BY: ALEXANDRA CALLOWAY-NATION
Mexico represents just one of the Latin American countries with which China has an interest in initiating and deepening a trade relationship. This trade not only comes in the form of exchanging goods and services but also foreign direct investment (FDI) from China. Chinese companies see the benefits of localizing their means of production in Latin American countries for several reasons. First, the cost of production in most of Latin America is comparable to production in China. Second, localizing production in a Latin American country means they have more direct market access for those goods. Third, localizing production in Latin American countries allows China to bypass many trade and non-trade barriers that arise from producing those goods in China and shipping them overseas, namely, discrimination against “made in China” products, tariffs, and shipping costs.
The deterioration in relations with the United States, exemplified by the ongoing NAFTA renegotiation, has encouraged Mexico to look elsewhere for potential trade ties and FDI.
China is currently Mexico’s fourth-largest trading partner accounting for 6.7 billion USD of Mexico’s annual exports. These exports are still very far behind the United States, which accounts for 372.4 billion USD of Mexico’s annual exports. China has seen the potential to exploit the growing vacuum left by the United States in the wake of deteriorating relations with Mexico and the NAFTA renegotiation. China usually finances projects that fall into three major areas: resource extraction, transportation infrastructure, and energy projects. These investment areas fit perfectly with the Mexican government’s stated development plans.
From 2003-2016, Chinese FDI in Mexico totaled a measly 6 billion USD.
Mexico currently holds a 67.4 billion USD trade deficit with China, though many projects between Chinese and Mexican companies proposed in recent years would go a long way in ameliorating this deficit. In 2014 the state-owned Mexican oil company, PEMEX, and three Chinese state-owned enterprises announced the 5 billion USD Sino-Mex Energy Fund, which would invest in extraction projects in Mexico. Last year, the China Offshore Oil Corporation won two high-profile bids to extract oil from the Gulf of Mexico. Finally, Beijing Automotive Industry Corporation, which already has a truck assembly plant in Veracruz, announced plans to increase sales in Mexico and potentially build another plant.
Mexico’s lack of competitiveness can be attributed to the rise in organized crime throughout the country, along with a lack of energy and tax reforms, as well as corruption and government inefficiency. According to a 2014 report by the IMF, a major source of income for the country could be the exploitation of hydrocarbons. For that to be successful, the Mexican economy would need an annual investment of 40 billion USD starting in 2015 until 2019, which has yet to be realized. In addition to lost opportunities, Mexico has fallen eleven rankings from 2016 to 2018 in the World Bank’s “Doing Business” report, where the country now sits at 49, below Rwanda and former members of the Soviet bloc. For most investors, stability would be a prerequisite for investment. The challenges faced by Mexico exemplified by the World Bank report does not come as a setback to China which has energy and trade agreements with countries like Afghanistan and experiences worse security and drug-trafficking issues, as well as worse corruption and lack of basic government infrastructure.
With stability not as a key concern, the lack of Chinese FDI comes down to a limited effort on the part of both China and Mexico to develop and expand their relationship. This lack of effort has two reasons. First, pressure from the U.S., which increasingly views trade as a zero-sum game, where for China to “win” by doing business in Mexico, the U.S. must “lose.” In a similar regard, China may see increased FDI and trade with Mexico as proverbially stepping on the toes of the U.S. and may continue to refrain from engaging with Mexico until it feels it can do so without the fear of retribution. Though trade is not a zero-sum game, and a country like Mexico can benefit from as much FDI as investors are willing to risk, the relationship between Mexico and China will not begin to flourish either until China feels like it is in the position to engage with Mexico without retribution from the U.S. or the benefits of closer economic ties with China are greater than the rewards and retribution from the U.S. The NAFTA renegotiation or the escalating tariffs recently implemented by the U.S. may well be the events that spur China and Mexico into action, pushing two of the U.S.’s largest trading partners closer together and further away from the U.S.
Alexandra Calloway-Nation recently completed her Master’s degree in International Trade and Economic Diplomacy from Middlebury Institute of International Studies, where she developed a comprehensive knowledge of international trade policies and institutions as well as regional expertise in China and East Asian economic development. She has worked in the financial services sector and is proficient in Mandarin Chinese.
Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.