Serving From Hermosillo: Opportunities in Cross-Border Trade of Services

Abstract

Technological advances have increased the general tradability of services, leading international trade in services to outpace trade in goods, especially after the global financial crisis and the COVID-19 pandemic. Services once considered less tradable due to the necessity of physical proximity between consumer and provider are now increasingly digitized and delivered remotely. Cross-border services now represent 79% of all internationally traded services, and digitally deliverable activities like engineering, accounting, database and other information services are experiencing yearly U.S. imports growth rates over 15%. This report analyzes how Mexico has been capitalizing on some of these trends over the past five years using the most granular data available. Then, we analyze opportunities from the perspective of Hermosillo. Hermosillo is poised to benefit from this global expansion due to its comparative advantages and existing productive capabilities in potentially tradeable services. We estimate the revealed comparative advantage of Hermosillo in each tradeable service category and find that the city is better positioned than similarly rich and complex cities in Mexico to take advantage of several of these opportunities. This is because Hermosillo is currently intensive in these opportunities, and also because Hermosillo has other industries that are similar to the opportunities in terms of their occupational structure (which could potentially supply additional labor in case tradeable service industries were to expand rapidly). Moreover, Hermosillo’s wage differentials compared to the U.S. are significant for most industries and occupations, including all tradable service industries and teleworkable occupations. This provides a cost advantage for foreign firms seeking to outsource part of their operations. Hermosillo also boasts a well-educated workforce with high levels of schooling and a strong emphasis on STEM fields, positioning it well to meet a potential expansion in educated labor demand. Some tradable services represent bigger opportunities for Hermosillo, but the city will need to develop new capabilities in cross-border service provision in order to take advantage of them. In particular, engineering services, database and other information services, business and management consulting, research and development, education, and accounting services require attention and further research to inform effective strategies. To realize these opportunities, local firms may need to overcome sector-specific challenges related to internationalization. Policymakers can play a pivotal role by fostering strategic partnerships, attracting multinational service providers to bring in knowhow, and creating supportive enabling environments for teleworking and digital service provision.