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Mexico-China Outlook

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What is the outlook for Mexico's economic ties with China following President Calderon's first visit there?

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

Mexican President Felipe Calderon [travelled to China last] week...What is the outlook for economic and trade ties between the two countries? Are Mexico and China more rivals than partners?

Francisco Gonzalez, Riordan Roett Assistant Professor of Latin American Studies at Johns Hopkins University's School of Advanced International Studies: Mexico has lost considerable ground to China's impressive export machine. But Mexico also possesses a unique comparative advantage over China, which is proximity to the US. Proximity is President Calderon's trump card when he visits China. While it makes perfect sense to produce lightweight goods such as apparel, toys, and most household goods in the lowest-cost economy—regardless of its geographic location—the most cost-effective and efficient way to export heavy goods such as cars, airplanes, electronics, hardware, and, crucially, goods and services whose timely delivery is key for good business outcomes is proximity to market. The best way for Mexico to benefit from China's exporting power is by offering joint ventures and partnerships with Chinese public and private firms. Chinese partners would gain the advantage of location, which would help China's next generation of exports as the country moves up the production ladder. In turn, Mexican partners would gain access to capital and, very importantly, to Asian business know-how, given how strongly integrated China's firms are (as the assemblers of finished products—not unlike Mexico—whose inputs come from Japan, South Korea, and many southeast Asia countries). It is high time for Mexico to enhance its diplomatic and economic presence in the Asia-Pacific region, the strongest source of global growth in the next generation.

Alejandro Schtulmann, Head of Research at Emerging Markets Political Risk Analysis (EMPRA) in Mexico: President Calderon's visit to China signals a long overdue change in Mexico's relations with the Asian giant after a careless approach toward Beijing in the past. Unlike other emerging and industrialized countries, Mexico persistently ignored the rising influence of China in the global economy. Over the last decade, successive administrations did little to develop Sino-Mexican relations—not only regarding matters of trade, but also at the political level. A breakthrough took place in December 2007, when the Mexican government was forced to renegotiate a series of compensatory quotas with Beijing to avoid going through WTO procedures, which would have had a detrimental outcome for Mexico. Despite competing in a large number of sectors, Mexico and China have infinite possibilities for complementary exports, and both countries will greatly benefit from expanding their trade and investment relations. For Beijing, increasing its economic presence in Mexico is key to improving the country's access to the US through NAFTA. In the case of Mexico, it is expected that a series of agreements (...) signed during Calderon's visit will result in increased investment from the Asian nation. However, increasing Mexican exports to China will not be an easy task. The country has long lacked active economic diplomacy to help its national companies open markets and find new export opportunities.

Ana Leroy, Director of Latin America Trade Services at White & Case LLP: President Calderon's trip to China signals a positive change in Mexican foreign policy toward the Asian giant. The decision to foster trade and economic ties with China reflects a long-term objective to change Mexico's perception of China as its largest competitor and instead establish 'a strategic partnership.' Seeking closer ties with China will be more fruitful than blaming the Asian country for Mexico's problems and competitiveness losses. Although increased global competition, mainly from China, has contributed to the decline of several Mexican industries (including the maquiladora, apparel, and textile industries), other factors, such as adequate government policies, lack of investment in more value-added services, and competition in the domestic market from illegal imports, have also contributed to the decline of these industries. A successful strategy to deepen ties with China will depend on Mexico's ability to transform its current perception of the Asian country and to learn from China's economic success in many areas where Mexico still lags behind. Mexico's soaring trade deficit with China—$27.9 billion in 2007—will be difficult to reverse in the short term, but Mexico is already taking steps to improve trade relations with China. The Mexico-China Transitional Agreement on Antidumping Duties, concluded in June 2008, became Mexico's first attempt to deal with Mexican anti-dumping measures against China and address a long-standing trade irritant. The conclusion of this agreement is noteworthy because it sets the stage for a new trade partnership between Mexico and China prior to President Calderon's trip to China.

Tapen Sinha, ING Comercial America Chair and Professor of Risk Management at Instituto Tecnologico Autonomo de Mexico: Calderon visited China for the first time in his presidency. He went to India last year. For international investors, Mexico has been a better bet than either China or India, despite their spectacular growth in the past five years. For American consumer durable markets, Mexico and China have been seen to be rivals. After all, both General Motors and Ford have been successful in reducing wage rates in their auto plants in Mexico with a credible threat of moving to China. There are more opportunities than rivalries between the two countries. For example, if bilateral trade agreements are strengthened between China and Mexico, it is possible to integrate vehicle production processes between China, Mexico, Canada, and the US. For example, very labor-intensive parts of the process could take place in China, more natural resource-intensive processes could take place in Canada, and the intermediate just-in-time processes could take place in Mexico, with the ultimate delivery to American consumers. This could be an opportunity for both Mexico and China. On the oil front, direct cooperation between China and Mexico can be of mutual benefit. China is already involved in deepwater oil exploration on behalf of Cuba. A similar agreement can be reached between Mexico and China. This could help reduce the perception that Pemex is selling out to American interests.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

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