Defining a Robust Commercial Agenda: Mexico’s Great Challenge  

Interview with Enrique Dussel Peters, professor at the Graduate Studies Division of the School of Economics, UNAM  

By: Guillermo Máynez Gil

Defining a Robust Commercial Agenda: Mexico’s Great Challenge  
Given the eventual entry into force of the USMCA and in the context of the tariff war that the United States faces with China, its main trade partners, Mexico needs to build a robust strategy that allows it to strengthen its position in the global market and capitalize on the opportunities offered by a production and export model based on regional platforms.  

 Everything points to the USMCA soon becoming the trade regulatory framework between North American countries. What are your thoughts on NAFTA?

In very wide terms, NAFTA is part of a development strategy that took shape during the Carlos Salinas administration and that some of us call “export-oriented industrialization.” It resulted in a socioeconomic polarization process that only benefited a small group of homes, companies and federative entities, particularly those closely linked to export products and processes. From a perspective of territorial endogeneity, a concept I have worked on for decades to study the way in which different territories are integrated into global trade chains, we see that the bulk of the national production apparatus – mostly in small, medium and micro companies, from Mexico City to southern Mexico – not only lagged behind, but was displaced by competition.

 

Now, in 2020, NAFTA plays an increasingly less important role. The prevalent feeling in the past year and a half was that if said agreement was not successfully renegotiated, the result would be a crisis in the Mexican production apparatus. This is empirically questionable. In 2019, aggregated imports from the United States paid a tariff of less than 1.5%, on average, and in those from Mexico, 0.11%. Therefore, with or without a treaty, very few segments of global value chains would be affected. The main problem for Mexico is the lack of integration of our exports into the production dynamics of the bulk of the national production apparatus.

 

Can China be considered the fourth member of NAFTA? What impact did the irruption of the Asian giant had on trade in and out of NAFTA?

The impact is very significant, so much that the history of NAFTA can be clearly divided into two periods: the first one, from its inception to the beginning of this century, and the second one, from November of 2001 when China entered the WTO. Phase one involved investment and trade growth within NAFTA; phase two, China became the United States’ main trade partner, displacing Canada and Mexico, and coming in second place of total trade with the latter two countries.

 

China burst into NAFTA’s trade dynamics in a very important way. Although the trade coefficient within North America did increase from 40 to 47 percent in the first years of NAFTA, by 2018, it fell to lower levels than in 1994; particularly as a result of China’s growing participation. Deep trade disintegration among NAFTA members was seen in the second phase.

 

How did trade between Mexico and China evolve during NAFTA?

China became Mexico’s second trade partner in 2003. Between 2003 and 2019, Mexico’s trade with China, as a proportion of its total trade, increased from under 3% to 10%. It is a sui generis trade relationship: in 2018 the import-export relationship with China went from 11 to 1. The main Mexican imports from China concentrated in numerous areas namely, electronics, automotive, a large number of light manufacturing and, increasingly, capital goods.

 

World trade seems to be increasingly organized as regional blocs. How does this trend impact on trade between Mexico and China?

Trade flows underwent very significant changes when Trump began the trade war and up until a few weeks ago. In 2019, unlike the two NAFTA phases I previously mentioned, Mexico became the United States’ main trade partner. This unusual and relevant fact is mainly due to the plummeting of U.S. trade with China. If between 2016 and 2017 more than 16% of total U.S. trade was with China, in 2019 it fell to 13%. Since trade with Mexico remained relatively constant, our country pushed down China as the United States’ number one trade partner.

 

Unfortunately, authorities in the last two decades have not become aware of the huge opportunity this triangular relationship with the United States and China represents for Mexico. We believe that we sometimes can and sometimes cannot address the bilateral relationship with China. Mexican governments have not done enough to promote a closer rapprochement with the Asian giant. A consistent strategy that sets the course for the short and long term of trade and investment is lacking.


ENRIQUE DUSSEL PETERS

 

Do you think Mexico can continue being the United States’ main trade partner?

It basically depends on the course of the relationship between the United States and China. If normalized, China will quickly go back to first place. If the disagreement prevails—and my studies indicate so regardless who wins the elections in the United States—in a climate of tensions and concerns for national security, Mexico’s current position will continue. We must keep in mind, however, that the difference with Canada is minimal. The big responsibility falls on our authorities, who must take very concrete measures to incorporate a greater number of Mexican suppliers in the different links of the export chains. Progressively close the entry of temporary imports that are then re-exported with practically no added value in the country.

 

Other than trade flows, what impact will this trade war have on the arrival of investment from China to Mexico?

It’s one of the most important themes we have studied at UNAM’s China-Mexico Center. In both public and private sectors, there is a prevalent perception that Mexico will—automatically—receive large flows of Chinese investment as a result of this trade war. I would be more cautious.

 

Historically, Chinese investments in Mexico have kept a low profile. Under 1% of foreign direct investment Mexico received between 1999 and the third quarter of 2019 came from China. Furthermore, conditions for a substantial increase in the medium term are non-existent because Mexico has failed to set a clear agenda for Chinese companies as well as for the Chinese government, so they invest in Mexico. In general terms, China lacks knowledge about Mexico, NAFTA, and USMCA. It also doesn’t have enough information regarding the rules of origin, the industrial organization of suppliers, clients, labor laws, and other relevant aspects.

 

As long as effective promotional work is not undertaken, China will continue to invest in other countries. The exception is a small group of Chinese companies that in the last five years have invested in regions of Mexico such as Bajío, and in the automotive, electronics and telecommunications industries.

 

In any case, Mexico has failed to leverage the Chinese potential, and it will continue to do so if there is no coordinated work between the Economy an Foreign Affairs secretariats, both between them and with the business and academic sector.

 

Can we expect more multinational company plants announcing they will move their operations from China to Mexico?

We need to analyze it on a case-by-case basis. For starters, most international companies that have established themselves in China in the last ten years did not necessarily do so due to low workforce costs, nor with their sights set on establishing an export platform there. The size of the domestic market is the determining factor. China is already the largest world consumer of smartphones, cars, telecommunications, etc. These companies will remain in that country be there a trade war or anything else. Volkswagen, for example, sells more cars in China than in Germany. Moving their plants from China to Mexico makes no sense in their business model. We must differentiate matters and not be guided by generalities that sometimes border on the absurd.

 

There are cases, of course, such as footwear, the yarn-textile-garment chain, or certain import-for-export processes in which Chinese companies, or companies established in China could be seriously considering leaving that country (a process that started over five years ago). However, they can establish themselves in a hundred different countries, from Vietnam and India, to Uruguay or Honduras. Mexico is but one of the options.

 

Thinking along these lines, what can Mexico do to seek investment from China (and other countries) to develop more national supplies and increase the national content and complexity of our exports?

It depends on the value chain in question. It’s not the same to import parts for harnesses or umbrellas, than for automobiles or aircrafts. Specific diagnoses are required—many of which already exist—but above all, efforts for national production integration, as President López Obrador has been saying, which unfortunately, has not been followed by concrete actions. Adding companies in the south of the country—domestic market oriented, specially the smaller ones—to the most dynamic activities, that´s the challenge.

Until February 2020, there hasn’t been any concrete program to leverage this position as the main trading partner of the United States, nor the enormous potential that Mexico’s trade has with the rest of the world.


CHINESE INVESTMENTS IN MEXICO HAVE KEPT A LOW PROFILE

Amidst all these trends, how will the USMCA impact China’s relationship with North American countries?

In general, and given the aggressiveness of the Trump administration’s measures, the USMCA is to become the first international anti-China trade agreement. Clause 32.10 states that if one of the three USMCA members plans to negotiate a free trade agreement with a non-market economy such as China, it must get approval from its partners or leave the USMCA.

 

Mexico will have to deal with this situation, in which two giants are fighting, and not be able to stay out of the dispute. These are our two main trading partners.



How will the USMCA affect trade and investment flows between China and the North American region?

If the proper measures are taken, Mexico could be the big winner in the increase in regional content provided in the USMCA rules of origin. The increase—from 62.5 to 75 percent—is a very clear incentive: if the regional added value is increased, the tariff won’t be paid. What country has grown the most in the automotive chain? Mexico.

 

If we manage to increase the added value internally for the country’s exports, we will improve our economic performance. But the new trade rules will have to be seen in their right dimension. There are cases where a company produces in México and does not complying with the rule of origin will have to pay a 0.1% tariff to export to the United States; in other words, nothing. If the effort to generate greater value inside is not justified, the company is better off paying the tariff. There are products like pickups which will pay a 25% tariff.

 

What do you think about the new labor regulation introduced by the USMCA?

I find it very favorable. One of the main liabilities of NAFTA is the gaps that remain in terms of productivity and wages. The wage gap between the United States and Mexico has increased in the manufacturing sector. Now, I’m afraid that in many cases, paying the equivalent of USD$ 16 an hour is naive. For 40-hour weeks, it would amount to over 50 thousand pesos a month. It would be magnificent, but impossible in today’s conditions in Mexico, whether with North American inspectors or not. It will hopefully be possible in the long term.



Is there a favorable scenario to strengthen Mexico’s foreign trade? What should be done to improve the quality of the integration of the Mexican economy into international markets?

Yes, there is a favorable scenario. The USMCA negotiation was extremely difficult, and representatives of Mexico made tremendous efforts in the face of blackmail, insults and other pressures. Moreover, Mexico has been lucky with the United States-China trade war. The pending task—for 25 years—is the same: we need further integration into export production processes. Little has been done and we need to step up.



In light of all these processes, including the race to tech leadership, how do you see the future of U.S.-China relations in the short and medium term? What will Mexico’s and Canada’s role be in this dynamic?

The United States and China, according to their own officials, are in a race between great powers. Canada and Mexico are at another level, and we have to get used to the fact that, in the medium and long term, these tensions will go beyond the commercial aspect. There will be much more competition in terms of technology and investments, in the search for exclusive allies. This places Mexico and other countries at a crossroad that will require highly delicate diplomacy to find enough room for maneuver.