Mexico’s main underexploited opportunities lie in Europe and Asia. Its limited exports to those continents (about 9 percent of its total) are especially surprising because Mexico has signed more free trade agreements than any other country, including accords with the E.U. and Japan. But much of what gets assembled in Mexico contains so much foreign (particularly U.S.) content that it fails to count as Mexican, according to the E.U.’s rules of entry. In general, as a result of its role as an assembler of U.S. products, Mexico enjoys less benefit from its depth than a typical country with its metrics would. According to an analysis by Jaime Serra, who was Mexico’s lead negotiator on the North American Free Trade Agreement (NAFTA), each U.S. dollar of Mexican exports generates only US$1.80 of economic activity in Mexico, versus comparable figures of $2.30 for Brazilian exports and $3.30 for U.S. exports.
Mexico needs to develop more domestic suppliers. That means its policymakers, like those in India, need to improve the country’s domestic business environment. Reducing corruption and improving physical security should be a prominent part of that agenda. Cracking down on monopolies would also help the Mexican economy, and one way to do so is opening the country to more foreign competition.
For Mexican business, too, the agenda is clear. Mexican exporters should invest to capture Asian and European opportunities, raising their game to bridge the greater distances and differences involved. They should not try to take on the world, just focus on winning in a few key markets. And rather than try to sell only on the basis of low costs, they should emphasize upgrading to differentiate their companies from global competitors.
Capitalizing on Connectedness
The examples of the Netherlands, India, and Mexico point the way toward a group of general prescriptions for prosperous engagement.
1. Picture the world to reveal potential gains. Visual images can depict the current flows of trade, capital, information, and people, into and out of each country. They can also show the potential gains from better global connectedness. More than 500 maps depicting how the world looks from the perspectives of nearly 200 countries are available at www.ghemawat.com/maps.
2. Understand what is unique about your country’s situation. Global connections are conditioned heavily by each country’s distinctive cultural, political, geographic, and economic profile. Connectedness strategies must be tailored for each country.
3. Increase depth through domestic and international policies. Every country, even the Netherlands, has much to gain by increasing the depth of its connections. Implement policies that directly support international flows, such as trade facilitation, as well as measures that improve your country’s domestic business environment, such as reducing legal obstacles to starting and running businesses.
4. Analyze breadth to find untapped markets. Some countries focus too much on only a few trading partners, whereas others miss out on nearby opportunities. Don’t treat global connectedness as a zero-sum game; expand your trade rather than just shifting shares from one country to another.
5. Remember the importance of distance. Most countries’ deepest connections will be to other countries within their own regions. In fact, roughly 50 percent of trade, foreign direct investment, and migration take place within regions, and regions with more ties tend to be much more prosperous. This is natural given the extent of cultural, administrative, geographic, and economic commonalities that typically bind regions together.
6. Don’t forget internal connectedness. Large and diverse countries, such as India and Nigeria, can reap substantial gains by weaving their regions together. Even some small, rich countries like Belgium, with its divide between Flanders and Wallonia, have opportunities for greater internal integration.