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China & Mexico: Fair Competition?

New regulations give Mexico a chance to dispute unfair prices of  Chinese imports.

Inter-American Dialogue 

In a long-anticipated move, Mexico was scheduled to remove numerous trade barriers with China [on December 11, 2011], in compliance with its WTO obligations. The action will lead to Chinese imports of apparel and other goods competing directly with locally made products in Mexico. How big of an economic impact will the end of the trade barriers have on Mexico? Which Mexican industries will be most affected? Is China competing fairly with Mexico on trade?  

Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México and professor at the University of Nottingham Business School: The United States has been Mexico's largest trading partner for a long time. In 2010, Mexico exported $298 billion worth of goods. Of that, 74 percent went to the United States. Mexico imported $301 billion in 2010. The U.S. share was 61 percent. Imports from China represented nearly 7 percent of the total during the same period, while imports from South Korea accounted for nearly 6 percent. Mexico has been the world champion of free-trade agreements, having accords with nearly 50 countries. Yet, Mexico's trade does not have much to show for such agreements. On the other hand, China has no free trade agreements with any country. Yet, it has managed to export to over 150 countries. Its exports to Mexico are almost eight times as large. China, as evidenced by its investments in Mexico, is interested in a few specific areas: telecommunications, mining, computers, textile and port management. With the new tariff-free regime [...], China will be able to export much more freely to Mexico. For every raid on illegal goods in Mexico City and elsewhere, Chinese shoes, clothing, toys and other products turn up with extreme regularity. Now all of that can be done legally. Mexico has long complained that Mexican exports to China have been unfairly targeted. Now they can be tested under the WTO. Mexico expects Chinese imports to rise by 20 percent in the short run and up to 100 percent in the long run.

Christopher Wilson, program associate at the Woodrow Wilson Center's Mexico Institute: Since joining the WTO, China's share of Mexican imports rose from 2 percent in 2001 to 15 percent in September 2011. Expect this trend to continue when Mexico's tariffs on 204 products drop to most-favored-nation rates this month, making Chinese imports of those goods significantly cheaper. The vast majority of affected products are consumer goods like clothing, shoes and toys. For these, consumers are likely to benefit from lower prices while manufacturers are challenged to either increase productivity or go out of business. There is little doubt that Mexico's footwear industry, in particular, will be significantly weakened. A few of the affected products are intermediate goods, such as chemicals, fabrics and mechanical parts. Reducing tariffs on these goods will challenge their domestic producers, but should also decrease costs for manufacturers using them as inputs. Although Chinese exports probably benefit from a certain degree of artificial and unfair advantage, Chinese manufacturers of goods like garments and shoes also tend to out-compete their Mexican counterparts. Mexico must take measures to increase productivity, shift to higher-skill industries and engage, rather than shy away from, the rising Asian economies. Finally, the lower tariffs may also have a positive side effect, working as a disincentive to the tariff-evading techniques, such as incorrectly classifying goods or sending them through third countries, that are used by some Chinese exporters.

Rhys Jenkins, professor of development economics at the University of East Anglia: One should not exaggerate the overall impact of the ending of Mexico's compensatory quotas on the economy, although they are obviously a concern to specific industries. Judging from the complaints emanating from Mexico, the measures have been less than totally effective in restricting Chinese imports. China is accused of evading restrictions by misclassifying products and by diverting exports through third countries, such as Malaysia, whose products are not restricted in the same way. Contraband is also a problem. This is likely to mean that the removal of the compensatory quotas will have less of an impact on Mexican producers than is often claimed. Nor does the ending of the quotas mean that Mexico will not be able to apply other measures, within WTO rules on anti-dumping and safeguards, to restrict imports from China if these are thought to be selling at below cost or risk disrupting the market. The fact that Mexico, unlike a number of other Latin American countries, has not recognized China as a market economy in WTO terms also makes it somewhat easier to establish the grounds for anti-dumping measures. The sector which is most likely to be affected by the removal of restrictions is the footwear industry. Other cases where restrictions are to be removed are in textiles and clothing, bicycles, toys, tools and some electrical products. Mexican producers in these industries have had ten years to prepare to face Chinese competition and if they are not ready now, it is unlikely that they ever will be.

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

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