Why Mexico’s business community is turning its sights to China

Share

When Mexico tossed out a contract with a Chinese company for billions of dollars worth of new high-speed rail construction, it was tempting to see a broader rejection of Beijing and the practices of its state-owned companies.

The exact opposite is true. Since Enrique Pena Nieto came to power in 2012, Mexico has pursued a wide-armed embrace of China, an important pivot that has gone largely ignored in the controversy over the rail contract.

Mexico's concerted strategy of courting China stands in stark contrast to the often skeptical stance among its North American neighbours. But because of the sweeping provisions under NAFTA, if Mr. Pena Nieto succeeds with his cross-Pacific ambitions, he stands to remake Mexico as a gateway for China into the vast continental trading area.

It's a matter of obvious interest to Canada: Chinese companies that gain status under the North American Free Trade Agreement by setting up in Mexico gain the ability to sidestep the tariff and other barriers they might otherwise face.

In the past, that has never been much of an issue, since frosty Sino-Mexican relations kept Chinese companies at a distance. But that's changing.

As president, Mr. Pena Nieto's first foreign trip outside Latin America was to China. He has met President Xi Jinping in China, at home in Mexico and in St. Petersburg, Russia. His foreign secretary Jose Antonio Meade has written about becoming "true travelling companions" with China. The two sides have sought to hammer out a bilateral investment fund, and last year signed a "tequila agreement" that opened the door for exports of Mexican pork and hard liquor.

Mr. Pena Nieto, at the time, sought to draw parallels between the two countries as both being "on the rise in a new international order."

It's a message that has resonated with a Mexican business community that has turned its sights to China.

Earlier this fall, a delegation from Tijuana landed in Beijing to beat the drums of trade. Enrique Esparza, president of the Tijuana Economic Development Corporation, opened a presentation with a slide calling Tijuana "the perfect location to serve North America … and the world."

He highlighted the changing wage picture: Where China used to have vastly cheaper labour, its workers are paid so much better now that salaries are now within 20 per cent of each other. Add in productivity gains, and the Boston Consulting Group now estimates that Mexico is four percentage points cheaper than China in average direct manufacturing costs, a major reversal from a year ago.

Then, Mr. Esparza argued, layer on a growing crop of engineering graduates – 115,000 a year nation-wide – and the obvious advantages of proximity to those giant markets to the north.

"If your client is a Home Depot or a Wal-Mart and they need new product on the shelves in two or four weeks, it's not going to happen if you're manufacturing in China, unless you're carrying significant inventories," he said.

Mexico has also offered itself as an alternative to China's famously porous approach to intellectual property protection.

It seems to be working. "In the last year, we have seen an influx of Chinese companies coming to the Tijuana border region," Mr. Esparza said. "We're seeing, for example, furniture manufacturers that were all but gone from Tijuana are now setting up shop along the border again."

The warming trade comes after a lengthy period of Sino-Mexican relations that were just short of hostile. A dispute between the two nations threatened to block Beijing's prized ascension to the World Trade Organization. Mexico still formally supports independence for Taiwan. In 2011, then President Felipe Calderon entertained the Dalai Lama at the Presidential Palace in Mexico City, sparking Chinese fury.

The acrimony hasn't helped straighten out hugely imbalanced trading relations. Though China was Mexico's fourth-largest export destination, it was unrequited love: Last year, Taiwan invested more in Mexico than China. And it was largely China's rise to the WTO that sucked manufacturing out of Mexico in the first place.

Now, however, a Chinese company is building a factory in Mexico to supply auto parts to Nissan. Another is manufacturing copper tubes for air-conditioning systems.

And Mexico has a keen sales pitch to win more. It now has free-trade agreements with 44 countries, more than any other country on earth, so what's made in Mexico can be sold far and wide. It has an oil sector that is opening up, and infrastructure needs beyond high-speed rail. It even has growing numbers of Americans coming to retire and looking for newly built condos and resorts, said Jose Alberto Limas Gutierrez, head of the economic and commercial section at the Mexican embassy in Beijing.

"All of this means more opportunities for Chinese companies," he said.