28 sept. 2012

The Limits of a Brazilian-Mexican Partnership

Mexican President-elect Enrique Pena Nieto arrived in Brazil this week amid an outpouring of media optimism about the possibility of a robust partnership forming between Latin America's two largest economies. Cooperation was also the theme of Thursday's discussions between Pena Nieto and Brazilian President Dilma Rousseff -- especially in their talks concerning energy and auto sales. But despite myriad similarities between Mexico and Brazil, stark differences and conflicting interests will ensure that the countries remain primarily competitors.
Given Mexico's impressive trajectory in recent years, as well as expectations that the Pena Nieto administration will implement key economic reforms, it's not a stretch to view the two countries as equals. Indeed, a recent study by Numora, a Japanese financial consulting firm, suggested that Mexico's economy could rival Brazil's by 2022. Brazil's gross domestic product would have to shrink substantially for Mexico to catch up at its current growth rates, but the statement is still emblematic of the rising enthusiasm financial professionals have for Mexico.Certainly, there is plenty to be excited about when it comes to Mexico.
Its gross domestic product was $1.2 trillion in 2011 and is expected to grow by 4 percent in 2012. The country boasts a friendly investment climate marked by stable foreign direct investment. With international markets still stumbling from the global financial crisis, and considering Europe's stagnation, Mexico's performance makes the country a notable exception to the slowed global outlook for industrialized nations.
For Brazil, which until recently had been a darling of investors, growth could slow somewhat in the next few years. The country's rapid recovery after the 2008 financial crisis largely stemmed from increased mineral and soy exports to China that compensated for declining value-added exports to the United States and Europe. However, uncertainty about China's ability to continue importing high levels of commodities could force Brazil to focus more on its manufacturing sector, which has been struggling to compete in international markets due in part to the strength of the Brazilian real, as well as the country's strong protectionist trade policies.
Unlike Mexico's export-driven growth model, however, Brazil relies relatively little on international trade. Roughly 10 percent of its $2.5 trillion annual economy comes from exports -- a dynamic that stems in large part from the slow but substantial development of Brazil's internal economy.
Competition Inevitable
Still, despite its comparatively small export sector, Brazil is a natural competitor for Mexico. On a broad scale, the two countries vie regularly for market share in the northern hemisphere. On a more granular level, they export very similar products, including automobiles and small electronics.
For example,Taiwanese tech giant Foxconn recently announced plans to build five facilities in Brazil for the assembly of tablet computers. Much of the high expectations for Mexico rely on the assumption that rising labor costs in China will encourage assembly plants such as Foxconn's to move elsewhere. Boasting direct, tariff-free access to the U.S. market, Mexico would appear to be a uniquely attractive destination. Still, Mexico will have to compete with countries like Brazil to attract investors. This reality will force the Pena Nieto administration to tackle key issues such as labor and corporate tax reform immediately after taking office.
The limits of cooperation between Mexico and Brazil emerge particularly in the energy sector. Brazil's wildly successful state-owned energy firm Petroleo Brasiliero could theoretically be willing to share expertise with Mexico's ailing Petroleos Mexicanos in a joint venture. But at this point, it seems unlikely that serious bilateral energy cooperation with Mexico would be in Brazil's interest. Without serious institutional reform, Pemex will continue to suffer from corruption, underinvestment and a chronically poor regulatory structure. Moreover, Brazil needs to devote the bulk of its resources to the development of its own oil and natural gas reserves. Energy cooperation between the two countries is possible but would be too limited to cure Mexico's oil woes.
There are also larger, inescapable geopolitical realities dividing the two countries. The western hemisphere is dominated politically, militarily and economically by the United States. From a geopolitical perspective, however, Latin America is not a unified region, and Washington is primarily concerned with the Caribbean basin. Everything south of the Amazon, from Brazil and Ecuador to the tip of Tierra del Fuego, might as well be a world away from the United States.
So while Brazil is certainly interested in cultivating ties with the United States, Mexico has a far greater share of Washington's attention. Mexico is -- and will continue to be -- geopolitically tied primarily to the United States. From its position of relative independence in South America, Brazil's immediate geopolitical concerns involve members of the Mercosur customs union, especially Argentina. In other words, Mexico and Brazil occupy very different corners of the globe. For the time being, their aspirations for a significant geopolitical partnership will remain rhetorical.