Can China profit from Trump’s hostility to Mexico? It’s complicated

Ready and waiting.
Ready and waiting.
Image: Henry Romero/Reuters
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The arrivals area of Mexico City’s airport, decked out with advertising for Huawei phones and services, might suggest to a visitor that Mexico, like other parts of Latin America, is one of China’s new economic and political expansion grounds. Mexican President Enrique Peña Nieto’s arrival in China Monday (Sept. 4) for a three-day visit to boost trade ties will strengthen that impression.

The reality? It’s far more complicated.

China’s president Xi Jinping has announced plans for US$500 billion in trade and US$250 billion in direct investment for the Latin American and Caribbean region for 2015-2019 (see link above), but bringing Mexico firmly into that plan is proving arduous. That’s largely thanks to the much-maligned North America Free Trade Agreement (NAFTA), which US president Donald Trump has been raging against since his campaign, most recently calling it “the horrible, terrible NAFTA deal.”

“It has become fashionable to say that since the new American administration has been alienating Mexico, Mexico needs to diversify and that China will fill that void, but Mexico is still part of NAFTA and this involves some difficulties in regard to China,” says Enrique Dussel Peters, coordinator of the China/Mexico Studies Center at the National Autonomous University of Mexico. First among these are the “rules of origin” regulations. In the car industry, for example, which accounts for 40% of Mexico’s imports to the US, vehicles need to have 62.5% (pdf, p. 2) of their components originating in NAFTA countries in order to be tariff-free (paywall).

A vendor waits for customers during the Expo China Homelife Show, a platform for leading Chinese companies seeking to do business in Mexico, in Mexico City in June.
A vendor waits for customers during the Expo China Homelife Show, a platform for leading Chinese companies seeking to do business in Mexico, in Mexico City in June.
Image: Carlos Jasso/Reuters

That has made it hard for China to try to enter automotive production in Mexico with a view to the NAFTA market—the rules also cover subcomponents imported from outside the agreement region and require these to be substantially transformed in order to count as NAFTA-originated components. While the US trade secretary has accused China of using Mexico as a dumping ground for vehicle components that will end up in the United States–Mexico’s economy secretary has vigorously denied that, saying that the Chinese content of cars made in Mexico that go to the US is  under 3%. Meanwhile, the little auto manufacturing China is doing in Mexico is either aimed at the domestic market or at other Latin American countries, and the numbers are small.

“What many people do not realize, is that China and Mexico have been talking to each other, in view of increasing exchanges, for at least 10 years,” says Dussel Peters: “it’s not been just a chat during a weekend gathering, but nothing has been simple or straightforward.”

Still, the more the Trump administration pushes Mexico away—apart from the bid to revamp NAFTA, Mexicans have been angered by the proposal for a border wall between the two countries that Trump insists they will pay for—the more the Latin American country is going to want to be seen as actively drawing closer other partners, and China, its third-biggest trading partner, is a logical choice.

In Mexico, historical ties with China are being highlighted, for example at the recently opened Museo Internacional del Barroco, where Mexico proudly displays the Chinese-inspired blue-and-white ceramics that have been made by Mexican potters since the 16th-century, as well as lacquer furniture influenced by China and Japan that was the rage in the same time period. They’re a reminder of the bygone era of the Mexican silver dollar as international currency, and of the Spanish Manila Galleons as an intercontinental trade link carrying goods from east to west via Mexico.

Peña Nieto’s visit to China comes as a second round of talks for a possible renegotiation of NAFTA began in Mexico City on Friday (Sept. 1). Apart from talks with the Chinese president, he is also participating in the BRICS meeting (which, apart from China, comprises also Brazil, Russia, India, and South Africa) taking place in Xiamen. On Wednesday, Peña Nieto will visit Hangzhou, home to e-commerce giant Alibaba, with the hope of putting Mexican products onto the platform.

Ties with China have warmed substantially  since Peña Nieto was elected. Early in his term, the Mexican president signed the 2013 “Tequila Agreement” with Xi, under which Mexico was supposed to boost its exports to China. His predecessor, Felipe Calderòn, meanwhile, was at odds with China over everything from a Dalai Lama visit to Mexico, to textile dumping accusations.

But the treaty has not achieved as much as was hoped for Mexican exports, and many tariffs have not been scrapped.

Mexico runs a more than US$60 billion trade deficit with Beijing, Dussel Peters noted. Close to a fifth of Mexico’s imports, largely machinery and electronics, as well as consumer goods, come from China (the share from the US is nearly 50%), while just 1.5% of Mexico’s exports go to China.

Part of the issue, says Jorge Guajardo, former Mexican ambassador to China, is that “there is not that much for us there,” referring to the possibilities of enhancing exports to China. Both countries are manufacturing powerhouses, and “we are competing against each other: sure, there is an interesting market in China for Mexican agricultural products, like avocados and berries, but that is a very, very protected market,” he says.

Avocados were virtually unknown in China, but have been imported in large numbers since 2011, and the demand has been surging by about 250% a year, as urban Chinese develop a taste for healthy, foreign and expensive food. Still, Chile, which has a free-trade agreement with China since 2005, has supplanted Mexico in this export, as, in the current absence of a more comprehensive agreement, Mexican avocados are subject to a 10% tariff—a reduction from the previous 25%, but still costly.

For China, meanwhile, there have been embarrassing back-to-back reversals for Chinese efforts to directly invest in Mexico under Peña Nieto.

The first was the cancellation in 2014 of a US$ 3.7 billion high-speed rail link to be built by China Railway Construction from Mexico City to the industrial city of Queretaro over controversies about the transparency of the bidding process. Then, there was the Dragon Mart fracas, a 1,400 acre, multi-million dollar development near the seaside resort of Cancùn, which was scrapped in the construction phase over its disastrous environmental impact. If it had gone ahead, it would have been a mega platform for Chinese goods to be sold in Mexico, which, according to the project, was supposed to have exhibition spaces for more than 3,000 Chinese suppliers of toys, electronics, apparel and other consumer products manufactured in China.

It’s a surprising string of setbacks for China, given the ease with which it has been able to move ahead with major projects elsewhere in the world (such as Sri Lanka or Pakistan). Apart from slowing China’s exuberance, Mexico’s mistrust of China’s aggressive economic expansion might even provide a point of rapprochement with the US, still its largest trading partner and the destination for more than 80% of its exports. After all, if there’s any country Trump has insulted more frequently than Mexico in speeches and on Twitter, it’s China.

“The way Trump has been talking towards Mexico has been catastrophic, catastrophic, catastrophic,” says Guajardo, the former Mexican ambassador to China, “And all of a sudden people in Mexico are saying we should forget about the United States. It’s the feeling of a spurned lover. Even now that Mexico is at odds with the Trump administration, being wary of China is where we can find some form of cooperation with the United States.”