Pacific Money

Watch Out USA: Mexico Has its Own Asia Pivot Plan

It seems Mexico has its own idea of a “pivot” to Asia. And its all about growing its economy.

When President Barack Obama sits down with Mexican President Enrique Peña Nieto tomorrow, the topic of Asia is likely to be lurking in the background.

That’s because Peña Nieto has made diversifying Mexico’s trading partners to reduce dependency on the U.S. a cornerstone of his administration’s focus on economic development.

Asian markets are crucial to achieving this goal.

Indeed, although this will be the first time Obama and Peña Nieto sit down since the latter officially became president in December, President Peña Nieto has already spent a week in Asia at the beginning of April in which he met with Hong Kong’s Chief Executive Leung Chun-ying, China’s President Xi Jinping, Japan’s Prime Minister Shinzo Abe and Japan's Emperor Akihito.

The Mexican President laid out the rationale for Mexico’s own Asia pivot in an op-ed in South China Morning Post ahead of his trip last month:

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“We have a great opportunity to capitalize on the strategic importance of the Asia-Pacific region, encourage multilateral trade and further co-operation within the Pacific Rim. And this very first trip I make around Asia is a clear proof of the intention of my government to enhance Mexico's ties with the region. It is only through constant dialogue that we will be able to achieve the goals we are aiming as strategic partners. Never have the two shores of the Pacific been closer than they are now; it is a chance we better not miss.”

Mexico-Chinese relations are the most important for Peña Nieto but also the most troublesome. As emerging manufacturing countries the two have long been rivals jockeying for a greater share of the U.S. market. For instance, Mexico was the last country to agree to China joining the World Trade Organization, holding out over fears China’s entrance into the body would erode its comparative advantage in the U.S. market, while also bringing a flood of Chinese goods into Mexico proper.

These fears have proven accurate. Two years after joining the WTO in 2001, China surpassed Mexico in exports to the United States for the first time ever. Trade between China and Mexico also boomed after Beijing joined the WTO, growing from US$3 billion in 2000 to US$50 billion in 2010, but this has been heavily one-sided. In 2011, for instance, bilateral trade amounted to US$54 billion; with all but US$2 billion of this coming in the form of Chinese exports to Mexico.

Further exuberating this US$50 billion trade deficit is the fact that China’s investment in Mexico has not been forthcoming, Dr. Adrian H. Hearn of the University of Sydney China Studies Center tells The Diplomat.

“Chinese investors have explored everything from copper pipes to automobiles, starting off enthusiastically but ending in frustration,” Hearn notes.

Indeed, Mexico has even lagged far behind other Latin American countries in terms of attracting FDI from China.Citing data from the Economic Commission for Latin America and the Caribbean (ECLAC), Hearn adds: “Between 1990 and 2011 Chinese firms invested $19.7 billion in Brazil, $9.2 billion in Argentina, and $718 million in Costa Rica, but only $132 million in Mexico.”

This cannot all be blamed on China, of course. In fact, some of its largest investments in China have been delayed due to local opposition regarding Beijing’s entrance into Mexico. And it was Mexico which—not surprisingly given the trade deficit—rebuffed China when it proposed a free trade agreement last year, despite the fact that Mexico has free trade agreements with over 40 countries worldwide.

Still one of Peña Nieto’s primary objectives in Asia last month was to increase the amount of investment pouring into his country from the Asia-Pacific.

Japan will likely be the key to meeting his investment goals, given the greater success Mexico has had in attracting investment from Tokyo in the past. Not surprisingly, then, the Tokyo portion of Peña Nieto’s trip last month was centered on a Mexico-Japan Business Forum hosted by the Japan Business Federation.

In addressing around 200 leading Japanese entrepreneurs with business interests in Mexico already, Peña Nieto boldly proclaimed:

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“We want to establish policies, as we are already doing, to encourage greater investment in Mexico to achieve greater economic growth, even though the prospects and future scenarios already indicate that, this year and in the following years, Mexico will have positive economic growth of above 3 percent, 3.5 percent is expected this year.”

Still, even while courting Japan, Mexico is hoping to take advantage of China’s economic rebalancing towards greater domestic consumption.

Hearn of the University of Sydney points out that China’s push to accelerate the pace of urbanization could offer Mexico some opportunities to narrow the trade deficit. Even while warning Mexico against reorienting its policy towards agricultural, Hearn says that demand for foreign food in China will increase alongside a growth in its urban population, “and Mexico could be an important source owing to its abundance of arable land, favourable climate, and floating exchange rate.”

Even more promising for Mexico, according to Hearn, is that the “construction and upgrading of Chinese cities will also impact the fortunes of energy and minerals exporters, including Mexico.”

Mexico already exports copper and iron ore to China and the Memorandum of Understanding Peña Nieto signed while in China last month, “envisions the annual sale of ten million tons of concentrated iron for ten years (worth US$15bn to Mexico at current prices).”

Zachary Keck serves as assistant editor for The Diplomat.