Mexico and the benefits of global value chains

By Elena Vidal and Alberto González Pandiella, OECD Economics Department

At the beginning of the 1990s, Querétaro, a state in central Mexico, was primarily known for its agriculture and small-scale industries. Many residents migrated to larger cities or the United States in search of better prospects. Today, Querétaro is a recognized hub for the aerospace industry. Thousands of jobs were created, and local talent has thrived thanks to partnerships between companies and local universities and technical schools.

The 1994 North American Free Trade Agreement (NAFTA) was crucial in this success story and triggered a transformation of the Mexican economy, which became deeply integrated into global value chains (GVCs), with exports as a share of GDP tripling between 1994 and 2023.  This success story is not without shadows and significant challenges remain.  Not all the states in Mexico benefited from the trade agreement equally, and Southern states lagged, contributing to the high inequalities seen in Mexico today (OECD, 2024). Disentangling backward and forward linkages shows also that Mexico’s GVC participation is mainly driven by backward linkages to GVCs, i.e., the share of foreign value added in Mexico’s total exports is large (Vidal and González-Pandiella, 2024). Conversely, Mexico’s forward participation, i.e., the share of Mexican value added embodied in foreign countries’ exports, is relatively low, (Figure 1). This reflects a strong specialisation in assembling processes and Mexico being a prime exporter of final goods assembled for the US manufacturing sector. Moving up in the value chain and developing stronger forward linkages would boost productivity and promote more and better remunerated formal jobs.

Figure 1. Mexico’s backward participation in global value chains is high and increasing while forward participation remains low

Note: LAC is an unweighted average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. Backward GVC participation corresponds to the foreign value added which is embodied in a country’s exports as a share of this country’ s total exports.
Source: UNCTAD-Eora Multi-Region Input-Output tables (MRIO) (1990-2017); and estimations (2018-2022).

Ongoing nearshoring trends provide historic opportunities to spread the benefits of integration into GVC to other regions in Mexico (González Pandiella and Maravalle, 2024). Nearshoring also holds the promise to improve supply chain linkages, shifting from low-cost assembling processes to higher value-added functions being carried out in Mexico. Identifying which public policies can help to grasp these opportunities is of upmost relevance at the current juncture, with a new government taking office in September 2024. According to our recent paper (Vidal and González-Pandiella, 2024), the following 5 public policies would help :

1. Keep free trade agreements and maintain low tariffs. Mexico’s current trade policy stance of maintaining wide trade agreements and low trade tariffs is conducive to GVC participation. Seeking new trade agreements, especially in services, and enhancing trade integration with Latin America would also help to increase GVC participation.
2. Improve infrastructure, logistics, and connectivity. This would particularly increase most remoted regions chances to integrate into GVCs.
3. Increase investment in research and development (R&D).  This would boost firms’ local innovation activities and facilitate that higher value-added activities can also take place in Mexico.
4. Improve the rule of law and the business environment.  This is essential for attracting foreign investment and encourage domestic entrepreneurship, as it reduces risks, uncertainties and costs associated with cross-border transactions.
5. Increase female labour participation and enhance educational outcomes. Higher female labour market participation increases the pool of available talent and skills, allowing firms to tap into a more diverse workforce. This diversity can lead to a wider range of perspective and ideas, boosting firms’ innovation and adaptability and their ability to move to more sophisticated sectors and activities. By having a larger workforce equipped with relevant skills, companies can better manage risks associated with labour shortages or disruptions, enhancing the resilience of supply chains.

References:

OECD (2024), OECD Economic Surveys: Mexico 2024, OECD Publishing, Paris, https://doi.org/10.1787/b8d974db-en.

González Pandiella, A. and A. Maravalle (2024), “Harnessing nearshoring opportunities in Mexico by boosting productivity and fighting climate change”, OECD Economics Department Working Papers, No. 1799, OECD Publishing, Paris, https://doi.org/10.1787/0ca7fc0a-en.

Vidal, E. and A. González Pandiella (2024), “A review of Mexico’s participation in global value chains”, OECD Economics Department Working Papers, No. 1802, OECD Publishing, Paris, https://doi.org/10.1787/1ab1e52e-en.