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The China-Mexico Strategic Relationship and Its Impact on the U.S.


by Evan Ellis, via The Manzella Report, June 2, 2014

mexican eagle flagAs the People’s Republic of China (PRC) has expanded its commercial and other relationships with Latin America and the Caribbean over the last decade, Mexico has remained closely tied to the United States, both in economic and security affairs. The degree to which Mexico has served as a “buffer” to the sea change in orientation of Latin America and the Caribbean toward the P.R.C. is due to several factors.

These include Mexico’s integration with the U.S. and Canadian economies under NAFTA, as well as frictions between Mexico and the P.R.C., and the expanded Mexico-US security cooperation in the “war against transnational organized crime” during the presidency of Felipe Calderon.

Seeking an Expanded and Improved Relationship

Enrique Peña Nieto’s inauguration as president of Mexico in December 2012, and Xi Jinping’s ascension to the presidency of the P.R.C. just three months later, dramatically changed the political dynamic between the two countries, ushering in a new period in which both have aggressively pursued deeper economic, political, and other relations.

For the P.R.C., the impulse for deeper and better relations with Mexico involves the latter’s historical role as a regional leader, one of the most important markets in the region, and a potential platform for exporting Chinese products to the U.S.

For Peña Nieto and his Partido Revolucionario Institucional (PRI), stronger economic and political ties with the P.R.C. diversifies Mexico’s economic and other foreign relationships away from the focus on the United States that many believed characterized the Partido Acción Nacional (PAN) governments of Vincent Fox and Felipe Calderon that preceded the present Peña Nieto regime and the associated return of the PRI. In economic terms, a deeper and better relationship with the P.R.C. compliments Mexico’s membership in the Pacific Alliance as part of the country’s reassertion of the regional leadership role that has traditionally been a point of pride for PRI governments.

In a similar fashion, the expansion of Mexican exports to and investments from China presumed to flow from such a policy would bolster and leverage Peña Nieto’s ambitious project of internal reforms in sectors such as petroleum, mining and education.

The emphasis given by both China and Mexico to a deeper and better relationship can be seen in the unprecedented frequency with which Xi and Peña Nieto have met—three times in a space of six months during 2013: in April of that year on the sidelines of the Boao summit on Hainan Island, China, in June in Mexico City, as part of Xi’s trip to Latin America and the Caribbean, and in September at the G-20 summit in St. Petersburg, Russia. The next meeting between the two leaders is currently scheduled for November of 2014, in close proximity to, but independent from the first China-CELAC summit, also to be held in the P.R.C.

Although the two nations have defined their relationship as “Strategic” since December 2003, during the June 2013 summit between Presidents Xi and Peña Nieto in Mexico City, Mexico and China raised the level of cooperation to a “comprehensive” strategic partnership, with strengthened vehicles for collaboration on both bilateral and multilateral affairs.

In economic matters, the desire by both China and Mexico to deepen the relationship is visible in the plethora of initiatives and agreements between the governments since 2013 to facilitate cooperation in agriculture, tourism, and finance. These include Chinese acceptance of Mexican tequila and pork exports, preliminary authorization by the Export-Import Bank of China of a $ 500 million line of credit to Mexico´s National Bank of Foreign Commerce (Bancomext), and discussion of a separate $1 billion loan to the Mexican oil company, Petroleos Mexicanos (PEMEX).

During 2013, four Mexican ministers paid visits to China: Foreign Affairs, Communications and Transport, Tourism, and Agriculture. In addition, Mexico opened a commercial affairs office in its embassy in Beijing, while in April 2014, the Mexican agricultural ministry, SAGARPA, opened a representative office in the city.

Expanding Mexican agricultural exports to the P.R.C. appears to be a particular focus of the new Sino-Mexican cooperation, as a potential vehicle for bringing down the ten-to-one trade deficit that Mexico has continually incurred with the P.R.C. over the past decade(1), which as caused a significant portion of Mexicans, including producers of traditional goods such as textiles and footwear, to see engagement with the P.R.C. as more of a threat than an opportunity.

At the political level, when the Dali Lama visited Mexico in October 2013, the Mexican government released a statement supporting the P.R.C. position on Tibet, in contrast to Peña Nieto’s successor, Felipe Calderon, who personally received the Dali Lama during his September 2011 visit to Mexico.

China-Mexico Investment

Chinese investment in Mexico, to date, is larger than commonly recognized, yet remains limited. Major projects include a textile factory in Ciudad Obregon (Sinatex), a copper tube plant in Coahuila (Golden Dragon Precise Copper Tube Group), a computer assembly facility in Monterrey (Lenovo), telecommunications service and training facilities (Huawei), an automotive plant in Veracruz (Foton), a 500 hectare technology park being built in Guanajuato by the Chinese firm UST Global, and a joint venture between Chinese and Japanese companies in Aguascalientes to make plastic components for the automotive industry (TK Minth), among others.

In addition to Chinese investment in Mexico, by contrast to many smaller countries in Latin America and the Caribbean, Mexican companies are also active investors in the P.R.C. As of February 2014, according to the Chinese government, 57 Chinese firms were operating projects in Mexico with a value of $400 million, by contrast to 109 Mexican firms operating projects in China worth an estimated $69 million. Such reciprocity of investment and other commercial activities between the two countries arguably leads Mexican businessmen and politicians to view China as an equal (even if also a rival), rather than as a source of largesse.

If Chinese investment in Mexico to date has been primarily focused on manufacturing and technology sectors, new and contemplated projects are arguably moving the relationship in a direction that more closely resembles P.R.C. engagement with other Latin American countries. In June 2013, for example, the Mexican Secretariat for Communications and Transportation announced that it was speaking with Chinese companies regarding their potential role in constructing a rail line from Mexico City to Queretaro, a subway in Monterrey, a light rail project in Guadalajara, and a railway line connecting the Atlantic-coast port of Veracruz with the Pacific coast port of Salina Cruz, in the state of Oaxaca, a project long discussed in Mexico but revived as part of President Peña Nieto’s new engagement with the P.R.C.

Further mirroring P.R.C. activities in other parts of the region, Chinese investors have been quietly acquiring parcels of land in Sinaloa for the production and export of soybeans. Similarly, a small but important number of Chinese investors are active in the Mexican mining sectors, including development of the “Lupe” mine in Puebla by the Chinese firm JDC Minerals.

In Michoacan, the role of Chinese businessmen in purchasing and exporting metal ore from informal mining operations was brought to light by the Mexican Navy’s intervention against the transnational criminal organizations La Familia Michoacana and los Caballeros Templares in the state in November 2013.

One particularity of Mexico’s pursuit of Chinese investment has been the proactive role played by Mexican states in pursuing Chinese investment. Examples include Veracruz, whose governor Javier Duarte played a leading role in securing the investment of the Chinese automotive company Foton. Other examples include a $100 million Chinese investment in food processing facility negotiated by the government of Zacatecas and announced in March 2014, as well as the effort by the government of Aguascalientes to attract investment in solar energy projects from Chinese firms Trina and J.A. Solar.

On the other hand, although many such discussions are reported in the Mexican press, the number of projects which ultimately come to fruition is far less. Part of the difficulty, according to Mexican academics consulted for this article, is that Chinese and other investors must reach agreement with often imperfectly coordinated actors at each of the three separate levels of Mexican government.

Challenges to Deepening China-Mexico Engagement

Three sets of obstacles complicate the expansion and deepening of P.R.C.-Mexico commercial and political relationships: Mexico’s integration into the U.S. and Canadian economies via NAFTA, resistance from vested bureaucratic and commercial actors whose interests would be adversely impacted by such reapproachment, and a broad and deeply rooted mistrust among Mexicans toward the Chinese.

While Mexico’s position in NAFTA potentially allows Chinese businesses to use manufacturing operations in Mexico as a springboard into the U.S. market (provided domestic content provisions can be met), it also leads the majority of Mexican exports to be absorbed by the U.S. and Canadian markets. For products such as agricultural goods with only limited potential to expand production, diverting exports to the Chinese market incurs additional expenses which can only be passed on to Chinese consumers in the case of unique goods, and those associated with the Mexican national identity, such as tequila.

Proposed Chinese projects in Mexico also frequently face opposition from economically powerful and politically well-connected groups. Perhaps the most visible contemporary case is Dragon Mart, a 284,000 square foot retail and wholesale facility to be built in the state of Quintana Roo, spearheaded by Mexican businessman Carlos Castillo, in partnership with Monterrey-based Mexican businessmen and Chinese partners. The project has been opposed by Mexican manufacturers threatened by the expanded access to the Mexican market for Chinese products that Dragon Mart would represent, as well as community groups, who successfully blocked the project on environmental grounds in April 2013, before the decision was overturned by a state-level appellate court.

Other examples include the 2007 attempt by the Chinese automaker First Autoworks (FAW) to establish a retail presence and production facility in Mexico in alliance with local partner Grupo Salinas, and which reportedly was confronted by strong behind-the-scenes resistance from other auto producers.

Obstacles also arise from bureaucratic processes and institutional interests on both the Chinese and Mexican sides. Despite the high profile announcement in conjunction with the June 2013 Xi-Peña Nieto summit in Mexico City that the P.R.C. would accept Mexican pork exports, negotiations over phytosanitary and other technical issues has reportedly been painstakingly difficult, and as of May 2014, not one pound of Mexican pork had been exported to the P.R.C.

At the popular level, Mexico is one of the countries in the region in which distrust toward both Chinese businessmen and ethnic Chinese is most deeply rooted. As far back as the Mexican Revolution, anti-Chinese sentiment inspired laws such as the prohibition of intermarriage between Chinese and Mexicans. Today, Mexicans commonly refer in disparaging terms to low quality Chinese products, presumed to be contraband, which allegedly undercut the position of Mexican producers and take jobs away from ordinary Mexicans.

Implications

The obstacles faced by Presidents Xi and Peña Nieto in expanding and improving Sino-Mexican engagement are a reflection of Mexico’s geographic, social and historical legacy: proximity to the United States, the web of economic and political interests represented by Mexico’s business groups, and the question of Mexico as a “cosmic race” vis-à-vis other peoples.

For the U.S., the outcome has strategic implications as profound as those for Mexico itself. A hemisphere in which the U.S.’ historically most significant economic partner and source of migration becomes a hub for Chinese business and an advocate for P.R.C. interests in regional and global forums would be a dramatic departure from the hemisphere which served as a secure base from which the United States has projected itself onto the world stage for the past century.

Footnote: 1. In 2012, according to the Bank of Mexico, the P.R.C. exported $57 billion of products to Mexico, while Mexico exported a mere $5.7 billion of goods to the P.R.C.


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