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Lessons from North American Cross-Border Development: The Tijuana-San Diego Region

Tijuana-San Diego mega region is a highly successful cross-border metropolis, boasting a GDP of US$230 billion and a population of five million (40% of that of the entire US-Mexico border region). The rapid growth in economic integration between the US and Mexico over the past 50 years means that the region now hosts the busiest land border crossing in the Western Hemisphere, with some 120,000 passenger vehicles, 63,000 pedestrians and 6,000 trucks crossing back and forth every single day [1]. It therefore provides an extremely useful reference point for the development of the Guangdong-Hong Kong-Macao (GHKM) Greater Bay Area.

Picture: The Tijuana-San Diego Mega Region
Picture: The Tijuana-San Diego Mega Region

The mega region forms an integral part of the North American supply chain. With the Sino-US trade dispute still lingering on and the recent US-Mexico-Canada Agreement (USMCA, nicknamed “NAFTA 2.0”) having been signed, this makes the region (especially the Mexican part of it) highly attractive to international manufacturers and investors. This attraction is heightened by the proliferation of complementary economic activities and cross-border public, private and non-profit organisations in the region, not to mention the generous incentives contained in the new Mexican president’s ambitious border economic plan.

The Success of Maquiladoras

Mexico shares a long border with the US, covering more than 3,000km, which presents plenty of opportunities for ever-increasing cross-border economic integration. Baja California – the only Mexican state that has a border with California in the US – has become the most competitive industrial destination in Mexico, attracting more than 900 foreign manufacturing companies to settle in the state under the country’s IMMEX programme.

The IMMEX programme, launched in 2006, is designed to encourage foreign manufacturers to set up wholly-owned subsidiaries in Mexico that operate what are known as maquiladoras. These are factories that import raw materials or components under duty-free arrangements and process them for re-export. Mexico has been developing this sector of the economy since 1965, especially for manufacturers targeting the US market, and it was significantly boosted by the signing of the original North American Free Trade Agreement (NAFTA) in 1994.

The programme allows companies to import equipment, machinery, raw materials and semi-finished goods into Mexico duty-free, perform value-added operations to them, and export the goods back abroad, and, if desired, sell a percentage of the finished goods in Mexico. The equipment and machinery may be held in Mexico on a bail-out basis for as long as the programme is in effect, after which it has to be re-exported or sold for its then-current value.

Foreign companies operating under the IMMEX programme also benefit from less complex business rules, a lower income tax rate and access to lower-paid Mexican labour. The relationship between the foreign parent and the Mexican subsidiary must be clearly set out in the Maquila agreement, which must be filed with the government and approved by the Mexican Secretary of Economy. An IMMEX company may sub-contract parts of its operation to other IMMEX companies in Mexico, which helps to broaden its manufacturing base.

Picture: Manufacturing Operations in Mexico
Picture: Manufacturing Operations in Mexico

The new Mexican President Andrés Manuel López Obrador (widely known by his initials AMLO), who took office on 1 December 2018, has promised to introduce an ambitious border economic plan, which includes lowering value-added tax (VAT) from 16% to 8%, reducing income tax from 30% to 20%, and cutting the Special Tax on Services and Production (IEPS) to lower the price of the gasoline, diesel, and electricity in border cities. That would cover any cities located within 100km of the US-Mexico border, rather than 20km as before.

These measures are likely to encourage new investment in manufacturing, not only from local companies based in central and southern Mexico, but also from foreign companies focusing on the North American market. This is especially the case given the continuing Sino-US trade dispute and the signing of USMCA, which includes more stringent value content rules on which imported products qualify for duty-free treatment.

Strategic Location

Successful export-processing and manufacturing businesses need more than just low production costs. Another important factor is their access to both the market for their products and the source of their production inputs – raw materials, or parts and components.

Tijuana – the largest city in Baja California – has an advantage over other border Mexican cities in this regard. Located in the country’s north-western corner, on its Pacific coast and immediately across the border from the US, it is closer to and has better connections with Asian manufacturers and investors than its counterparts do.

Picture: Home to the City of Tijuana, Baja California is the closest Mexican State to Asia.
Home to the City of Tijuana, Baja California is the closest Mexican State to Asia.
Source: Invest in Baja
Picture: Home to the City of Tijuana, Baja California is the closest Mexican State to Asia.
Home to the City of Tijuana, Baja California is the closest Mexican State to Asia.
Source: Invest in Baja
Picture: Tijuana is accessible to both Mexican and US seaport ports by sea, air and land (road and r
Tijuana is accessible to both Mexican and US seaports by sea, air and land (road and rail) tranport.
Source: Invest in Baja
Picture: Tijuana is accessible to both Mexican and US seaport ports by sea, air and land (road and r
Tijuana is accessible to both Mexican and US seaports by sea, air and land (road and rail) tranport.
Source: Invest in Baja

Tijuana is Mexico’s leading manufacturer of exports and home to the nation’s largest electronics production cluster [2]. It has the largest number of land border crossings between Mexico and the US, including the busiest border crossing in the Western Hemisphere, San Ysidro Port of Entry. But it is also just 110km away from Ensenada – one of Mexico’s busiest seaports, which handles more than 2 billion tons of cargo [3] annually and is well connected to more than 60 seaports in nearly 30 countries, including China, Japan, New Zealand and Spain.

Ensenada has done well in recent years despite its proximity to the US Port of San Diego, and the largest, busiest maritime gateway in North America for Asian cargo, the adjoining ports of Los Angeles and Long Beach. Exporters who used to ship their goods from Tijuana via the US west coast ports are increasingly turning to Ensenada, because of the mounting congestion and delay at the American ports, the increasingly competitive ocean rates, and the improving road and rail connections to the north and east via Union Pacific Railroad and BNSF Railway.

Hutchison Ports (HP), a subsidiary of Hong Kong-listed CK Hutchison Holdings, is investing extensively in Mexican seaports. It runs services from five major seaports on both the Pacific and Gulf coasts, Veracruz, Manzanillo, Ensenada, Lazaro Cardenas and Tula. Through its maritime container terminals, HP, which handles about one-third of all containers coming in and out of Mexico every year, is trying to make shipping between Asia and Mexico more accessible and reliable.

Picture: Hutchison Ports (HP), a subsidiary of Hong Kong-listed CK Hutchison Holdings
Hutchison Ports (HP), a subsidiary of Hong Kong-listed CK Hutchison Holdings, is operating five commercial seaports in Mexico, handling about one-third of the containers coming in and out of the country.
Source: Hutchison Ports
Picture: Hutchison Ports (HP), a subsidiary of Hong Kong-listed CK Hutchison Holdings
Hutchison Ports (HP), a subsidiary of Hong Kong-listed CK Hutchison Holdings, is operating five commercial seaports in Mexico, handling about one-third of the containers coming in and out of the country.
Source: Hutchison Ports

Tijuana, meanwhile, has expanded its air transport connections with Mexico’s interior and with mainland China, with direct flights to Shanghai and Beijing already in operation. Businesses are becoming increasingly interested in delivering directly to Tijuana International Airport (TIJ), rather than flying into Los Angeles International Airport (LAX), and then taking the goods by truck into and out of Mexico.

Looking to turn Tijuana into an air hub especially for perishables and agricultural products to Asia, the city’s former mayor Carlos Bustamante recently launched a 24-hour air cargo and logistics park, Matrix Terminal, with a customs inspection area and a bonded distribution centre next to TIJ. Federal Express (FedEx) is already flying daily to and from Matrix Terminal, while other global freight forwarding companies such as DHL and UPS and Asian airlines are reported to be close to reaching co-operation agreements. The Mexican low-cost airline Volaris opened an airplane maintenance facility there in 2015.

Photo: FedEx is flying daily to and from Matrix Terminal in Tijuana.
FedEx is flying daily to and from Matrix Terminal in Tijuana.
Photo: FedEx is flying daily to and from Matrix Terminal in Tijuana.
FedEx is flying daily to and from Matrix Terminal in Tijuana.

Tijuana also benefits from the concentration of industrial parks and zones in the city. It is home to 65 of the 100 such parks and zones in Baja California. This lends great support to the city’s mature manufacturing business ecosystem and has strengthened its status as Mexico’s top aerospace and defence cluster, not to mention the leading centre for the production of medical devices in North America. These industrial parks and zones are rapidly attracting interest from foreign manufacturers looking for new production bases to optimise their supply chain worldwide.

Location
No. of Industrial Parks and Zones
Tijuana
65 Industrial Parks
Mexicali
25 Industrial Parks
Ensenada
4 Industrial Zones
1 Industrial Park
Tecate
3 Industrial Parks
Rosarito
2 Industrial Parks

Source: Invest in Baja

New rules about which products qualify for duty-free status under USMCA come into force in 2020. They require products to have higher levels of North American Content (Regional Value Content) and limit the use of foreign components. This is expected to trigger a recalibration of the North America supply chain, which may make Tijuana even more attractive as a manufacturing hub. Foreign manufacturers are expected to open up new operations or increase their production in Tijuana so that their goods remain eligible to enter the North American market duty-free.

Meanwhile, with Mexico looking to tilt its economy towards the Pacific, many Mexican manufacturers are increasing their links with Asia. The country has joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Pacific Alliance with Colombia, Peru and Chile, important signals that Mexico is determined to further open its doors to trade with Asia.

Mexico is Hong Kong’s largest trading partner in Latin America – the leading destination in the region for its exports and the second most important source of its imports. That position is likely to be strengthened as Hong Kong and mainland Chinese companies search for Mexican partners so that they can tap into the North American market, while Mexican exporters look to make further inroads into the burgeoning Asian market.

Lessons for the Guangdong-Hong Kong-Macao Greater Bay Area

Unlike the GHKM Greater Bay Area, the economic integration in the Tijuana-San Diego region involves two sovereign states – Mexico and the US. Policy co-ordination therefore needs to go beyond economic and social considerations and usually includes complex political and diplomatic issues. In terms of the GHKM Greater Bay Area’s future development, there are a number of lessons that can be learned from the approach to cross-jurisdictional co-ordination adopted by its North American counterpart.

An example of this was the recent tightening of US immigration policy which resulted in a humanitarian crisis in Tijuana.  Thousands of Central American migrants who had travelled in caravans to try to enter the US ended up in makeshift camps in the city and at the US-Mexico border. This placed a considerable stress on Mexico’s social system – a burden that the country was unprepared for. The US’s tougher immigration stance means Mexico is increasingly becoming a destination for migrants rather than a throughway, which puts pressure on the country’s relations with Central American countries.

This makes it clear that it is very important for the GHKM Greater Bay Area to co-ordinate policy and communication in a comprehensive way between the governments of the Hong Kong and Macau Special Administrative Regions, the Chinese mainland authorities involved, and participating non-governmental, non-profit organisations.

Given the differences in levels of social infrastructure and economic development among the 11 cities in the GHKM Greater Bay Area, policies implemented unilaterally can cause social and economic problems unless they are properly planned and communicated well in advance. By avoiding policy clashes – such as the US tightening immigration policy while Mexico launches an ambitious border economic plan – social tension and economic concerns among foreign businesses can be warded off.

The Tijuana-San Diego region’s intermodal transport network development and the resulting diversion of cargo traffic from US West Coast seaports and airports to Tijuana, reveals another important lesson. It shows how crucial co-ordination between planning agencies in the GHKM Greater Bay Area is, if unhelpful competition, overinvestment and idle capacity are to be avoided.

The region is, however, a good pointer to how border crossings and customs clearance can become as frictionless as possible. When it comes to seamless border crossing, for example, the Cross Border Xpress (CBX) – a 390ft enclosed pedestrian bridge for TIJ passengers which opened for business in December 2015 – has reduced the journey between San Diego and the airport to a five-minute walk. People in San Diego now have easy access to more than 30 destinations within Mexico that planes from TIJ fly to, many of which are not currently served by southern California airports. The success of the CBX is proof of how cross-border collaboration can add value to all stakeholders and allow people and trade to move more easily and profitably.

Cross-jurisdiction coordination should not just be limited to hardware. To make crossing the border back and forth between Baja California and San Diego more hassle-free, for instance, Trusted Traveller Program cards (e.g. NEXUS, SENTRI, Global Entry and FAST) and Enhanced Driver's Licences (EDLs) are now accepted as valid identification documents in addition to passports.

Despite the strides forward that have been taken in lessening the friction at the border between the two parts of the San Diego-Tijuana region, work to reduce it still further continues. Advocates for more efficient border crossings and programmes – organisations like Smart Border Coalition that brings together leading governmental, academic, business and civic communities from both countries – are pushing for improvements on the issues of border waiting times, access to roads and cargo pre-clearance.


[1] Smart Border Coalition

[2] Tijuana has more than 120 companies dedicated to the assembly, production and manufacture of electronic devices, from printed circuit boards, cell phones and headphones, to components for aerospace, medical device and automotive manufacturing.

[3] Roughly 65% of the goods flowing through the port are from or heading to Tijuana.

Content provided by Picture: Louis Chan
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