Can Canadians Really “Buy Into” Mexico?

A recent investment advice column in the Globe and Mail (by David Milstead, August 3) highlighted some surprising facts about Mexico’s economy. The bullish author suggested Mexico will be a global economic powerhouse in future years thanks to pro-business policy shifts (like the new plan to open up the petroleum sector, 65 years after nationalization, to renewed foreign ownership), and he trumpeted the coming rise of a confident new middle class.

Yet Milstead also cited research indicating the continued suppression of labour costs in Mexico – which hardly seems consistent with a happy image of mass, middle-class prosperity. A decade ago, many economists predicted that Mexico’s low-wage strategy for attracting export-oriented manufacturing would flounder in the face of China’s stunning entry into global trade. However, wages in Mexico have been tightly controlled, while wages in China are growing steadily. Merrill Lynch now estimates that manufacturing labour costs are 20 percent lower in Mexico than in China (whereas 20 years ago Chinese workers were half the price). Those contrasting trends reflect the differential policy orientation of the two countries. In China, despite all its democratic faults, the economy is still managed largely with an eye to improving mass living standards. Mexican governments, in contrast (whether ruled by the PAN or the PRI), have pursued the opposite goal: suppressing living standards and tightly disciplining labour, all in the name of further boosting profit margins.

Mexico’s new labour law will reinforce this perverse trend. The law was passed late last year in the dying days of the former PAN Caldero government, but with the full support of the incoming PRI regime. The result of this unholy alliance between Mexico’s two neoliberal parties will be the further suppression and flexibilization of labour. The law extends the use of individual labour contracts, liberalizes agency work, and allows hiring by the hour (rather than the day) in order to facilitate more part-time and short-shift work. Rules which supposedly prohibit employment discrimination based on gender, pregnancy, or marital status (cited by the government as proof of Mexico’s “modernization”) are window-dressing; they will mean little in the context of a labour market increasingly left to its own free-wheeling devices. In labour relations, the new law is clearly a step backward: independent unions will be even harder to establish (for example, independent unions must expose their entire membership lists for employer and government scrutiny, a clear invitation to intimidation), reinforcing the power of the official (and mostly compliant) PRI-affiliated unions.

No wonder wages in Mexico have gone nowhere, despite the country’s strong exports and tighter continental integration. Real wages in the formal sector of the economy declined sharply in the first years of NAFTA, recovered somewhat around the turn of the century, but have stagnated ever since. In manufacturing (where wages are much higher than the economy average), the gap between Mexican wages and U.S./Canadian costs has not narrowed at all under NAFTA – not surprising, given the deliberate wage-suppressing orientation of Mexican policy. All-in labour costs in manufacturing are still one-sixth of Canadian levels (same as when NAFTA was signed in 1994); in the all-important automotive industry, the ratio is one-tenth. In the informal sector, meanwhile, incomes and living standards are much worse, driven down in part by the impact of agricultural liberalization on displaced rural populations.

Despite all this trickle-down therapy, Mexico’s economic “boom” has been distinctly unimpressive by Latin American standards. While corporations (Mexican and global) love Mexico’s aggressively neoliberal policy stance, Mexico’s real economy has badly lagged the rest of Latin America. Average real GDP growth has averaged under 2% per year over the last five years. That’s a small fraction of growth rates in other major Latin American economies (including Brazil, Argentina, Peru, and even Venezuela). That’s barely enough to keep up with population growth, let alone to power the improvement in mass living conditions that has been achieved in Brazil, China, and other more successful emerging economies.

In sum, there is no credible case that the Mexican liberalization and export-orientation that was facilitated by NAFTA has lifted the lot of Mexican workers – but it is undeniable that NAFTA has undermined employment and wages in Canada and the U.S. The migration of manufacturing investment (including in relatively high-tech segments like automotive, aerospace, and telecommunications equipment) has accelerated since the 2008-09 crisis, as global firms closed capacity in Canada and the U.S., while expanding their presence in low-cost Mexico. In Canada’s case, this migration is manifested in a ballooning bilateral trade deficit with Mexico. The overall imbalance swelled to a record $20.1 billion in 2012 – up 72 percent since 2009. Our imports from Mexico now outweigh our exports by a five-to-one ratio. Based on average shipment-to-employment ratios in manufacturing, that bilateral deficit corresponds to the loss of around 125,000 Canadian jobs. Our lopsided trade with Mexico therefore represents around a quarter of the half-million total decline in manufacturing employment in Canada since we peaked in 2000.

Almost half that bilateral deficit is concentrated in the auto industry. Canada’s automotive imports from Mexico have exploded by over 80 percent in 3 years – yet our automotive exports back to Mexico (despite its supposedly high-spending middle class) were actually lower in 2012 than in 2005. We import $12 of automotive products from Mexico for every dollar we export there. The auto industry provides an extreme illustration of the true dynamic of NAFTA: stable access to deliberately cheap Mexican labour, and an accelerating southward migration of export-oriented investment and capacity. Ross Perot’s prediction of a continental sucking sound has been increasingly ratified by recent trends. Any upside for Canada (as opposed to for Canadian businesses that have relocated there) is increasingly hard to find.

David Milstead, however, optimistically thinks he sees one. He recommends that Canadians position themselves to share in Mexico’s future expansion by buying mutual funds and other vehicles with high exposure to Mexican equities. His article highlights several possible investment opportunities (mostly mutual funds sold by Canadian banks). This, he says, is how “a Canadian can buy into Mexico.”

Milstead’s suggestion that Mexico’s growth is good for the owners of capital in Canada is perhaps an inadvertent ratification of my analysis above: namely, that corporations have benefited from NAFTA, while workers in all three countries have been harmed. (Milstead does not address the issues of Canada’s trade deficit with Mexico, job losses, or the migration of capital investment there.) But the very idea that a country could capitalize from globalization by investing in other countries that are “benefiting” (even in the skewed manner that Mexico could be said to be) is preposterous.

The six Latin American-oriented investment funds featured in the table that accompanies Milstead’s article demonstrated an average 1-year total return of just 2.1 percent. (Presumably that is after deducting predictably exorbitant expense ratios, which averaged 2.9 percent across the 6 funds.) Average returns for the 6 funds over a longer time horizon (3 years) were even lower: barely above zero. To earn enough investment income at the average 2.1 percent return to offset the economic drain represented by Canada’s humungous trade deficit with Mexico, Canada would have to own $965 billion worth of Mexican equities. Just for comparison, that’s almost twice as much foreign portfolio equity investment than Canadians collectively have in the total world ($580 billion as of end-2011, according to Statistics Canada).

In fact, Canadians’ portfolio equity holdings in Mexico amounted to a paltry $2.5 billion as of end-2011. At the same 2.1 percent total return, that holding generates about $50 million in investment income per year. That’s not even enough income to offset one day’s worth of Canada’s $20 billion bilateral trade deficit with Mexico last year.

No matter what mutual funds Canadians buy, Canadians cannot possibly “buy into” Mexico’s future economic expansion (such as it is) through their personal investments. Mexico’s socially unbalanced, uneven, and unimpressive growth in recent years offers no upside for Canada, and does not remotely offset the direct employment and investment losses that are clearly associated with NAFTA. The best way to improve our net benefits from our bilateral relationship with Mexico would be for the federal government to indicate its intent to withdraw from the NAFTA as it presently stands, and to begin negotiations on a new framework for trade and investment within North America premised on two-way trade, continent-wide growth, and rising living standards. That would be a great way to mark the 20th Anniversary of NAFTA next January 1.


  • Considering that the article clearly states:


    The largest U.S.-based exchange-traded fund is the iShares MSCI Mexico Capped ETF (Ticker EWW). Formed in 1996, it has more than $2.2-billion (U.S.) in assets and is designed to track the performance of the MSCI Mexico Investable Market Index, which covers 99 per cent of the value of the country’s market. (The “capped” portion of the name refers to rules that limit the size of holdings in the fund.)

    The top holding, by a long shot, is America Movil SAB de CV, the country’s wireless phone company, at nearly 19 per cent of the fund. Fomento Economico Mexicano SAB de CV, the bottler of Coca-Cola beverages throughout Mexico and a number of Latin and South American countries, makes up another 8 per cent of the fund, as of July 30.

    The fund has an expense ratio of 0.53 per cent.


    it is clearly misleading to cite the “exorbitant 2.9% average ratio” (which I of course agree is too high).

    Buy the iShares fund if you want to invest in Mexico. And don’t pick your investments based on one-year returns.

  • I’m sympathetic to your argument, but I wonder whether it is sound to consider only bilateral trade, considering that NAFTA may have increased indirect exports from Canada to Mexico via the US (i.e. exports of parts or raw materials to the US attributable to demand for finished goods in Mexico).

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