Mexico's energy reform counter to global trends - Albuquerque Journal

Mexico’s energy reform counter to global trends

In the post-World War II period, as globalization of companies and economies rapidly increased, countries started establishing incentives to attract foreign direct investment (FDI).

These incentives included offering tax breaks for foreign companies, free or subsidized government land, R&D allowances, and funds for training workers. By attracting FDI, countries benefited by having new development, new monies flowing into their borders, and the creation of good-paying jobs for their citizens.

In its quest to industrialize its northern border, and to employ citizens returning after the United States canceled the bracero agricultural labor program, which employed Mexican laborers on American farms, Mexico established its maquiladora program.

This program parlayed off of changes in the U.S. tariff code, which made it easier for companies to manufacture in foreign countries in order to better compete against foreign competition. Often referred to as the “twin plant program,” maquiladoras allowed foreign companies to manufacture in Mexico, with only the value added to the product in that country subject to tariffs. In other words, if a U.S. company is manufacturing a cell phone using a Mexican maquiladora plant, and all the materials are exported to Mexico for assembly, only the value of the Mexican labor would be subject to taxation once the phone is shipped to the U.S. market.

Programs such as Mexico’s maquiladora program have been wildly successful in attracting foreign direct investment. One only has to drive through border cities such as Juárez, Mexico, to see plants from Fortune 500 and Fortune 100 companies sprinkled throughout massive industrial parks.

Mexico President Andrés Manuel López Obrador has attempted to unwind energy reform and put the energy sector back in the hands of the Mexican government. (Luis Barron/Eyepix/ABACAPRESS.COM/TNS)

Today, there are more than 6,000 foreign companies operating in the Mexican maquiladora industry, employing approximately 3.2 million people. The maquiladora industry now accounts for 53% of Mexico’s total exports.

However, we have now entered a new era, in which a country’s policies and practices are just as important in attracting FDI as are established incentives. There are companies that won’t establish operations in Brazil, due to that country’s failure to address deforestation in its Amazon region. Other companies are refusing to expand operations in China because of that country’s human rights violations.

And now the Economista periodical is reporting that President and Managing Director of General Motors de Mexico Francisco Garza has stated, “If Mexico does not have renewable energies and a legal framework focused on sustainability, it will cease to be an investment destination in the short- and medium-term for General Motors and other companies.” Mexico passed historic energy reform laws under former President Enrique Peña Nieto, which allowed foreign companies to enter this formerly nationalized sector. The objective was to attract FDI in order to modernize Mexico’s energy sector and to allow the country a path towards renewable energies.

Since succeeding Peña Nieto as Mexico’s president, Andrés Manuel López Obrador (AMLO) has attempted to unwind energy reform, and to put the energy sector back in the hands of the Mexican government. AMLO is proposing prohibiting the electricity commercialization market to foreign investors, and limiting the private generation of energy production to 46%. Priority also would be given to the Federal Electricity Commission’s existing power plants, which run on petroleum and coal. AMLO also wants to cancel all current generation permits/contracts and do away with the self-supply of electricity that firms are gravitating towards, by using wind and solar options. The new policy focuses on using petroleum fuels and coal as the major energy sources for the country. Of course, this flies in the face of the trend of countries and companies towards zero emissions within the next few decades.

In January, GM announced that it will be shifting production to build only electric vehicles by 2035. By 2025, the company will be offering 30 new electric vehicles globally. It is estimated that GM’s all-electric strategy will require an investment of $35 billion dollars. That is an enormous amount of investment that countries around the world will want to convert into FDI by attracting GM’s electric production plants.

By committing itself to a quantum shift of strategy, GM will want to situate plants in countries that are committed to reducing future carbon emissions. The rolling back of Mexico’s energy reform seems to be taking the country off the table as a prospect for GM’s future investments. Mexico’s precarious energy strategy may not only have self-repercussions.

Because the U.S. and Mexico’s economies are so intertwined, loss of investments in Mexico could result in the loss of supply opportunities on behalf of U.S. suppliers. This would be a lose-lose situation.

Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at jerry@nmiba.com.

 

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