China and Mexico: Developing Trade, Investment for the Future

December 26, 2017 Posted by China Briefing Reading Time: 6 minutes

By Juan Rojas

In his most recent visit to China in September, Mexican President Enrique Peña Nieto emphasized the need to continue promoting trade and new investments between both countries. This goal was illustrated by the signing of a cooperation agreement between Mexico and Chinese e-commerce giant Alibaba.

The visit marked the seventh time that Chinese President Xi Jinping and Nieto have held bilateral meetings since 2013, when both leaders agreed to grant the status of the Sino-Mexican relationship as a “comprehensive strategic partnership”.

However, despite the fact that Mexico is China’s largest commercial partner in Latin America, and China is Mexico’s second largest trading partner in the world, both countries have not yet deciphered how to take full advantage of its potential.

As Nieto’s term as Mexico’s president ends next year, what does the future hold for this important bilateral relationship?

Competing economies

Any analysis of Sino-Mexican relations cannot ignore Mexico’s relationship with the US and its participation in the North America Free Trade Agreement (NAFTA).

After the effects of the 1982 economic crisis that hit Latin America, Mexico changed its development strategy from one based on a closed market to one based on exports, access to the global economy, and economic integration with its northern neighbors.

After acceding to the GATT in 1986, and NAFTA entering into force in 1994, Mexico experienced positive economic growth: by the year 2000, Mexico continued opening new markets (it signed an FTA with the EU that year), had an annual growth of 6.6 percent of GDP and a GDP per capita of approximately US$9,000, while Mexican exports to Canada increased 136 percent, and 177 percent to the US.

Although China and Mexico have maintained a friendly and cordial relationship in the political sphere since establishing diplomatic relations in 1972, the rise of China increased the complexity and challenges of economic relations.

Mexico adopted a defensive position, having considered China to be a direct competitor in the North American market. It was the last country to withdraw objections against China’s accession to the WTO in 2001, while it also imposed countervailing duties and tariffs amounting to 1000 percent or more on a diversity of products.

A comprehensive strategic partnership

Today, the trade balance between China and Mexico has reached close to US$80 billion, where only US$10 billion correspond to Mexican exports to China. Despite the fact that approximately 70 percent of Mexico’s imports from China are intermediate or capital goods, which are used or repurposed for re-export, Mexico continues to seek to improve its participation in the Chinese market to achieve more balanced trade.

Taking advantage of the beginning of both the administrations of Xi and Nieto, both leaders relaunched the bilateral relationship in 2013, giving it the status of “comprehensive strategic partnership”.

In just four years, both countries added about 50 new cooperation agreements relating to a variety of areas, from economics and politics to culture, science, and education. In the last two years, eight new Mexican products have gained access to the Chinese food market, including white corn, beef and pork, dairy products, avocados, blackberries, beer, and tequila.

China is now Mexico’s second largest commercial partner and third largest destination for exports. Mexico, for example, is the main Latin American supplier of auto parts and motor vehicles for the Chinese market.

Likewise, many prominent Mexican companies have sought to take advantage of investment promotion policies and the size of its consumer market in China. Mexican companies such as Bimbo, Gruma, Nemak, Grupo Kuo, Metalsa, and Interceramic have established themselves in China.

However, despite the many advantages of investments in China, many Mexican companies find it difficult to access the Middle Kingdom.

In Mexico, SMEs generate 50 percent of GDP and 70 percent of employment. For many Mexican SMEs, logistics costs make China a difficult destination for exports, much less for investment, in comparison to other North American markets closer to home.

Further, the China-Mexico relationship is still haunted by challenges. For example, the cancellation of the state-owned China Railway Construction Corporation (CRCC)’s tender for a high-speed rail project in Mexico, which was framed as a “symbol” of the relationship, showed the lack of communication between both countries.

Nevertheless, there is reason for optimism.

China has sought to present itself to Mexico as an alternative to the US. China has also taken advantage of recent energy reform in Mexico, which opens the door to foreign investment in the industry. The state-owned China National Offshore Oil Corporation (CNOOC) plans to invest US$8 billion in Mexico over the next 30 years, indicating that both countries want to move the relationship forward.

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B2B, B2C redefining China-Mexico relationship

The recent signing of the agreement between Mexico and Alibaba Group in Hangzhou last September can be understood of a sign of things to come for China and Mexico.

The main objective of this agreement will be to train Mexican SMEs in Business to Business (B2B) and Business to Consumers (B2C) sales through the internet, improving their cross-border e-commerce capabilities and logistics, and introducing them to the Alipay payment system.

The partnership between Mexico and Alibaba has already produced early results: 80 tons of Mexican avocado were sold in China through e-commerce in just two days following a campaign between ProMexico, the Mexican government agency in charge of export promotion, and the electronic sales platform Tmall, which is owned by Alibaba.

Likewise, Alipay’s venture into Mexico will increase the attractiveness of Mexico as a tourist destination for Chinese citizens.

This agreement can represent an opportunity for Mexican companies to finally overcome the obstacles that separate both countries, fitting into the Chinese economy’s transition from its exports-based model to one driven by domestic consumption.

However, great challenges await this new-found complementarity between both countries.

Mexico must make a concerted effort to diversify its economy outside of North America and establish its place in Asia-based value chains. Transitioning the Mexican economy towards Asia will require trade and investment that develops infrastructure, logistics, export capacity, financing, human resources, and a better understanding of business cultures.

The bases are there.

In the 16th century, the Nao of China, or Manila Galleon, traversed the Pacific, carrying the silver of New Spain (now Mexico), after passing the Philippines, to the port of Shanghai. In exchange, China’s fine silks arrived at the port of Acapulco. With intelligence, prudence and the commitment from the public and private sectors, the integration of the Mexican economy with China may finally find its balance.

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