Mexico and China: Partners or Competitors?

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In a number of Latin American nations, China has challenged the U.S. as a principal trading partner. China is the main export market for both Brazil and Chile and second behind the United States for Argentina, Costa Rica, Cuba, and Peru. If these trends continue, China is likely to displace the European Union as Latin America’s second largest trading partner after the United States. In 2008 alone, China spent an estimated 100 billion USD in Latin America. However, not all countries have benefitted equally, as Mexico and the Caribbean Basin only received a small portion of Chinese trade.

China’s trade ties with Mexico are not nearly as extensive as those China has with other Latin American countries. This situation has become stressful with China now overtaking Mexico in certain U.S. export markets. Many see Mexico and China as competitors, but this is not necessarily true. To Mexico, China should not be viewed as a threat, but rather as a way to seek out more economic opportunities.

Pilot Language Program

Early this year, Mexican authorities started a pilot Chinese language program in the city of Aguascalientes. Rather than starting the Chinese language program in Mexico’s capital, authorities have selected a working class city. So far, the program is only aimed at a total of 126 fourth, fifth, and sixth grade students at Pedro Garcia, a local public school. The authorities plan to continue the program in following years. One of the teachers at the school believes this program represents a larger trend, as it resembles an earlier program designed to teach English to Mexican students. While some fear that this program is the endeavor of an elite academy or the work of the Chinese government trying to spread its influence, neither is the case. Because Pedro Garcia is a pubic school, no tuition is necessary to participate in the program. The Mexican government subsidizes all the materials, such as workbooks with names like Mandarin Hip-Hop.

The program caters mainly to low-income families, and many of the students are the children of factory workers or come from single-parent homes. The hope is that these students will become more competitive in the labor force as the number of Chinese companies based in Mexico rises. Moreover, the program will further prepare workers to engage with incoming Chinese companies themselves, instead of relying on outside translators and third parties. In an effort to maintain their language skills, the students are taught Mandarin in English so that translations switch from English to Chinese, rather than from Spanish to Chinese. This ensures that the students develop a familiarity with both languages and are less dependent on their native Spanish.

Mexico’s Unfriendly Attitudes Towards China

Nevertheless, Mexican xenophobic attitudes towards China date back to the early 20th century when Chinese workers began immigrating to Mexico to build railroads. As noted by Sergio Martinez of the Mexican-Chinese Studies Institute at the National Autonomous University of Mexico, these notions continue to influence Mexico’s restrictive immigration policy directed towards Asians. Moreover, much of Mexico’s economic relationship with China has been concentrated on the sale of Chinese products rather than serious investment. Mexico’s notorious bureaucracy and overall reluctance towards Chinese industries has slowed the expansion of trade relations between the two countries. Many Mexican companies prefer not to compete directly with Chinese products and steps have been taken to limit this as much as possible.
Furthermore, Mexico was the last of the Latin American countries to sign a free-trade agreement with Beijing. Mexico was also the last country in the world to support China’s entry into the World Trade Organization (WTO) because of deep concern over trade and employment issues. There have been a number of charges by Mexico accusing China of “dumping” within the WTO. “Dumping” involves the practice of setting the prices of its products either below the domestic price or the cost of production, making products artificially cheaper than they normally would be. Because both China and Mexico are known for their cheap goods, Mexico is very wary of Chinese goods and prices, especially any that would negatively impact the Mexican economy. Recently, the rapid expansion of Chinese markets across Latin America has caused an influx of Chinese investments in Mexico, usually in traditional targets such as nickel mines, but also in new areas such as car-part factories and electronics.

Chinese Investment Versus American Investment

China’s expanding presence in Latin America is due, in part, to differences between its investment practices and those of the United States. With the United States, investment usually comes with anti-corruption provisions, technology transfer stipulations, management expertise, labor force protections, corporate social responsibility, and hiring at the local level. The U.S. also has traditionally tried to use economic and financial incentives to encourage regional reforms aimed at promoting democracy. Significant U.S. investment creates pressure to enforce labor and environmental protections, promote human rights, and maintain the rule of law.

Chinese investment doesn’t necessarily come with many conditions and extraneous factors. China promises only commercial ties, without any political or policy interference. Because these investments are seen as without a foreign policy agenda, they are generally well received by the host country. Chinese investors generally do not care if the country they are investing in is pro- or anti- United States. They do not push for human rights and worker protection mandates when investing in a country. Their main focus is business, not politics.

Workers’ Strikes in China

Recently, there have been a series of strikes at auto plants in China. Although the Chinese government is usually quick to crush most protests, the government actually took a step back and did nothing when it came to these recent labor disputes. The strikes are seen less as a political threat and more as an economic tool to help restructure China’s export-driven economy to a more self-sustaining one, driven by members of China’s consumer class. China’s economy currently relies mostly on exports because the bulk of its workers lack disposable income to buy various goods. By increasing wages, these workers will have more savings to actively engage in the economy as consumers.

Many consider the demand for higher wages by Chinese workers to be a reflection of a younger, savvier domestic work force that is better organized and has higher expectations. One of China’s main internal problems is its wealth disparity, which increasing wages for many factory workers will help solve. As noted by Liu Shanying, an analyst with the Chinese Academy of Social Sciences’ Institute of Political Science in Beijing, China is trying to promote more equal growth, and allowing workers to have higher wages is part of this plan. Although the government has taken a more relaxed approach towards striking workers, the workers themselves have also facilitated the growth process. They have generally kept their demands limited and haven’t called for the creation of national independent unions, which are banned.

Has China Largely Replaced Mexico?

Since 2003, China has been the chief source of U.S. imports, a position that has been maintained by the artificially low value of China’s currency. China’s trade surplus with the United States is 16.5 billion USD, with 23.4 billion USD in exports and 6.9 billion USD in imports. On the other hand, Mexico’s trade surplus with the U.S. is only 4.8 billion USD, with 16.4 billion USD in exports and 11.6 billion USD in imports. Moreover, while Mexico is the U.S.’ third largest trading partner, the U.S. is Mexico’s largest trading partner. In terms of U.S. imports, Mexico is ranked third, after China and Canada, while in exports, Mexico is second after Canada. The United States is also the largest source of foreign direct investment in Mexico.

Mexico’s foreign trade strategy has mainly been based on NAFTA, which has boosted Mexican exports to the United States. However, this came at the cost of increased dependency on the U.S. Thus, Mexico was heavily impacted by the U.S.-led economic crisis, while China was only slightly affected because it isn’t nearly as dependent on the U.S. economy. In 2009, Mexico’s GDP fell by nearly 7%, while China’s grew by 7.9%.
Because China is less dependent on the United States than Mexico is, its strategy is largely different. China is using its weight as a world economic power to consolidate and diversify its markets. Rather than relying on a stronger foreign economy, China sets out to create its own. Bilateral trade between Mexico and China is mainly in favor of the latter, which sold 32.5 billion USD of goods to Mexico, while only buying 2.2 billion USD in 2009.

Although the numbers seem to show that Mexico is lagging behind China, the reality of the situation is not so clear. U.S. businesses employ twice as many workers in Mexico as they do in China, which provides for more job opportunities for Mexican workers. At the end of 2005, American companies owned 71 billion USD in foreign direct investment in Mexico compared to 17 billion USD in China. Mexican firms also own 8.6 billion USD in foreign direct investment in the U.S., compared to just 0.5 billion USD owned by Chinese firms. There is also more intra-firm trade in U.S.-Mexican trade flows, with 30% of U.S.-Mexican goods traded between affiliates of the same company in 2003, compared to less than 1% in U.S.-China trade flows.

Some economists cite Mexico’s growth in such strategic industries such as textiles and apparel as an artificial phenomenon created by NAFTA. Mexican producers were able to supplant more efficient producers outside of NAFTA because of the tariff-free access to U.S. markets that the agreement allowed. As global quotas on textile and apparel trade have recently changed, Mexico’s artificial advantage diminished. However, overall, Mexico’s competitiveness and industrial output has not declined. Mexico is actually enjoying its strongest comparative advantage in further specialization of products. Employment has been rising in industries such as chemicals, services, electronics, machinery, furniture, and transportation.

Mexico’s Advantages

Mexico has three key advantages over China in terms of their comparative economic relationship with the United States. The first is its geographical location, which allows it to be a key supplier in a supply chain that is dependent on time. Delivery by truck or train through Laredo and other ports in Mexico takes only a couple of days, whereas the delivery of similar shipments from China usually takes around three weeks. This advantage is especially applicable for heavier goods such as machinery and auto parts.

The second factor that gives Mexico an edge is its involvement in NAFTA. Some of the U.S.’s highest trade barriers apply to sectors where China enjoys its strongest comparative advantage. Many of these barriers focus on lower-end, labor-intensive consumer products such as apparel, footwear, toys, and sporting goods. Because of NAFTA, Mexico enjoys tariff-free trade and gains a competitive edge over China.

Mexico’s third advantage in regards to U.S. trade is its maturing democratic system. Although democracy can hardly guarantee a corruption-free government, even the imperfect democracy that Mexico features can be seen as being more stable and transparent than an authoritarian system. Working with Mexico, rather than China, is part of the United States’ pro-democratic campaign.

Mexico’s Next Steps

Taking into account the increasing number of worker strikes in China, and Mexico’s various economic advantages, Mexico needs to refocus its economic strategy to cut down imports of non-essential products and promote a policy that boosts national exports. Mexico should establish a forward-looking and constructive trade relationship with China by setting up joint ventures, especially alliances in business and technology. This would encourage more Chinese investment, rather than relying on the exchange of various products without any solid relationship and hoping that the terms of trade would be in Mexico’s favor. As China’s economy continues to grow, its presence in Latin America is only going to become stronger. Mexico must recognize this fact and seek to establish roots in order to form a durable relationship for the future