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B.C. eyes opportunities in USMCA as part of revamped trade strategy

Despite proximity and free trade agreements, B.C. does little trade with Mexico
A view of the Veracruz city port in Mexico. TC Energy has inked a deal to connect a multibillion-dollar pipeline to the port

Canada and Mexico have been part of a North American free trade agreement for three decades, and the ports of Vancouver and Ensenada are less than 1,300 nautical miles apart – a quarter of the distance between Vancouver and ports in Taiwan, South Korea, Japan and China.

Moreover, Canada and Mexico are connected by a North American network of pipelines and railways.

Yet the amount of trade B.C. does with Mexico is paltry compared to the trade it does with Asia.

In 2021, B.C. exported a mere $107 million worth of commodities to Mexico – much of that pulp and paper products – while it exported $2.9 billion worth of goods and commodities to South Korea, $4.8 billion to Japan and $8.9 billion to China. B.C. imported $2.4 billion worth of goods from Mexico in 2021, with vehicles, electrical equipment and agricultural products topping the list.

“When we first signed onto NAFTA, there was a sense that Canada and B.C. would make headway, grow exports into that marketplace, but we have not had much success in Mexico at all,” said Ken Peacock, chief economist for the Business Council of British Columbia (BCBC). “It is a puzzle that we just, so far, have not made much headway in the Mexican marketplace in terms of B.C. exports.”

But as the U.S. moves to decouple from China and re-shore some of its industries, Mexico is well positioned to become America’s manufacturing branch plant, owing to its proximity to the U.S., its inclusion in the U.S.-Mexico-Canada Agreement (USMCA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and its low-cost but highly skilled workforce.

All of which could mean potential new markets in Mexico for manufacturing inputs, as well as investment opportunities by Canadian companies in Mexican manufacturing.

“The idea of re-shoring, as the Americans look to bring product back to North America, you really can’t do that without Mexico,” said Carlo Dade, director of the Canada West Foundation’s Trade and Investment Centre, and member of the Mexican Council on Foreign Relations.

“Mexico gives you a nice mix of … skilled productive labour in the maquiladoras (manufacturing plants) in the auto sector and other manufacturing that you simply don’t have in the U.S. and Canada. It’s not just cheap labour – it’s productive labour.”

“The U.S. is not part of the CPTPP,” Dade added. “So, if you’ve got supply and production chains in the U.S. and they reach a certain threshold on the goods that you’re making, and you’ve got too much U.S. content, you can’t sell it from Canada using the CPTPP rules. But if you’re getting that content from Mexico, that qualifies for the CPTPP, and it also qualifies for NAFTA. You can essentially double dip with Mexico.”

Mexico is suddenly on B.C.’s trade and investment radar screen. B.C. recently announced a new trade diversification strategy that focuses on developing trade and investment with Vietnam, Taiwan and Canada’s USMCA partner. It also includes opening a new trade and investment office in Mexico.

One area where there has been significant investment in Mexico on Canada’s part is in mining. B.C. mining companies that own and operate silver and gold mines in Mexico include Pan American Silver (TSX, Nasdaq:PAAS), Equinox Gold Corp. (TSX, NYSE-A:EQX), and First Majestic Silver (TSX:FR; NYSE:AG).

Mexico recently took what some Canadian miners consider to be a major step backwards, with mining law reforms that could chase away Canadian investment in Mexico’s mining sector. The new law reduces mining concession terms and would oblige mines to give five per cent of their profits to local communities.

B.C. mining mogul Ross Beaty – who founded Pan American Silver and is chair of Equinox Gold – told The Northern Miner that Mexico’s new laws are “hostile to the industry and uncompetitive with other mining jurisdictions.”

Roberto Velasco Álvarez, chief officer for North America at the Mexican Secretariat of Foreign Affairs, acknowledged the new mining laws are “points of friction” between the two countries. He noted the new law is being challenged in the Mexican courts.

“We certainly understand that there are concerns by some companies,” Alvarez said in an interview with BIV. “Our ministry of the economy is talking with the companies. We’re also working with the Canadian government to make sure that we understand these concerns and that we are able to find mutually agreeable solutions.”

Another area that has seen increased Canadian investment in Mexico is energy. Last year, Canadian midstream company TC Energy (TSX:TRP) inked a deal with a Mexican state power utility to build a $4.5 billion gas pipeline connecting the port of Tuxpan with Coatzacoalcos, and the ports of Veracruz and Dos Bocas in the Gulf of Mexico.

“Last year, for the first time, Canadian companies became the No. 2 largest foreign direct investors in Mexico after the United States,” Alvarez said.

Mexico uses natural gas for power generation and for industry, and is now also developing a liquified natural gas (LNG) export industry. There are eight LNG projects proposed for Mexico, with three in various stages of development or construction. What’s surprising about these developments is that Mexico produces very little natural gas. It imports about 80 per cent of the gas it uses from the Permian Basin in Texas and New Mexico.

Western Canadian natural gas producers operating in B.C.’s Montney formation have already signed offtake deals with American LNG exporters in the U.S. Gulf Coast. Given the pipeline network connecting North America, it’s conceivable that Mexico could also become a buyer of Western Canadian natural gas, although Alvarez said he expects most of the natural gas for Mexico’s LNG exports will continue to come from the U.S.

“But certainly I believe there’s an important space for Canadian companies to play a role … and either to backfill gas in the United States or to connect with this infrastructure,” he said.

Dade said he believes Mexico could become a market for B.C. lumber and other wood products, and the recent acquisition of the Kansas City Railway by Canadian Pacific to create a new North American railway – Canadian Pacific Kansas City (CPKC) (TSX,NYSE:CP) – could help facilitate those kinds of exports. CPKC just recently launched its new Mexico Midwest Express, an intermodal service that is “truck-competitive” between the U.S. Midwest and Mexico.

“We now have one rail line to move goods from Canada down to Mexico,” Dade said. “We’ve always had inter-switching and the ability to move goods fairly well, but now suddenly you’ve got a better rail option. So, Mexico becomes more viable, not just with the re-shoring, but with the physical infrastructure in the one rail link.”

As for the tourism sector, Canadians have long flocked to Mexico for vacation and retirement, and now Mexico is giving back in the form of workers for B.C.’s understaffed hotels.

Earlier this month, the BC Hotel Association inked a “labour mobility” pilot project with the Government of Mexico that will help address worker shortage in B.C.’s hospitality and tourism sectors by placing 100 Mexican workers in accommodations across B.C. 

This article was first published in BIV's print edition. For first access to in-depth print stories and analysis, become a subscriber.

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