China Power

Xi Jinping in Mexico: “Relaunching” a Relationship

Mexico should move beyond its obsession with the trade deficit. Both countries can benefit from closer ties.

Chinese President Xi Jinping is meeting with his Mexican counterpart Enrique Peña Nieto on June 4, part of Xi’s first official trip to the Western Hemisphere.  The visit has been billed as a chance to “relaunch” the countries’ relations after a decade in which fierce competition for export markets and a growing trade deficit begat a distant, wary relationship. Both countries have something to gain by closer ties, but seizing the opportunity will require dropping long-held preconceptions about the commercial relationship. 

When China joined the WTO in 2001, it sent a shiver down the spine of Mexican industry. With a seemingly endless supply of cheap labor and an arsenal of industrial policies, the Chinese juggernaut was seen as a direct threat to Mexican producers’ privileged position in the U.S. market – not to mention their domestic business. Indeed, China’s share of U.S. imports increased from around 8 percent in 2001 to almost 20 percent by 2011, much of which likely came at the expense of Mexican producers, whose market share in the U.S was stagnant over that period. At home, a flood of Chinese imports competed directly with domestic producers – and usually won. Reports of factory closings, China’s supposedly anticompetitive trade policies, and the ever-expanding trade deficit were mainstays in the Mexican media throughout the 2000s.

Given this backdrop, it is not surprising that Sino-Mexican relations have been less than cozy in recent years. Leaders made regular official visits, interacted in forums such as APEC, and even signed a Strategic Partnership Agreement in 2003. But the trade issue overshadowed all else. Mexico has initiated 17 actions against China in the WTO, and vows to “rebalance” the countries’ commercial relationship dominate Mexico’s discourse on China.

The arrival of new leaders in both countries – Mexican president Enrique Pena Nieto took office in December 2012, less than a month after Xi assumed leadership of China’s Communist Party – presents an opportunity to forge a closer, more fruitful alliance between two key emerging markets. First, though, Mexico needs to get over its obsession with the trade deficit, a number that fails to capture the complexity of the countries’ commercial relationship and obscures opportunities for positive-sum cooperation.  

Why is Mexico’s fixation on the trade deficit short-sighted?

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First, there is the issue of trade in value-added. The fragmentation of global production means that the country exporting a final product is not necessarily the country that adds the most value to the product. The well-known iPhone example is a good demonstration: the products are assembled in China using technologically complex inputs and cutting-edge design produced elsewhere – especially Japan. In value-added terms – which determines where high-paying jobs are located – Japan actually “produces” around 35 percent of the iPhone, even though iPhone exports from China to the United States count towards the U.S. trade deficit with China. So focusing on any one bilateral trade deficit or surplus makes little sense.

The trade deficit argument is also misguided because imports are critical to firms’ competitiveness. Again, the globalized nature of production makes the ability to import a flexible range of intermediate products and raw materials increasingly important. Mexican manufactures benefit from the availability of low-cost Chinese imports, and a significant share of these becomes inputs for Mexico’s exports to the United States. Mexico’s exports contained a full 48 percent of foreign added value according to recent estimates – making the country’s exports highly dependent on imports.

Another reason why Mexico should worry less about its trade deficit with China is that the China of 2003 is not the China of 2013. Rising salaries have eroded the wage differential with Mexico, which was nearly 200 percent when China joined the WTO. Meanwhile, the recovery in oil prices since the global financial crisis has given Mexico an additional competitive advantage, thanks to its proximity to the U.S. market. As a result, manufacturing in Mexico has experienced something of a revival, especially in the auto industry, where production has doubled since 2009.

Mexico’s strong and growing manufacturing base creates one opportunity for cooperation in the economic realm. China’s increasingly ambitious, internationally focused companies would like to play a bigger role in Mexico. To date, Chinese direct investment in Mexico has been meager, totaling around $430 million between 2001 and 2012 compared with $15 billion total investment in Latin America and the Caribbean in 2010 alone. In the rest of the region, however, China’s interest is in natural resources, which account for 90 percent of its total FDI.  The investments in Mexico, by contrast, reflect the desire of Chinese companies in industries such as automobiles, consumer electronics, and white goods to stake a claim to Mexico’s large consumer market and participate in production chains integrated with the U.S.

The Trans-Pacific Partnership (TPP) negotiations, which aim to deepen integration between North America, Japan, and SE Asia – but exclude China – make a strong presence in Mexico all the more strategic for Chinese industry.

China would certainly be interested, too, in seizing any opportunities for foreign participation in Mexico’s oil sector that anticipated energy reforms would create. China National Petroleum Corporation signed a technology exchange agreement with Mexico’s national oil company Pemex last March, and more energy agreements could be in the works for Xi’s visit. Beyond these material concerns, China’s relationship with Mexico can serve as an antidote to the accusation that China’s only agenda in the region is exploiting its mineral wealth.

Cooperation in these areas of mutual interest would give Mexico more leverage to address the trade balance issue in a pragmatic way. Bilateral trade deficits are not in and of themselves a bad thing, especially in a global economy characterized by fragmented production.  Rather than rail against one misleading figure, Mexican diplomats should strategically select trade measures they deems unfair and work to negotiate a legal resolution on a case-by-case basis with China. The EU does something similar in its relations with China, maintaining a list of all outstanding issues and discussing them on a regular basis in high-level meetings.  Stronger overall ties, grounded in cooperation on areas of mutual interest, will make progress on trade issues more likely.

Theodore Kahn (@TheoAKahn) is a researcher on trade and development in Latin America.