RMIT International University Vietnam OMGT 2321 Global Trade Operations – A2

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 information is shared between systems
and locations could result in data leaks or loss (Demchenko 2021).
The automotive sector, as well as significant investments made by foreign vehicle
manufacturers to strengthen their production activities, have contributed to Mexico's rapid
economic growth (Tetakawi 2015). According to the WTO, Mexico has 12 FTAs25 with 44
countries worldwide. Additionally, it has 23 dual investment treaties that allow organizations
25 FTAs: Free Trade Agreements

13


operating within the country to reach nearly 1 billion existing and potential customers
(Ballesteros 2010). Mexico provides businesses with a particularly skilled human resource with
professional and technical degrees. These people work in almost every position within the
factories installed by overseas organizations, from assembly to managerial positions (Tetakawi
2015).
According to the country's conditions, Mexico should improve the suitability of the
workforce to take advantage of the growing global market for offshored service.
e, FDI
An FDI26 is a type of long-term investment by an individual or an association of one country
to another by placing a factory or business establishment. This focuses on accomplishing longterm benefits and assuming responsibility for this property (Corporatefinanceinstitute.com,
2021).
There are innumerable advantages of FDI. Economic stimulation is the essential wellspring

of outside capital, just as expanded incomes for a country. It frequently brings about the outset of
production lines in the country of investment, in which some local equipment and materials or
labor force be used (Connectusfund.org, 2018). Moreover, FDI helps with the advancement of
human resources. They are given adequate training and skills, which assist with boosting their
insight on a broad scale; they can train others and make a gradually expanding influence on the
economy (Connectusfund.org, 2018).
On the other hand, there are still some obstacles to FDI. Since the political issues in
different countries can immediately change, FDI is exceptionally hazardous (Connectusfund.org,

26 FDI: Foreign Trade Investment

14


2018). Furthermore, FDI can sometimes affect trade rates to benefit one country and the
drawback of another. Lastly, the essential concern is that organizations will not reestablish
benefits once again into the host country, which leads to substantial capital surges from the host
country. Accordingly, numerous countries have guidelines restricting foreign direct investment
(Corporatefinanceinstitute.com, 2019).
Based on common rule, Mexican FDI legislation follows a barring procedure for oversea
investment, connotations that foreigners can openly partake and contribute without a constraint
on the level of capital or monetary interest, except for specific saved areas (Lovells, 2020). In
2019, Mexico was the US' second-largest products export market. There were numerous export
categories, the total agricultural products that were exported was $20 billion in 2019, and some
popular export categories like dairy products $1.5 billion, pork production $1.3 billion, beef
productions $1.1 billion (Ustr.gov, 2021). Manufacturing in Mexico receives 30% of FDI, which
is the favored area (Globalsmes.org, 2021). Considering the recorded significance of Mexico's
gold and silver businesses, financial services receive 20% of FDI, ahead of mining and extractive
industries receiving 19% of FDI. Agricultural falls last claimed less than 1% of FDI
(Globalsmes.org, 2021)

Mexico mainly relies on its cooperation with the US, so it will be vulnerable if there are
any changes to the trade agreement, so Mexico should partner with other countries to minimize
all the impacts.
III, Conclusion
This study has discussed Mexico's characteristics through historical analysis and its trading
patterns by assessing its trade policies. Mexico's financial contribution has been successful in the

15


last 20 years; to adapt to changes in the agriculture business, the Mexican government should
maintain the current strategy while also focusing on technological advancement. However, in the
long run, Mexico should embrace sustainability development, particularly in agriculture, to
safeguard both the advantages of consumers and domestic businesses and vulnerable producers.
Furthermore, Mexico should also strengthen its workforce's capability to capitalize on the
expanding global market for offshored services. Last but not least, the country should reduce its
dependence on the US to mitigate risks and the negative impact of changes in trade agreements
on its economy.
IV, References
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16

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21


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< />● VTZ 2020, ‘International Trade in Mexico’, VTZ News, viewed 12 July 2021,

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< />● Workman, D. 2021, World’s Top Exports, viewed 10 August 2021,
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VSC NEWS, viewed 15 July 2021, < />V, Appendices

23


Figure 1: The major exported sources in Mexico

Figure 2: The major imported sources in Mexico

24


Figure 3: The major exported and imported service of Mexico in 2018 (OEC, 2019)

Figure 4: Exports of goods and services in Mexico (% of GDP) (The World Bank, 2021)

25