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Foreign Policy

China and Mexico: An Emerging Trans-Pacific Partnership?

Sep 24 , 2013

China’s exploding interest in Latin America is a defining element of the past decade in the Americas.  From a base approaching zero, China is now the top trade partner for Brazil, Chile, and Peru and ranks near the top for several others.  Mostly, this is a reflection of the sale of primary goods from the region to China, and the return purchase of products manufactured in China.  Investment is also flowing, primarily from China to Latin America, although Latin American multilatinas are increasingly aware of investment opportunities in China.

One nation has conspicuously been absent from the party: Mexico.  Latin America’s second largest economy after Brazil, Mexico has long been tied closely to the United States economically, in 2012 sending almost 80 percent of its exports north and importing almost 50 percent from the United States.  Even as South Americans have sold aggressively into the China market since the first visit of then-leader Hu Jintao in 2003, Mexico’s trade patterns remained largely the same as before.  The North American Free Trade Agreement (NAFTA) gives Mexico preferential access into the world’s largest market, and the changing nature of production and global supply chains has meant that North America has now become an integrated production space.  The National Bureau of Economic Research has found, in fact, that 40 percent of Mexico’s global exports are inputs from the United States.  At the same time, Mexican producers have long complained that China’s market has been difficult to crack, particularly in areas where Mexico is a competitive producer.

Similarly, China’s quest for economic takeoff over the past decade has required massive inputs of raw materials from around the world, including energy, ores, minerals, and agricultural products, among others.  With the exception of energy, most of which has been used domestically or exported to the United States, Mexico simply doesn’t produce the types of materials that China has sought from elsewhere in Latin America.  Many of the items that Mexico does produce for export are manufactured goods—exactly the sort of products in which China has specialized.  And both have been increasingly competitive in seeking to serve the U.S. market.  The two countries have long seen themselves as competitors, rather than natural economic partners.  Politics has also intervened: the visit by the Dalai Lama to Mexico in 2011 and the H1N1 health scare put the relationship in the deepfreeze.

As a result, neither nation has made much effort to improve the bilateral relationship.  Until now.

One of the top foreign policy initiatives of the Pena Nieto Administration in Mexico since the inauguration in December 2012 has been to diversify Mexico’s political and economic relationships.  That is not necessarily to say that Mexico is looking to distance itself from the United States, but rather that it is looking to broaden its other relationships as a means to build Mexico’s global profile—a priority for the new team in Mexico City.  One important way to do this is to redefine the bilateral relationship with China.  At the same time, leadership change in China earlier this year has offered a fortuitous opportunity to re-engineer relationship led by two newly elevated, next generation leaders.

The evidence of warming relations is mounting, even as relations between China and South America are cooling given continued political uncertainty in countries such as Venezuela and a slowing Chinese economy that is softening regional commodities sales.  Shortly after his inauguration, Mexican President Enrique Pena Nieto traveled to China in April, where he sought greater balance to the trade relationship weighted heavily in China’s favor.  Newly installed President Xi Jinping reciprocated by traveling to Mexico City in June.  A third meeting between the two leaders was just held in St. Petersburg during the G20 earlier in September.

Out of these meetings—and numerous others conducted at the cabinet and sub-cabinet levels—have developed a series of commitments to upgrade the relationship through increased Chinese purchases of Mexican goods including tequila and pork, educational exchanges, and energy and minerals investments, among others.  The last of these is particularly important given Pena Nieto’s efforts to reform the energy sector in Mexico by allowing direct foreign investment for the first time since the 1938 nationalization.  Should this effort be successful, Mexico’s energy sector will be hungry for capital, technology, and know-how, including foreign markets, and China will be better positioned to participate in the sector.  At the same time, increasing Chinese investments in Mexico generally will serve as a platform for production that can target the U.S. market as a near shoring play.  There is evidence of investment flowing back to Mexico given increasing labor costs and challenging business conditions in China; China’s own government may also be noticing the trend and seeking to take full advantage.

That is not to suggest that the effort to improve China-Mexico ties will overtake Mexico’s relationship with the United States.  It can’t, and it won’t, given geography, history, culture, and a fully integrated economic relationship built on NAFTA and furthered within the pending Trans-Pacific Partnership.  But it does mean that Mexico is creating new relationships in an effort to pursue its own international “going out” strategy, positioning itself as a blindingly obvious oversight in the original grouping of the so-called BRIC economies, a decreasingly-useful exercise in international political economy by acronym.

Beijing and Mexico City are moving quickly toward a more robust economic and political relationship focused on greater exchange and mutual understanding.  This is a story that is only just developing, but could have important ramifications in pan-Pacific affairs, particularly as Mexico plays an even greater regional role.  For China, the issue is strategic.  For Mexico, too.  It’s a story that many of us will be watching closely in the weeks and months to come.

Eric Farnsworth is Vice President of the Council of the Americas and Americas Society, heading the Washington, DC, office since 2003.

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