Interview with Mexico’s Secretary of the Economy, Ildefonso Guajardo

July 31, 2017

Since our readers last heard from you in 2014 Mexico’s economic growth has disappointed; why is that?

Minister Guajardo: It is important to remember that Mexico is not isolated from the rest of the world. Since we last spoke the world economy went through a difficult moment, with China’s rate of growth falling, Europe stagnating and the prospects for the US looking uncertain. So in that context, the fact that Mexico grew at a steady average of 2% per year wasn’t that bad. Our growth was higher than the Latin American average, and looks very favourable to Brazil, which is suffering a recession.

Of course we want to do better than 2% and the signs are that growth is picking up. In March GDP growth came in at almost 3% for the month on an annualised basis, while FDI of $8billion for the first quarter of this year was a record. Job creation is also up, so I think the overall picture for the Mexican economy looks good.

How will President Trump’s plans to build a wall, cut immigration or tax remittances impact Mexico’s economy?

MG: If you look at the most salient policy proposal, the supposed wall, I think it has become obvious that it would impact both sides. There has been a clamour of complaints from Americans on the border that worry about the ecological, economic and practical impact of such a large wall. Ultimately it is down to the USA to decide what it wants to do as a sovereign nation but it won’t receive a peso from Mexico to help build the wall. There also seems to be a growing realisation in the USA that the wall is a blunt instrument that won’t solve the delicate issues that affect both nations, such as narco-crime and illegal immigration.

Ultimately it is down to the USA to decide what it wants to do as a sovereign nation but it won’t receive a peso from Mexico to help build the wall…

Indeed the net migration from Mexico to the US is now negative, as more Mexicans return home. The majority of immigrants that head north from our country are from Central America or the Caribbean. We are a transit country for immigrants entering the USA, which means that as a trusted partner we can be a solution to the problem. Finally, the threats that have been made to tax remittances are practically meaningless. The incredible spread of financial technology means that there are multiple ways to send money to your family in another country and it is hard to see how they could all be picked up and taxed.

How will the renegotiation of Nafta impact Mexico?

MG: I think Nafta can be improved for the benefit of all three members. I was involved in the original negotiations 22 years ago and it was a benchmark agreement for the 20th century. However, now there are lots of areas that need to be updated. Back then there was no need for a chapter on e-commerce, which is clearly a vital part of trade between Canada, Mexico and the US today. Also there was no chapter on energy. Today energy is one of the most important sectors in all three countries. In Canada technological advances have allowed the massive exploitation of its unconventional resources, the same applies to the US with its shale gas and oil. Finally in Mexico the energy reform is completely transforming the industry. All of this means that North America is an energy power, which has huge implications for other parts of the economy. The cost of natural gas in North America is one-third of the price in Europe or Asia; that has massive consequences when you consider that gas makes up 25% of the cost of steel or cement production.

But it’s not just Nafta. We are also in the 4th round of our discussions to update the free trade agreement that we have with the EU. Finally, and this will be of interest to your readers, I visited London to speak to Lord Price about the possible shape of a post-Brexit agreement between Mexico and the UK.

The mining industry is strongly criticising the new royalties introduced by this government; has the new regime been a failure?

MG: Not at all. The new system of royalties was well designed and much needed. Previously the concessions were taxed according to the size of the territory not inline with the volume or value of the metal being extracted. We realised that didn’t make much sense so we looked around the world and created a new law based on international best practises.

Of course there may be some small flaws in the law. For example, mining companies have complained to me that exploration costs should be tax deductible to encourage more discoveries and I can see the logic in that. We should fine tune the royalty payments with small changes like that, but in essence it is a better system than its predecessor. If you don’t believe me look at some of the recent investment flows. We have seen more than $1billion of incoming capital for new projects so far this year from Canadian miners that could invest anywhere in the world. That shows that Mexico continues to be an internationally competitive destination for mining investment.

The reform package has been the central tenet of this government; how have the reforms impacted the economy?

MG: Yes this government’s reform package was wide-ranging and expansive, covering political rights, social issues and the economy. The economic reforms were long overdue and can be seen as a follow up to Nafta being signed in 1994. One of the goals of Nafta was to help Mexican companies become part of international supply chains. The large Mexican corporations had the resources to do this and did well from Nafta. However, the small to medium enterprises, which are the backbone of our economy, found it difficult to compete because they could not overcome the considerable structural barriers in their path. For example, if a small firm is paying twice as much for telephony services as an international rival, how can it compete? Likewise Mexican firms that could not afford to build their own power plants were paying much higher energy bills too. Now the reforms are bringing those costs down and should help share the benefits of Nafta to a larger part of the Mexican economy.