MEXICO AND CHINA: TRADE CONDITIONS AND CHALLENGES IN THE SHORT, MEDIUM AND LONG TERM

Enrique Dussel Peters, professor in the Postgraduate Studies Division of the Economics Faculty of the UNAM and coordinator of the Center for Chinese-Mexican Studies of the School of Economics.

MEXICO AND CHINA: TRADE CONDITIONS AND CHALLENGES IN THE SHORT, MEDIUM AND LONG TERM
Trade between Mexico and China is expanding with giant steps and, as the author explains, it presents distinctive characteristics, among them highly concentrated imports and exports, an elevated and growing trade deficit, and a significant technological gap.

China is trending. On the threshold of the 21st Century's third decade, it has become a savvy competitor for US hegemony. It has achieved this after four decades of a reform and openings process that has enabled it to maintain an economic expansion and an effective development dynamic that, among other achievements, has led to the virtual disappearance of extreme poverty. The process of “globalization with Chinese characteristics” does not appear to depend on ideological affinities or the recognition of diplomacy.1 Through instruments such as the CELAC-China Forum —in which eight countries from Latin America that hold diplomatic relations with Taiwan participate– China has strengthened its presence in Latin America and the Caribbean in trade, financing, foreign direct investment and infrastructure projects.

 

What does the vertiginous rise of the Chinese economy (the world’s largest by GDP and by its purchasing power parity, according to 2020 IMF statistics) mean for Mexico and its massive internal socioeconomic challenges? What consequences does the upscaling of Chinese technology, the US’ fierce response to this process, and the tensions that prevail between both world powers since 2018 bring to Mexico?

 

In the China-Mexico Studies Center (Cechimex) of the Economics Faculty of the Universidad Nacional Autónoma de México and in the Latin American and Caribbean China Academic Network (Red ALC-China), there has been an insistence over the last decade on the need to improve the quality of studies regarding China and its relations with the countries of Latin America and the Caribbean. The abstract and generalized topics, from the Nao to investment, financing and infrastructure projects, must be surpassed to focus on those that allow the dynamics of the bilateral relationship to be understood and to raise the level of the proposals to improve it.

 

Below we focus exclusively on the topic of Mexico-China trade. Beyond the significant differences between the official trade statistics from both countries, we will examine the structural and combined aspects of bilateral trade, using the recent disputes that have strained relations between China and the US as a frame of reference.


Source: own elaboration based on Banxico (2020).

TOTAL TRADE

Over the last decade, Mexico’s foreign trade has seen deep structural changes. While the US has historically maintained a position as the country’s largest trading partner, its participation has progressively declined, from a maximum of 81.03% of the total in 1999 to 62.94% in 2019. This dramatic decline has taken place alongside the increased trade exchange between Mexico and Asia, with which foreign trade volumes have tripled over the last three decades, and in 2019 China contributed 20.95% of total trade. Of Mexico’s Asian trading partners, China is the largest. Not only did the country become Mexico’s second-largest trading partner in 2003, but since 2010 trade with Mexico has surpassed China’s trade volume with the EU bloc. In 2019, bilateral trade flows between Mexico and China represented 9.84% of the country’s total trade volumes, well above the 1% registered in 2000. Between 2000 and 2019, the total trade exchange between Mexico and China grew at an average annual rate of 19.4%, way above the rate of growth of the country’s global trade and that with the US. During that same period, exports increased by an annual average of 20.6% and imports by 19.4%. In Table 1, the dynamic expansion of trade between Mexico and China can be observed.

 

EXPORTS

Between 2000-2019, the value of Mexican exports to China increased 34-fold and, during the last five years of that period, China became Mexico’s third-largest export market, behind the US and Canada. In 2017, Mexican exports to China contributed 1.63% to total exports, the largest contribution to date. For their part, US exports to China dropped from a maximum 88.74% in 2003 to 75.99% in 2019. Of the total Mexican exports to China, 67.37% were made from five groups of goods, among them: oil, with 39.12%, auto parts and vehicles 18.73% and electronics, with 9.52%.

 

IMPORTS

China consolidated its position as Mexico’s second-largest importer, only behind the US and displacing countries such as Japan and Germany. Until 2006 Mexican imports from China were under 1% of total imports, but by 2019 they represented 17.77% of the total. Over the last two decades, between 2000 and 2019, Chinese imports into Mexico grew 30-fold. It was in this sphere of foreign trade that Mexico saw its sharpest decline in its links to the US. In 1996, goods from the US accounted for 75.49% of total imports, while by 2019 they accounted for 44.11%, a more than 30% decline over the period. In terms of goods by type, 65.63% of the total value imported from China was split into three groups: electronics (37.99%), car parts (22.70%) and vehicles (4.95%). China has overtaken the US to become Mexico’s largest supplier in several types of goods.


Source: own elaboration based on Cechimex (2020).

 

TRADE BALANCE

Mexico’s trade balance has shown profound structural changes over recent decades. In the period 1995-2019, the trade surplus with the US increased drastically and, in 2019, totaled $152.75 billion, 7.6 times more than in 2000. No less significant is the performance of the trade balance with China: in 2019, Mexico’s trade deficit with that country was $76.19 billion, 30 times more than in 2000. Chart 1 shows the import-export ratio with China, which in 2019 was 12/1.


Source: own elaboration based on Cechimex (2020).

 

TRADE BY TECHNOLOGICAL LEVEL

A number of institutions and authors have identified the enormous gap in technological content in the goods and services traded between Latin America and the Caribbean and China.5

That structural characteristic highlights the lack of added value of exports to China from Latin America in comparison with imports from China. Something similar, although to a less extent, occurs with trade between Mexico and China: over the last decade the difference or gap between exports and imports with China was more than 30% and, in some cases, above 50% (as occurred in 2011), while in the case of the US, Mexico demonstrates a medium and high technological level in its exports compared with its imports. That shows the profound industrial integration of Mexico with the US, and the growing integration of Chinese goods for domestic and export markets.

 

IMPORTS BY TYPES OF GOODS

Table 3 shows the additional characteristics of Mexican imports from China, and a comparison with those from the US. Firstly, it highlights that, since 2003, more than 80% of Chinese imports correspond to capital goods and intermediaries, which means that they are integrated into the productive processes of merchandise aimed at both the domestic and export market. In contrast, since 2003 less than 20% of Chinese imports correspond to consumer goods (14.72% in 2019, and 10.22% of imports from the US). Of special interest is the high level of participation of capital goods in Mexican imports from China, which accounted for 32.80% of the total in 2019. In that same year, the contribution of capital goods to total imports was 18.67%, and 11.33% of those imported from the US. This performance reflects the increased process of technological upgrading by China in Mexico, a theme which has been analyzed among the three countries of the USMCA.6


Source: own elaboration based on UN-COMTRADE (2020)

RECENT PERFORMANCE

Trade flows between China and the US have been affected by the general tension that has characterized the bilateral relationship between those nations since 2017: China’s participation in total US imports dropped from 16.34% in 2017 to 13.49% in 2019. Within the framework of those disputes, China continues to strengthen its presence in the Mexican market: between 2017 and 2019 its participation in Mexico’s overall trade increased by 0.1%, while imports increased by 0.6%. With such trajectories, China’s participation in total trade accounted for 10.21% in August 2020, an historic high. If those trends are maintained during the rest of this year and the following months, there will surely be “suspicions” and debates, both in the US and Mexico, given that, as a general strategy and since 1994, and including by the current administration, Mexico prioritizes its relationship with the US. In 2020, with the signing of the USMCA, and its chapter 32.10, Mexico’s capacity to sign free trade agreements that were not part of the market, such as the People’s Republic of China, has been restricted. It will be particularly interesting to observe the way in which Mexican companies, particularly those in the auto parts and automotive sector, will overcome the new rules of origin (that are stricter than under NAFTA) in the face of (non-regional) imports from China.

 

CONCLUSIONS AND SOME PROPOSALS
The increase in Mexico-China trade has been spectacular since the 21st century began (and since even before that). In 2019, trade flows between China and Mexico grew at a rate faster than those between its other trading partners. Trade with Mexico’s second-largest trade partner since 2003 also has shown a number of distinctive features: Highly concentrated imports and exports in a number of chapters of the Harmonized System, an elevated and growing trade deficit, as well as a significant technological gap in bilateral trade (in 2019, 73% of Chinese imports and 36% of its exports were of a medium and high technological level). Intermediate goods and capital influxes also have significant weight in Chinese imports into Mexico (more than 85% of the total since 2008), and their participation in the productive processes of Chinese companies operating in Mexico has increased. This combination of trends has remained constant in general terms since 2017, and has strengthened with the increase in tensions between the world’s two largest economies and forms a frame of reference in which to draw up a series of policy proposals, some of which we focus on here.7

Firstly, it would appear indispensable to improve the quality of public, private and academic institutions dedicated to the analysis and promotion of trade with China. Currently, Mexico’s Economy Ministry and Foreign Affairs Ministry, as well as various business and academic bodies, are not up to speed on the importance of trade with China or of the “integral strategic association” agreed on by both countries in 2013. The four bilateral institutions, the Binational Commission, the High-Level Group (GAN) and those specialized in Economy and Investments (GANE and GANI, respectively), have not provided a satisfactory response to the trade challenges in themes such as statistics, illegal trade and triangulation. Neither do they have a solid policy to strengthen the presence of Mexican products in the Chinese market.

Secondly, it would appear indispensable for Mexico, led by the competent authorities in the Economy Ministry, to draw up an agenda with short-, medium- and long-term actions aimed at expanding trade flows between the two countries, and Mexican exports to China in particular, and which is the global importer that has seen the strongest growth over the past five years. An agenda of this kind (there are already specific proposals with respect to this) needs to concentrate on the combination of global value chains with an effective potential, and which would include food and drink, auto parts, footwear, textiles and confection, and the electronics sectors. Without an accurate and timely diagnosis, however, it will not be possible to set out a timely trade agenda that is closely linked to the efforts made to attract foreign direct investment.

With the aim of contributing to a more effective “integral strategic association” between the two countries, Mexico in particular needs to clearly respond to China’s invitations to join the Belt and Road Initiative and the Asian Investment and Infrastructure Bank (AIIB). It is probable that such a tightening of ties would be met with suspicion by the US, although it is a not insignificant fact that many countries in Latin America and the Caribbean, as well as in Europe, already form part of those Chinese initiatives. Mexico’s eventual incorporation, from another perspective, would not only allow the country to widen its margin of action in foreign policy, but also contribute to strengthening ties with its second-largest trading partner and the world’s largest economy.

 

Notes

1 Enrique Dussel Peters, “Una globalización con características chinas”. Nueva Sociedad, February 2018.

2 International Monetary Fund, IMF DataMapper, Washington, D. C. 2020.

3 Eugenio Anguiano Roch, “Confrontación Estados Unidos-China”, Series of Conferences at Cechimex, September 23, 2020.

4 According to the respective official sources, Mexico exported $6.854 billion to China, while the amount reported by China for that same trade flow was $14.337 billion. Mexico reported imports from China of $83.052 billion, while China’s report gives a total of $45.875 billion. Mexico’s trade statistics are used in the article. The bilateral trade statistics can be consulted in

5CEPAL, “Las tensiones comerciales exigen una mayor integración regional”, Perspectivas del Comercio Internacional de América Latina y el Caribe, CEPAL, Santiago de Chile, 2018, and Enrique Dussel Peters (coord.), La nueva relación comercial de América Latina y el Caribe con China ¿integración o desintegración regional?, Red ALC-China, UDUAL, UNAM/CECHIMEX, Mexico, 2016.

6 Enrique Dussel Peters and Samuel Ortiz Velásquez, “El Tratado de Libre Comercio de América del Norte, ¿contribuye China a su integración o desintegración?”, en Enrique Dussel Peters (coord.), La nueva relación comercial de América Latina y el Caribe con China ¿integración o desintegración regional?, Red ALC-China, UDUAL, UNAM/CECHIMEX, Mexico, 2016, pp. 245-308.

7 Dozens of specific proposals drawn up by diverse authors can be consulted in Enrique Dussel Peters, “México: hacia una agenda estratégica en el corto, mediano y largo plazo con China. Propuestas resultantes de las labores del Grupo de Trabajo México-China (2009-2010), Cuadernos de Trabajo del Cechimex, México, 2011, pp. 1-8; Agendasia, Agenda estratégica México-China. Dirigido al C. Presidente Electo Enrique Peña Nieto, Mexico, 2012, Enrique Dussel Peters y Simón Levy-Dabbah (coords.), Hacia una agenda estratégica entre México y China, UAGENDASIA, COMEXI y CECHIMEX (2020).

8 Enrique Dussel Peters and Simón Levy-Dabbah, op. cit.