Friday, 27 Jul 2012
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Mexico Looks East
British Embassy Mexico City
With the G20 summit now over, Mexico signals intention to strengthen relations with Asia. Recent announcement that Mexico had joined TPP negotiations, as well as leading role Mexico is playing in the development of the Pacific Alliance, shows its level of commitment and ambition. Initial signs from the President in waiting, Pena Nieto, suggest this is one area of continuity between the current and the next Mexican Government.
When discussing Mexican trade it is natural to focus on the dominance of the relationship with the US. In 2011, Mexico’s exports to the US represented 79% of total foreign sales while imports from the US represented 50% of Mexico’s total imports. FDI from the US during 2011 represented 55% of the total amount coming in to Mexico (cf 28% from the EU).
However, Mexico is alive to the opportunities that Asia presents. Mexican exports to Asia significantly outpaced the growth in exports to any other region over the last six years, with a 20.3% average annual growth rate. This report explores Mexico’s existing trade and political relationships with China, Japan, and wider Asia, and looks to how the incoming government may interact with the world’s fastest growing region.
China-Mexico trade relations
Relations between Mexico and China are strong economically. China has been Mexico’s second largest trade partner since 2003, taking over from a position that Japan and Canada traditionally held. In 2011 Mexico became China’s second largest partner, and export market, in Latin America (after Brazil). Between 1995 and 2011 Mexico’s bilateral trade with China grew 10,640%, equating to an increase in value from US$ 542 mn to US$ 58 bn.
However, the trade relationship is far from equal, with Mexico recording a huge trade deficit of US$ 46 bn, mainly due to cheap imports, including clothing and electrical goods and components. Even traditional Mexican religious images, and Mexico’s national drink, tequila, are wholesale produced in China, to the great consternation of Mexican producers (and consumers). Chinese manufacturing investment in Mexico has hitherto been limited. This may be changing. A Chinese company, Chinamex is preparing to open a 5.6 manufacturing and warehouse facility in Cancun by the end of 2012. This site, a product of a $1.58 bn investment, will employ over 5,000 Chinese workers and will be the biggest economic and trading platform to produce and sell wholesale and retail Chinese products in Latin America. The effects of this development are already being felt; local schools are already including Mandarin lessons in their curriculums.
Differences over the trade deficit came to a head last November, with Mexican Trade Minister Bruno Ferrari asking his Chinese counterpart to address trade practices that were distorting several Mexican manufacturing sectors. Ferrari said that if China did not adequately address his concerns Mexico would seek arbitration against China at the WTO, for the fourth time since China joined in 2001. This did not come to pass. We can expect the next Mexican Government however to work hard to rebalance the deficit, through attempts to sell more Mexican-manufactured and agricultural goods to China.
In parallel with its export increase, China is also stepping up investment. Cumulative Chinese FDI in Mexico from 2000-2011 totalled US$ 151.9 mn, mainly channelled into commerce and the pharmaceutical industry. There are now 611 companies in Mexico with Chinese investment and Promexico (Mexico’s UKTI equivalent) manages 44 Chinese investment projects, in a portfolio worth around US$ 2.6 bn.
The foundations for the bilateral trading relation were set in September 2004, when the Mexican Ministry of Economy and the Chinese Ministry of Trade established the Binational Permanent Commission and High Level Bilateral Working Group (GAN). The last GAN meeting took place in April in Beijing, with Mexican Foreign Minster Patricia Espinosa meeting her counterpart Yang Jiechi. Actions were agreed to widen cooperation in areas such as biotechnology, water resources and agricultural research.
In the same month, Chinese Commerce Minister Chen Deming visited Mexico, meeting Mexican Minister for Communications and Transport Dionisio Perez Jacome in Mexico City, before attending the G20 Trade Ministers meeting in Puerto Vallarta. His bilateral with opposite number Bruno Ferrari covered boosting bilateral economic and trade cooperation; afterwards Chen launched the Mexico-China Trade and Investment Promotion forum.
Mexican trade relations with the wider region
Mexico’s second largest trade partner in Asia is Japan (total trade in 2011: US$ 18.8 bn) followed by Korea (total trade in 2011: US$ 15.2 bn). Japan’s cumulative FDI in Mexico from 1999-March 2012 amounted to US$ 3.2 bn (representing 1.1% of total FDI in Mexico) while Korea’s amounted to US$ 985 mn (0.3% of total FDI in Mexico). Around 83% of Japan’s FDI in Mexico has been channelled into the manufacturing sector (particularly the automotive industry) while almost half of Korea’s FDI has gone to the manufacturing sector and 37% into commerce.
Japan’s Nissan is the automaker with the largest manufacturing capacity in Mexico, from where it exports to over 100 countries: but new plants have also sprung up in general electric and electronic goods and Mexico is one of the world leaders in exports of white goods and TVs.
The level of Mexican trade with Japan and Korea, even when combined, is significantly lower than that of China. President Calderon has visited both countries (but not China). Mexico, under a PAN government, signed an Economic Association Agreement (AAE, like an FTA-lite) with Japan in 2005. On April 1st this year a Modifying Protocol on the AAE came into force, strengthening the agreement and looking for new opportunities in terms of market diversification and a more competitive access for Mexican agriculture exports to Japan. Whilst negotiations on a Mexico-Korea FTA stalled in 2008 due to domestic concerns that the agreement could widen Mexico’s trade deficit with South Korea, an agreement was reached during a Calderon-Lee bilateral in Los Cabos to re-start the negotiations before Calderon’s visit to RoK in September.
Mexico’s bilateral trade relations with South East Asia are also strong. Mexico is a significant destination for exports from ASEAN 7 (the ASEAN countries excluding Burma, Cambodia and Laos), with these totalling US$ 3.8 bn in 2010, and coming mainly from Malaysia and Singapore. Mexico’s exports to the ASEAN 7 countries in 2010 totalled US$1.2 bn, again mainly to Singapore, Malaysia and Thailand, and covered the automobile, electronics, healthcare, ICT, textile and garment sectors. Mexico has particularly strong relations with Indonesia, Singapore, Thailand and Vietnam in the electronic sector, with Singapore in the ICT sector, and Thailand in the automobile sector.
Multilateral trade relations
Mexico announced its long-fought for acceptance into the Transpacific Partnership (TPP) negotiations in the margins of the G20 Summit. Mexico views the TPP as one of the most important vehicles to promote integration in the Asia-Pacific region (currently the most economically dynamic region in the world). In terms of market diversification, negotiating preferential trade terms through the TPP with economies such as Australia, Singapore, Malaysia and Vietnam would benefit Mexico since the economic cycles in these markets are linked to the fast growing economies of China and India, where growing demand has been, and will likely continue to be, the driver for foreign trade in the next years.
Whilst Mexico is very pleased to have been accepted in the TPP, it accepts that progress within this bloc will likely be slow. Mexico will therefore continue to focus efforts on the Pacific Alliance (PA), which it sees as having the potential to delivering progress faster, based on the affinity between the four member countries in betting on market economies, foreign investment, and open trade to achieve development. Mexico sees the PA as a strategic mechanism to improve the PA’s foothold in Asia and other international markets.
Political relationships between Mexico and China are less developed. President Calderon and President Hu enjoyed a full bilateral in Los Cabos in the margins of the G20 Summit – and just seven months after Calderon had received the Dalai Lama in his Presidential Office. Calderon has enjoyed close relationships with Indonesia, Singapore and Japan.
Enrique Peña Nieto has said that his government will focus on economic goals, and use trade as an engine for the country’s economic development. In this regard, trade relations with Asia are very likely to remain at the forefront of the policy agenda, with dialogue with China having a significant importance. The Chinese have already issued an open invitation to Peña Nieto, together with the PRI President to visit China. This would not be Peña Nieto’s first visit to the country; when he was Governor of the State of Mexico he visited China on at least two occasions to sign investment agreements.
Mexico sees certain synergies with itself and Asia; both have had experience of overcoming substantial economic crises and both now feel, somewhat justifiably, that their dynamic economies are suffering as a result of a crisis caused by others. Mexico has looked with interest at what countries like Korea, Indonesia and Singapore have achieved and wants both to learn and to look for trade and investment opportunities.
However Mexico will continue, as ever, to take a pragmatic line towards China commercially. Whilst Mexico recognises Chinese strengths in providing low costs goods via low cost labour, Mexico seeks to rival or even outdo China as the low cost manufacturing centre of choice in the wider region for the North American market in the period ahead. Indeed, part of Mexico’s wish to join the TPP was to have a better handle on how this grouping will interact with China.
It will be key for the UK to continue to monitor the Mexico/China and Mexico/Asia relationship as it develops. The next Mexican Government is likely to place increased emphasis on these relationships – meaning that Europe, including the UK, will need to work hard for our share of Mexican attention. Equally Mexico's creation of Trade Agreements to the East should make Mexico an even more attractive low cost production site for exports onto Asia.
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