The Complex Trade Relations between China, Mexico, and the United States: A Geopolitical Approach

The Complex Trade Relations between China, Mexico, and the United States: A Geopolitical Approach

Note: this post is based on Montoya, M.A., Lemus, D., Kaltenecker, E. (2022). The Complex Trade Relations between China, Mexico, and the United States: A Geopolitical Approach. In: López, D., Song, G., Bórquez, A., Muñoz, F. (eds) China’s Trade Policy in Latin America. Contributions to International Relations. Springer, Cham. https://doi.org/10.1007/978-3-030-98664-3_8

Introduction: Trade Relations between China and Mexico

In recent years, China has considerably increased its weight in the world economy. In terms of nominal GDP, in 2010, China managed to surpass Japan, Germany, the United Kingdom, and France to become the second largest economy in the world after the United States. In 2009, China became the world’s largest export of goods, and since 2013 it has been the largest trading nation in goods. Its share of the global trade of goods increased from 1.9% in 2000 to 11.4% in 2017 (Woetzel et al., 2019). Consequently, China has become one of the engines of the world economy and the principal global player in the trade as a supplier and market. In an analysis of 186 countries, China is the largest export destination for 33 countries and the most significant import source for 65.

The fast growth of China is radically changing the global geopolitical ecology of investment, production, and trade. At the same time, China’s considerably expanded scale of operations has generated massive demand for capital, goods, raw materials, and energy, pushing up commodity prices with essential implications in many parts of the world. This irruption of China in global trade contributed to the boom in commodity prices that sustained many Latin American economies in the first decade of the 2000s. Thus, Chinese demand for Latin American primary products has emanated from its industrialization process, in which metals have played a leading role. The dynamism of this process has led not only to increases in the quantities demanded but also significant upward pressure on the prices of primary goods and minerals, resulting in a substantial improvement in trade for many Latin American Countries (LAC) (Durán Lima & Pellandra, 2017). The economic slowdown in China in recent years, however, has hit the price of raw materials hard and has left the economies in the region in a very vulnerable situation, especially after their deindustrialization process. Besides, Latin America continues to add very little value to the products exported to China. Moreover, FDI from China in energy and natural resources comes with favoring Chinese companies, which is generally not reciprocated by Latin American companies that want to invest in China (Durán Lima & Pellandra, 2017). As a result, the total China-Latin America trade increased from $17 billion in 2002 to almost $315 billion in 2019 (Lum, 2020).

Trade relations between China and Mexico are different. Three factors make Sino-Mexican commercial links notably different from those between China and the rest of LAC. The first factor is that the economies of China and Mexico compete in the US market. There is no complementarity between Mexican and Chinese economies, allowing Mexico to export primary and low-value-added products to China. Second, the perspective of global value chains can explain an essential part of the trade between China and Mexico. Many Chinese products imported by Mexico complement final Mexican products exported to the US market. Third, Mexico is a partner in the United States-Mexico-Canada Agreement (USMCA or T-MEC as Mexico calls it). This agreement took effect in all member countries on July 1, 2020. These factors have limited the expansion of China in Mexico (Montoya et al., 2020). In the current rivalry between the United States and China that began with the government trade war of President Trump in 2017, the United States government pressures other countries away from any commercial or strategic agreement that benefits China’s foreign trade.

This post reflects on the influence of geopolitical factors on the economic relations between China and Mexico. In other words, without ignoring the importance of economic ties within the framework of an economically interdependent and globalized world, we explore how and why geopolitical factors are essential when we analyze the China–Mexico relationship. This chapter is divided into four sections to analyze the complex commercial relationship between China and Mexico. The first is a literature review about the importance of geopolitics in understanding the reasons behind China’s actions in the region. The second is an analysis of the dynamics of imports and exports between Mexico and China between 2010 and 2018. The third is an analysis of the possibilities of Chinese FDI in Mexico to balance the trade deficit, considering the role of Mexico as a platform to the US market and how the Mexican government can rethink its strategy to rebalance the trade deficit. Finally, the conclusion discusses the geopolitical limitations and opportunities for Mexico’s commercial relationship with China (Montoya, Lemus, Kaltenecker, 2022).

China, Mexico, and the United States: Geopolitical Factors behind Trade Relations

Despite the richness of the analyses above, a fundamental aspect of the commercial relationship between China and Mexico is geopolitical. Geopolitics encompasses the study of exterior spatial relationships of states. It refers mainly to the geographical characteristics of these external relations and how some states’ problems impact the rest of the world. Rudolf Kjellen, a classical intellectual of geopolitics, claimed that geography plays a central role in the relationships of each nation-state, proposing that geopolitics could be the concept that links the world of geography with the political elements of the nation-state (Tuathail, 1996. The relationship between the geographic factors and the decisions and actions of foreign policy determines the development of the great powers. However, the end of the Cold War decimated the perceived importance of geographical elements in explaining the behavior of governments. As Russell (2014) showed, the optimistic vision of ending a bipolar war and rising international liberalism generated a common idea that geopolitics no longer matter, which proved wrong. Therefore, the dynamics, scope, and possibilities of the trade expansion of China in Latin America, including in Mexico, are determined by economic and geopolitical factors. The rise of China and its increasing presence in Latin America presents a new confrontation with the United States. This dispute goes beyond an economic row over financial benefits or trade surplus. In Mexico, geopolitics assume crucial relevance.

China seeks to expand its presence in Mexico by increasing its commercial activities, investing in infrastructure, and even providing cooperation in the health sector by providing medical equipment and vaccines against COVID-19. The United States, on the other hand, intends to maintain significant influence in Mexico by limiting China’s presence. Before discussing how political factors influence trade relations between China and Mexico, the following section focuses on the commercial relationship between Mexico and China and how Mexico can attract Chinese FDI to balance the trade deficit.

The Trade Relations between Mexico and China

With the change in its industrial matrix and its acceptance by the World Trade Organization (WTO) in 2001, China focused on global markets. Consequently, its trade with Mexico, as with the rest of the world, multiplied. The exchange of goods and services between Mexico and China grew almost thirty times from 2000 to 2018, from $2 billion to $56.4 billion (The Growth Lab at Harvard University, n.d.). The trade in goods has always been in deficit for Mexico. The negative balance for Mexico has multiplied by thirty in this period, growing from $1.2 billion to $39.7 billion, the most significant trade deficit with China of any country in the region, followed by Argentina with a value of only $4.6 billion.

The following parts of this section discuss the trade of goods between Mexico and China from 2000 to 2018, the latest data available, and simple comparisons to other essential economies in Latin America. In this context (2018), Mexico was the 12th exporter of manufactured goods globally, accounting for 2.3% of the world’s industrial exports. No other Latin American country appears in the top twenty manufacturing exporting countries.

Trade Balance

The trade balance between Mexico and China presents a deficit for Mexico in all items except for minerals. The deficit increased from $1.2 billion in 2000 to $34.3 billion in 2018. Balances in machinery and electronics contribute to more than 60% of this deficit, and textiles and chemicals explain another 25% of the Chinese surplus. The T-MEC trade agreement with the United States and Canada has enabled Chinese intermediate products for subsequent export to the US market, especially in the electronics, machinery, and textiles sectors (Valderrey, Kaltenecker, and Montoya, 2022). As a result, the trade balance between Mexico and China behaves differently than other countries in Latin America, such as Brazil, Chile, and Peru, which enjoyed large surpluses with China ($30B, $7B, and $4B, respectively, in 2018).

Mexico as a Platform: Possibilities for Chinese FDI in Mexico to Balance the Trade Deficit

Mexico has a large trade deficit with the United States because Mexico has played a role as an assembler of products for the United States market. At the same time, Mexico needs input from China. The asymmetry between these two economies is so significant that Mexico has always shaped its export activities depending on the US market. Additionally, most agricultural exports are destined for the US market due to its proximity to the United States. In this way, there is little margin in the global context of trade to increase the exportation of Mexican products to China. However, due to its geographical location, Mexico can use the fundamental advantage of its proximity to the United States by implementing a double geopolitical game. On the one hand, Mexico can attract Mexican territory factories to replace the US capital that is leaving China due to attempts to collate the economies of the United States and China in the context of current tensions between these countries. On the other hand, Mexico can favor investments from Chinese multinationals looking to take advantage of locating in the Mexican territory.

Mexico could increase the volume of products already exported to China through a policy of attracting Chinese FDI to grow Mexican exports to China. Although Mexico is not an important destination for Chinese investment, and the Chinese influence in Mexico is limited due to the United States’ power (Montoya et al., 2020)., there are several growth opportunities to export to the Chinese market. From the agricultural and commodities perspective, meat, fish, edible fruits, and metals are already active in the Chinese market. Given that China mainly imports commodities and agricultural goods from the Latin American region, Mexico could take advantage of China’s resource-seeking strategy, already implemented on several continents, and pursue access to the Chinese food market. Chinese FDI in Africa is evidence of this strategy. Africa produces more than a third of China’s oil and 20% of its cotton (Shepard, 2019). Africa also has roughly half of the world’s manganese stock, an essential ingredient for steel production, a vital industry for China. Mexico should also leverage its active automotive industry because it is already the fourth largest exporter of automotive parts to China. Bimbo, the world’s largest multinational company in the bakery industry, provides evidence of this strategy. The firm handled an entire ecosystem: building a local presence, establishing joint ventures or alliances with local companies, recruiting local talent, developing new business models, reshaping the value proposition, developing new brands or introducing traditional ones with a local flavor, and understanding the supply chain and routes to the Chinese market.

From a service perspective, the Mexican tourism sector is a promising market for Chinese visitors. Mexico is already a preferential destination for tourism but remains an under-visited destination for Chinese tourists due primarily to safety concerns (Lubin, 2019). Mexican destinations’ diverse culture, entertainment, and leisure is a critical strategic advantage. Mexican Hotel Chains such as Grupo Posadas and Camino Real Hotels could participate in this initiative, with the Mexican government promoting their infrastructure to potential Chinese tourists. Africa provides an example of regional marketing strategies to attract tourists (Matiza & Oni, 2014; Rose, 2007). There is also the possibility of using Chinese companies to connect Mexican producers and consumers. The Alibaba group provides an example of support offered by a Chinese company to Mexican small and medium-sized enterprises (SMEs) in the Business to Business (B2B) and Business to Consumers (B2C) segments. The e-commerce platform handles sales and payments online, improving its cross-border transaction capabilities and logistics (Rojas, 2017). Mexican SMEs should achieve the status of “Verified Supplier” on Alibaba’s platform to increase their sales to China. Mexico should be more present in trade shows in China to promote Mexican products, services, and tourism. Participation in trade shows can be an effective channel to access the Chinese markets because they offer a single, short-term venue to network and market. The Mexican government could also use its network of embassies worldwide to promote Mexico’s exports.

Finally, Mexico could explore prominent Mexican multinationals in China, such as Bimbo, the world’s largest bread maker since the acquisition of US baker Sara Lee, and Gruma, the world’s largest tortilla maker, to increase Mexican exports to China. Mexican multinationals can increase exports to China by taking the opportunity to fit themselves into the Chinese transition and domestic consumption. The dual circulation strategy will likely take center stage in China as a way toward more sustainable growth, making China less reliant on factors outside its control. Transitioning the Mexican economy toward Asia will require FDI in infrastructure, logistics, and export capacity, which Beijing should provide.

China and the Mexican Export Success in Latin America and beyond

Mexico, an export-driven country, produces and exports the same amount of goods as the rest of Latin America combined. Foreign trade is a more significant percentage of Mexico’s economy than any other large country. Mexico’s international trade, exports plus imports, equals 78% of the country’s GDP, much higher than Brazil’s 23% or even China’s 48% (Trade as % of GDP, 2020). Mexican companies have access to the US market and share a common language with the rest of Latin America (Amadeo & Estevez, 2020). Consequently, Mexico is a manufacturing and export platform because many plants in Mexico are part of the global value chains of multinational companies that target the US market.

Moreover, Mexico’s production capacity can target non-US customers as the country has the logistic advantage of access to the Atlantic and the Pacific Oceans. In addition, Mexico’s eleven free trade agreements involving 46 countries, including Chile, Colombia, Costa Rica, Nicaragua, Peru, Guatemala, El Salvador, Honduras, Japan, Israel, and the European Union, are solid evidence of Mexico’s capacity to be one of the world’s manufacturing platforms (Villareal, 2020). Finally, due to the recent escalation of commercial tensions between the United States and China, which imposed tariffs on Chinese products, consumers of Chinese products were driven away, creating demand for Mexican-manufactured products.

Conclusions

Mexico differs from other Latin American countries because of several factors: (i) the solid commercial links between Mexico and the United States; (ii) the profile of the Mexican economy, which leans toward the production of goods, therefore becoming a competitor of China as a platform for global manufacturing; and (iii) Mexico’s limited production of commodities. Despite these circumstances, several areas offer growth opportunities to improve trade between Mexico and China. First, Mexico can export more of its oil production to China, which still depends on oil imports for its economy. Long-term deals between Mexico City and Beijing could lock in the large Chinese appetite for oil, decreasing the Mexican trade deficit. Second, Mexico, an essential destination in the global tourism industry, could easily attract more Chinese tourists due to its infrastructure, expertise, and brand awareness. Cancun, Puerto Vallarta, Los Cabos, and the rich pre-Columbian historical sites are potential destinations that already attract thousands of tourists worldwide. Third, to reduce trade imbalances with other countries, Mexico must diversify its exports to other regions, such as Europe and Africa, made possible by Mexico’s location and the Atlantic and Pacific coasts. Fourth, Mexico could take advantage of redesigning global value chains to become a competitor to China as one of the international manufacturing hubs (Kaltenecker, 2020). Finally, Mexico could take advantage of the low wages in the Mexican economy. There is no evidence that Mexican wages will increase in the short or mid-term. In these ways, Mexico is different than other Latin American countries.

Although it is not the only reason, the geopolitical factor is a fundamental part of the difference between economic and commercial relations between Mexico and China. Historically, the United States has considered Mexican territory one of its essential areas of influence. Sharing a 3000-kilometer border means multiple challenges such as migration, drug trafficking, and weapons. At the same time, this border allows vigorous commercial exchange and deep interaction between the two sides of the border. The logic of US capital shapes Mexico’s imports and exports, the Chinese investment in Mexico, and the narrow room the Mexican government has for maneuvering. An example of this reality is the new clauses in the USMCA trade agreement, which include labor inspection on Mexican soil by US authorities and a clause that prevents trade agreements with non-free market economies such as China, under penalty of being excluded from the trilateral deal. Traditionally, Mexico and China have maintained cordial diplomatic relations, which has not helped improve the trade balance for Mexico or increased Chinese investment in Mexico. However, this situation could be changed with the Chinese government’s help in acquiring COVID-19 vaccines, help that the US government did not grant despite formal requests for it. This situation allows the Mexican government to be bolder in negotiating certain prerogatives with China on issues sensitive to US interests in the Mexican territory. Now Mexico could play a geopolitical card to balance its commercial relationship with China. This article showed that Mexico’s economic and commercial relationship with China is unfavorable. A first step to change this situation could be for Mexico to attract investment from Chinese plants that want to produce inputs in Mexico that allow greater access to the US market. A second step is to attract even more American diversions now that decoupling the United States and Chinese economies in some sectors is possible. The potential is there, but for it to be realized the Mexican government must bear in mind that the game behind the trade is geopolitics.

References

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Photos:

USA-China-Mexico: https://mexico-now.com/u-s-china-conflict-has-allowed-mexico-to-balance-its-trade-balance/

Mexico: Photo by Marisol Benitez on Unsplash

China: Photo by Christian Lue on Unsplash