of several leading drug felons in Mexico to the United States.
However, the president’s targeting of powerful drug trafficking cartels has come at some political cost. In 2008, over 6000 people died from drug-related violence, more than twice the number killed in 2007, and close to 5000 had been killed by September 2009. Moreover, violence is spreading beyond the traditionally dangerous US-border towns to some of Mexico’s biggest cities, such as Monterrey.
While Calderón´s Presidential term of six years will last until 2012, at the July 2009 mid term legislative elections, his party - the PAN- lost the majority in both the Senate and the Chamber of Deputies to the opposition PRI. Over the next three years Calderón´s government will need to negotiate with other parties to pass legislation which will likely make passing substantial reforms difficult.
Recent Developments
The main political – and economic – development in recent months has been the unwinding of the global financial system. Although Mexico initially appeared to weather the crisis well, the closeness of its ties with the US economic cycle has seen it slip into recession.
The Mexican Finance Ministry predicts a deficit equivalent to 4% of GDP in 2009. Mexico´s three main sources of revenue: oil, remittances from the US and tourism have all been hit hard in the past year. Oil production in Mexico has fallen to 800,000 barrels per day and this combined with the fall in world oil prices has had a dramatic effect on Mexico´s public finances. The tourism sector, which was already feeling the effects of the global economic crisis, experienced a sharp drop immediately following the AH1N1 influenza outbreak in April. In the first half of 2009 income from tourism dropped by 17% compared to the same period last year. Reduced remittances from the US will also contribute to the shortfall. For 2010 the deficit is expected to be around 2.7% of GDP.
Sectors most affected by the global financial crisis in Mexico have been manufacturing (in particular electrical equipment, electronics and machinery) and the auto industry. Production in the latter is expected to be 60% less than last year. Poverty levels have increased to 18.2% of the population, according to a report released in July by the National Council for Evaluation Social Development Policy. The Central Bank now forecasts negative growth for 2009 of between 6.5% and 7.5% to be followed by a return to positive growth in 2010.
The security situation involving the ongoing war against the drug cartels and the response to the economic crisis are the key issues dominating domestic political debates. The results of the mid-term legislative elections in July, in which the opposition PRI won the largest number of seats, showed that voters are losing confidence in the government’s ability to tackle the effects of the global economic crisis and other pressing domestic issues such as drug-related violence and corruption. Calderón will have three years to convince the voters to re-elect another PAN President in 2012 (by law Calderón cannot stand for re-election), but to do this it is likely that a rebound in the economy and an improvement in the security situation will need to occur.
Economic overview
According to the IMF, in 2008 Mexico’s economy ranked 13th in the world (only Brazil has a larger GDP among Latin American countries). It is currently the only Latin American member of the OECD which is evidence of the growing transparency and improved governance across the Mexican economy. Mexico is also one of the WTO members with the greatest number of Free Trade Agreements (it currently has a network of 12 FTAs with 44 countries).
The Mexican economy gradually gathered momentum since moving out of recession in 2002 before being hit by the effects of the current economic downturn. Mexico's GDP grew by around five per cent in 2006, the highest rate of growth for several years. Mexico can attribute its transformation from a highly protected economy to its more open, regionalised and market-based economy of today to widespread trade liberalisation over the past several decades. This has encouraged foreign firms to set up plants to take advantage of relatively low labour costs and proximity to the US market. Economic activity is increasingly dominated by the private sector, but is characterised by a mixture of modern, export-oriented industry and agriculture, alongside more outmoded sections of the domestic economy.
Much of Mexico’s modern economy has been driven by competition and export opportunities stemming from Mexico's extensive network of Free Trade Agreements (FTAs), covering more than 90 per cent of the country's trade. They include FTAs with Chile, the United States and Canada (North American Free Trade Agreement, NAFTA), the European Union; Israel; Colombia and Venezuela; Bolivia; Guatemala, El Salvador and Honduras; Uruguay; the European Free Trade Area (Norway, Iceland, Switzerland and Liechtenstein), and Japan. Mexico is currently negotiating an FTA with Korea and Peru.
Mexico’s economy needs to grow by at least 6 per cent to create the one million jobs required annually to keep pace with additions to the workforce from population growth. The contraction in 2009 will therefore lead to increased unemployment and underemployment.
The interconnectedness of the Mexican and US economies is well known. It is derived from close linkages across four important economic channels: trade, remittances, investment, and financial channels. The trade channel is especially well developed, with 85 per cent of all Mexican exports destined for sale in the American domestic market. Remittances from the Unites States accounted for US$25 billion in 2008 making it the country’s second largest source of foreign exchange. The investment channel further demonstrates the close ties between two economies’ with half of Mexican foreign direct investment flowing from US-based investors. Whilst highly integrated financial systems allows for close and reliable economic relations.
Trade and Investment
In recent years, Mexico's economic policy has been characterised by sound fiscal management and efforts to build the confidence of international markets and investors. Despite some spending increases, windfall profits from the sale of Mexico's substantial oil reserves have enabled the retirement of considerable foreign debt. Mexico is one of only two countries in Latin America that currently has 'investment grade' ratings from the major international ratings agencies.
However, failure to complete further and much needed structural reforms has seen Mexico's competitiveness fall, raising serious concerns about the country's ability to continue to attract the high levels of foreign direct investment that has driven economic growth since the conclusion of the North America Free Trade Agreement (NAFTA) with the US and Canada. The comparatively high costs of labour, capital, and services and relatively poor infrastructure within Mexico continue to be a brake on stronger economic growth. Cautious fiscal and monetary policies over the past six years have reinforced expectations of sustainable macroeconomic stability, but so far, these policies have not produced the rapid growth on the scale needed to boost employment and reduce poverty substantially: nearly half of the population live below the poverty line.
Over the medium-to-long-term, the outlook for the Mexican economy is mixed. Favourable demographic developments, steady increases in investment and migrant remittances, increases in manufacturing exports and a rise in human capital would all drive growth. However, the Calderon administration’s capacity to push through much-needed structural and microeconomic reforms will continue to affect overall growth and market competitiveness.
Bilateral relationship
Australia’s bilateral relationship with Mexico is strong. In November, 2008 the Australian Minister for Foreign Affairs, Mr Smith visited Mexico and signed a Memorandum of Understanding on Education to investigate ways to deepen educational ties between the two countries. A visit by President Calderon to Australia for the September 2007 APEC Summit underscored our mutual interest in strengthening bilateral trade, investment, political and people-to-people links. In April 2009, an Australian Parliamentary delegation (led by the President of the Senate) visited Mexico.
Australia and Mexico work together in a variety of different multilateral fora including international climate change negotiations, APEC, the International Whaling Commission, the G20 and the United Nations. Both countries cooperate closely on global energy and environment issues, disarmament and non-proliferation and human rights amongst other issues.
The latest Australian Census (in 2006) revealed that there were around 1800 Mexican-born persons resident in Australia at that time. Also in 2006, around 25,000 Australians travelled to Mexico whilst nearly 7,000 Mexican nationals visited Australia.
Mrs. Katrina Cooper is Australia’s Ambassador to Mexico and took up her appointment in January 2008.
Bilateral economic and trade Relationship
For detailed information, see our Mexico Fact Sheet (PDF)
Australian Trade and Investment Interest
The Australia-Mexico bilateral economic and trade relationship is in very good shape. Mexico was Australia’s second largest merchandise trading partner in Latin America in 2008 (just behind Brazil) with two-way trade worth $2.04 billion. Australia’s merchandise exports to Mexico are valued at approximately $671 million, dominated by coal. Meat, leather live animals, dairy and a growing range of services are also exported. The trade in Australian education and training services has been especially strong. Student numbers continue to grow and, in 2008, there were 1436 enrolments by students from Mexico in Australia. This makes Mexico Australia’s third largest education and training market in Latin America, after Brazil and Colombia (and ahead of Peru). Australian food and wine brands are increasingly on sale in Mexico. Tourist numbers have been trending upwards and more growth is expected as a result of the inclusion of Mexico in the 'Aussie Specialists' visa program and the new Qantas-Mexicana code-share arrangement.
Imports of merchandise goods from Mexico have increased significantly over the last decade and were valued at $1.37 billion in 2008. The major imports from Mexico were internal combustion piston engines, motor vehicle parts, telecommunications equipment and computers. Mexican investment in Australia had been concentrated in private real estate and manufacturing, although one of Mexico’s largest food companies, Grupo Gruma, bought two Australian companies, Rosita’s and Oz-Mex Foods, in 2006.
Mexico is one of the world’s most important developing countries and a key economy in Latin America. Its size and geographical proximity to the world’s largest economy and NAFTA partner, the United States, and very good links to markets in Central and South America, make it an attractive trading partner for Australia. Given complementary economic and trade profiles, there are strong prospects for expanding Australia-Mexico trade and investment.
The energy sector is becoming an increasingly important element of the trade relationship, with the sale of Australian coal, and potentially Australian liquefied natural gas (LNG), to Mexico creating new opportunities for Australian business. Expansion of energy and mining-related services also offers strong potential for future growth. The relationship has grown as Australian companies in a range of industries (mining services and technology, agribusiness, food and beverages, IT, software, biotechnology, automotive parts and education and professional services) enjoy success in Mexico. There is potential for new areas such as water management equipment and services, clean technology and environmental services including clean energy.
Coal is Australia’s largest single export to Mexico, having doubled from 2 million tonnes in 2004 to 4.4 million tonnes in the 2007 calendar year (worth US$234 million). In 2007 Mexico was Australia's fifth largest export market for thermal coal (after Japan, Taiwan, Korea and Thailand). Coal trade with Mexico was enhanced by the Mexican Government’s decision in 2002 to remove a 3 per cent tariff from most primary and intermediate goods (including coal) imported from all non-NAFTA sources, which had previously favoured US and Canadian coal exporters.
Mexico attracts significant foreign direct investment (over US$15 billion per year for the last 10 years) due to NAFTA membership and its generally liberal investment laws. The investment environment has improved markedly over the last several decades as a result of domestic reform and the introduction of more simplified procedures, higher ceilings on foreign equity and greater intellectual property protections. Australian direct investment in Mexico is modest, and concentrated in mining, consolidated services (linked to finance and leasing arrangements) followed by manufacturing. Australian companies with interests in Mexico include Macquarie Bank, Orica, Kings Minerals, Bolnisi Gold, Howe Leather, Mincom, Australian Elite Genetics, , Baja Aqua Farms and TNA Packaging Systems. The Australian firm Securency, a Melbourne-based company that uses polymer substrate to incorporate new security features in bank notes, has a joint venture with the Central Bank of Mexico and expects to open a manufacturing plant in Mexico before the end of 2008. Several companies such as Rio Tinto Australia, Xstrata Coal and Shell Australia have an interest in Mexico’s energy and resources sectors.
Export opportunities
The Australian Government is working actively to promote and facilitate bilateral trade. The Australian Embassy and Austrade work closely with Australian companies in a range of sectors to help enhance new market opportunities in Mexico. Promotional events are conducted regularly to boost sales of Australian food and wine, education, tourism and mining technology and services. In most sectors, Australian exporters face competition from other sources that benefit from significantly lower tariffs, due to Mexico’s existing free trade agreements. However, Mexican companies are continually looking at diversifying their trade relationship and doing business with Australia is now a viable option for many. In addition, the Australian Government devotes considerable effort to improving the regulatory environment for Australian exporters and investors and in assisting Australian exporters to resolve market access issues as they arise.
Energy
Australia is well placed to benefit from Mexico’s fast rising energy requirements: real potential exists to increase Australian energy exports in response to Mexico’s tightening energy supply/demand balance. The potential supply of LNG to Mexico presents a promising opportunity for Australia, given the shift towards natural gas usage in Mexico’s overall energy mix while there are growing opportunities in renewable energy. Australia has also emerged as a major and continuing supplier of thermal coal to Mexico.
Food and Agriculture
Opportunity exists for Australian investment in Mexico’s food processing sector and for wider engagement on agriculture. Australia currently exports live animals, meat (beef and sheep meat), dairy, wool, leather and wine to Mexico. There is considerable potential to increase export volumes out of Australia and to boost Australian investment in Mexico’s food processing industry. Australian wine is also well positioned to increase sales among Mexico’s growing middle class (20-25 million people) and the number of Australian wine brands available in Mexico has grown from 3 to over 40 in the last three years alone.
Infrastructure
Construction and engineering account for some 4 per cent of Mexican GDP. New investment in highways (US$5.5 billion), utilities (US$9.1 billion), resorts (US$1.2 billion) as well as the need to build over 5.1 million new homes by 2010 make Mexico a very attractive potential market for the Australian building, construction and engineering industries. Australian companies are already enjoying success in supplying high-end building products, water treatment technology and a range of services (source: BMI Mexico Infrastructure Report 2005).
Mining
Mexico is the world’s largest producer of silver and bismuth. It is the world’s fifth largest lead, sixth largest zinc and tenth largest copper producer. Mexico has a long history of mining and has an attractive regulatory regime and business environment for foreign investment and participation in the sector. Australian mining ‘juniors’ are active in the industry. They have been joined by a number of Australian technology and services exporters. Two of the major Mexican players (Grupo Mexico and Luismin) have mining investments in Australia.
Education and Training
There are excellent prospects for expanding Australia’s education and training relationship with Mexico. Mexico is now Australia’s third largest education and training market in Latin America, after Brazil and Colombia. There were over 1000 Mexicans who commenced studies at Australian educational institutions in 2008. Increased training needs to improve productivity and skills are also expected to provide new opportunities for Australia's Vocational and Training Education sector (VTE). Australian education services are well regarded in Mexico and the Department of Foreign Affairs and Trade, Austrade and Australian Education International work to continue to promote Australia as a quality provider of education services.
Other Services
Market opportunities exist for Australian businesses providing services linked to productivity gains, efficiency gains across the major industry sectors (energy, mining, construction, agriculture and food processing). The growth of Mexico’s middle-class also presents the chance for expansion in tourism, financial, professional services and franchising. Australia now has some eight active franchises in the Mexican market.
For further information or assistance developing business opportunities in Mexico, please contact Austrade on 13 28 78 (anywhere within Australia), visit www.austrade.gov.au or e-mail info@austrade.gov.au.
Updated September 2009