Mexico will enhance competitiveness and compete with China only if it defines a comprehensive strategy.
BY CECILIO GARZA-LIMON
China continues to be an enigma for Mexico. This sense of detachment, both at government and private sector levels, is an issue that Mexico must address urgently.
Today there is a mixture of fear and attraction toward China in Mexico. Attraction is motivated by superficial analyses that lead Mexicans to believe that business ties with China can be built rapidly and easily, without much preparation. Similarly, fear derives in great part from ignorance and lack of preparation.
The recent evolution of economic relations between Mexico and China brings considerable new challenges for Mexico. Mexico’s foreign trade has been its major engine of growth since the end of the 1980s, but this edge has been eroding, to a certain extent, as a result of China’s active integration into the world markets. The competition of Chinese products, in Mexico, the United States and other major markets, is an issue that affects Mexican development prospects.
Two major factors explain why Mexico is not making progress in dealing with the economic challenges presented by the People’s Republic of China:
• The lack of a Mexican government policy toward Asia, especially China
• The protectionist pressure exerted by Mexico’s private sector
Mexico’s main economic sectors, academia and government have not defined a coherent policy towards Asia. Consider the government: The Ministry of Foreign Affairs doesn’t even really distinguish among Asia’s various regions. The government devotes to Asia the remnants of its North American, Latin American and European policies and attention. For Asia, most everything is done on a haphazard basis, without planning and with a limited team of specialists.
In the early 1990s, when NAFTA was being negotiated, the Mexican negotiation team inadvertently placed Mexico within an economic strategy which was more Asian in nature than American. Mexico embarked in consolidating an export platform that ultimately assigned more importance to geographic advantage than to productivity. This put Mexican exports in a direct collision route with those that would be more effectively produced by the Chinese economy.
In 1994, few analysts understood the dire competition within NAFTA that would come from Chinese companies. Of course, the issue is not related to having opened Mexico’s borders to trade, but rather to failing to plan and foresee what it would mean to enter global competition without a broader strategy beyond North America.
At the onset of NAFTA, Mexico became an economy similar to China at the time: a kind of convenient platform for quick business returns. The Chinese realized this and they planned and acted in consequence, while Mexico continued opening its economy through an array of free trade agreements, but looking mainly toward the north.
There are more than twenty strategic studies centers on Mexico in China. By contrast, in Mexico there is not one single relevant economic or strategic studies center on China that focuses on business issues, despite the fact that this country has become a real obsession for us.
China’s capacity to focus is amply evident. When I presented my credentials as Mexican Ambassador to China, President Jiang Zemín surprised me by telling me about his long stay in Mexico at the beginning of the 1980s. Neither our Embassy nor the Mexican Ministry of Foreign Affairs knew anything about this. As a prominent engineer, he was commissioned to analyze the border situation with the United States, between Ciudad Juárez and Tijuana, due to the unique similarities in asymmetries between countries with such different levels of development and the parallel between southern China and British Hong Kong. This analysis would later allow him to be in charge of building the new city of Shenzhen, which took into account the experience faced by the maquila cities of the northern border of Mexico.
Another example is the creation of the Chinese One Shop Stop program, born as a consequence of NAFTA. China sent specialists to Mexico during several years to analyze the foreign firms that invested in Mexico. With discipline and patience the Chinese became involved in their daily problems, from tax, labor and supply-chain issues, to the industrial park problems, duties and costs not being recognized or solved by Mexican authorities. With this One Stop Shop program the Chinese not only learned what they should not do but they became more connected to the perceptions and mentality of foreign investors.
Today we can attest to the success of their program: more than 300 "maquilas" have left Mexico over the past few years, many of these moving to China. That is not only because the One Stop Shop program convinced them China would be a better investment, but because the Chinese also made the necessary reforms which Mexico has not yet been able to accomplish. Raúl Rodríguez expands on this issue in the following section.
China now actively participates and competes strongly in Mexico’s domestic market. The performance of Chinese exports to Mexico has been very successful, with an annual average growth rate of 37 percent during the past ten years. Since 2003, China has become the second largest source of imports entering Mexico, after the United States, representing almost 6 percent of total imports. Today, Mexico faces a $14 billion deficit, the largest in our foreign trade, and the ratio of imports from China to exports to that country reached 31 to 1 in 2004.
In addition to domestic competition, it is important to note that since 2003, China has displaced Mexico as the second largest trading partner of the United States, and that both China and Mexico compete in similar sectors, as ECLAC and the IDB have amply explored.
Another element of inconsistency in our bilateral relations with China is that the government of Mexico became a hostage of the Mexican private sector in its negotiations with China. Beginning in 1995, when the flow of Chinese products in Mexico became more obvious, the Mexican industrial chambers began to put pressure on the government to penalize imports from China. The Ministry of Commerce imposed compensatory fees on more than 6,000 dutiable Chinese items, many of them not even produced in Mexico and therefore not threats. Other Chinese imports had surcharges of up to 1000 percent.
These measures were to no avail. While most remain in place, Mexico is importing Chinese items at increasing rates, to a considerable extent by the way of contraband.
Later, in 2000, another situation would further strain the traditionally good political relations between both governments. After 13 years, China was reaching the final stage of its negotiations to enter the WTO and the Mexican government, again under pressure from its industrial chambers, was the most determined to impede its access until Mexico got better concessions than those obtained by the United States, Japan and the European Union. This confrontation with China because of domestic issues has resulted in noticeable damage, because, among Latin American countries, Mexico had been held in high esteem by China.
Ultimately, in this WTO negotiation, Mexico obtained a longer period to maintain quotas and duties against Chinese exports of toys, textiles, clothing, shoes, electronics and other items, with the idea of restructuring the national industry and in 2008 facing the lifting of compensatory duties imposed starting in 1995. Unfortunately, no substantial restructuring has taken place.
Mexico needs to understand that export orientation is not sufficient for growth and development, particularly when based on a relatively cheap labor force. In the early 1990s, that condition allowed Mexico to integrate into the U.S. market through NAFTA. Currently, however, several Asian economies (including China) offer a cheaper labor force, but also long-term strategies and a variety of incentives for investors.
Mexico will enhance competitiveness and compete with China only if it defines a comprehensive strategy. But before, Mexico has to redefine its public policies related to:
• Fiscal policy
• Industrial design
• Research and development
In addition to accomplishing these reforms, Mexico should actively pursue cooperation opportunities with China in value added chains such as textiles and electronics, and explore the creation of synergies and joint strategies with regard to North America and the Caribbean area. This will be critical to Mexico’s future.
Cecilio Garza-Limón is CEO of Mexico-based international consultancy RMI and a former Mexican Ambassador to China. This column is an an excerpt of a report from the China-Latin America Task Force of the Center for Hemispheric Policy at the University of Miami. Republished with permission.