Mexico and Brazil are going head-to-head for top spot in World Cup soccer and among Latin American economies. In the second contest, Mexico wins because its forecasted 2014 GDP growth is 4% vs. 2% for Brazil.
Mexico’s new president, Enrique Peña Nieto has unleashed a number of dramatic reforms to wake up its sleeping economy. The most exciting move was ending the 76-year government monopoly of Pemex that opens up the oil and gas sector to foreign competition.
The government has also launched a National Infrastructure Plan to boost logistics connectivity. It focuses on improving roads, railways, ports and airports to transform Mexico into a global logistics centre of high added value.
Specific projects include 60 new roads (15 toll roads, 29 freeways, and 16 rural roads), three passenger railroads, seven ports, seven airports and the launching of two new satellites. Most of the funding will come from public-private partnership (PPP) contracts worth more than US $100 billion.
In related news, Panama and a consortium of European construction companies agreed in February to resume work on the multibillion-dollar project to widen the Panama Canal. The US $1.6 billion cost overrun will boost the expansion’s final cost to nearly US $7 billion when it is finished in 2015.
While such projects offer smoother logistics tomorrow, Canadian shippers still have to cope with existing processes and procedures. Says Arnon Melo, Mississauga-based president & managing director, Mellowhawk Logistics Inc. “Many are afraid to ship goods to Latin America because they believe it requires paying bribes. In my experience, that’s never happened. Instead, what they need to fear is bureaucracy- time lines and regulations.”
Melo states that for trade-show items, most customs officials want to see them three weeks before the show opens. To exhibitors planning to ship heavy equipment by sea that can take up to 25 days, he suggests sending them several months in advance. Airfreight is more flexible but also more expensive.
He assures shippers not to worry about getting paid whether the sale is on open account or letter of credit terms. If they have any concerns, EDC offers financing for overseas sales as well as insurance against possible buyer bankruptcy etc.
“Customs regulations rules may be longer and more detailed than ours but they are not complicated,” he says. “Shippers also need to have someone in constant contact with customs officials. Chile is the easiest country to deal with since they respond quickly. Other countries take longer.”
In terms of clearing goods Melo believes Mexico is the fastest, typically taking three to five days likely because of its NAFTA experience. However, be aware of high handling charges.
Moving exports out of Mexico is quicker than moving imports into the country. He cites a Canadian client’s experience setting up its own distribution centre down there. It saved money thanks to lower labour costs. But it was hard to find enough people with sufficient logistics knowledge and experience to staff it.
He strongly suggests conducting adequate due diligence. Can the product actually be shipped to the destination? Don’t take your customer’s word for it, check with a freight forwarder or someone reliable who knows the rules and has the proper contacts to find the right answer.
Melo’s two golden rules for shipping to Latin America are first, never ship goods before receiving prior approval. “Trying to resolve problems after they arrive creates nothing but trouble,” he says. Second, find a reliable partner in the country to be your eyes and ears on the ground.
“Logistics is more about who you know than what you know.”
From Mexico’s long list of new infrastructure projects, ocean freight will benefit from an expanded Port of Vera Cruz on the Gulf of Mexico coast as well as updated facilities in Lazaro Cardenas and Manzanillo on the Pacific side. Transforming Lazaro Cardenas will help it to compete for Asian cargo by enabling it to reach the US Midwest more quickly and cheaply by avoiding crowded Southern California ports and rail lines. Similar to Prince Rupert BC and its CN Rail link, Lazaro Cardenas enjoys a dedicated Kansas City Southern Mexico (KCSM) rail line that will deliver containers to Chicago faster via Kansas City.
The Multimodal Corridor Master Plan for Mexico (MCMP) will, among other duties, create strategies for promoting infrastructure development, coordination agreements and logistics services to facilitate domestic and foreign trade.
At a recent Toronto breakfast meeting, Cesar Bueno, the recently installed Trade & Development Commissioner of Mexico outlined how his country’s demographic profile is crucial to its future growth. The median age of its 118 million people is 27 years. By 2020, it more 80 million of its citizens will be in their economic productive years. Foreign firms can benefit from this huge pool of productive workers and middle-class consumers who have enjoyed better education standards as well as improved social and economic stability.
Unlike its Latin American neighbours, Mexico’s strength is based on advanced manufacturing, not commodities. As a result, it has become a “nearshore” source for large complex components and equipment to help North American producers to reduce costs and eliminate uncertain product delivery times of goods outsourced to Chinese and Asian firms.
Many Canadian companies such as Bombardier are enjoying the improved productivity of Mexican workers. Bueno attributes that growing national resource to their ability to “learn fast, work fast and think creatively”. Thanks to those attributes, Mexico has passed Canada to become the largest automotive exporter to the US.
Beyond NAFTA, Mexico and several other like-minded neighbours are ready to take on the world. The so-called “four amigos”- Chile, Colombia, Mexico, and Peru - have recently signed the Pacific Alliance, a major regional trade pact. It will reduce tariffs on 92% of products traded between partners upon ratification with the rest to be phased out later.
Current members have more than 200 million consumers and claim 35% of the economic output of Latin America and the Caribbean and 55% the region’s exports. Costa Rica will join in 2015 with Panama and Guatemala coming in later. Canada has active free trade or other agreements with all of them.
Alliance countries also plan to join global value chains, especially those in Asia. Chile, Peru, and Mexico are already members of the Asia-Pacific Economic Co-operation (APEC) group that includes Canada and the US. Chile and Peru are actively involved in the current Trans-Pacific Partnership (TPP) negotiations.
There are also early-stage discussions with the existing Mercosur trade group consisting of Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Informed observers point to ultimately achieving the long-held dream of a Free Trade Agreement of the Americas (FTAA) encompassing the entire region.
In Mexico, many Canadian and foreign producers have set up operations in maquiladoras or free trade zones. Effective Jan. 1, 2014, the government eliminated some tax breaks for such manufacturers or maquilas including VAT-free temporary imports of goods, parts and components, not to mention machinery and equipment and raising VAT rates in Mexico’s border states, flat income and corporate tax rates.
As a result, maquilas must remit VAT payments for imported inputs upon entry into Mexico. That could complicate their cash flows since the tax paid will only be refunded after finished goods leave Mexico. However under the new rules, maquilas that receive new tax certification will continue to receive VAT tax credits upon importation and receive refunds for any VAT payments within 10-20 days.
The government’s other contribution-a modern, efficient logistics network linking maquiladoras more closely to border crossings, rail lines, harbours and airports will, in turn, attract more foreign producers to set up operations there.
Unlike in soccer, that results in a win-win for all sides.