2/17/2024 - Politics and Society

Mexico's role in China's expansion strategy

By Jose Daniel Salinardi

Mexico's role in China's expansion strategy

Amid diversification efforts and growing trade tensions, Mexico surpassed China as the main source of goods imported by the United States in 2023 for the first time in more than two decades. Imports from Mexico increased $22.8 billion per year to $475.6 billion last year, while Chinese imports decreased $109.1 billion to $427.2 billion, according to the U.S. Census Office. Economists said data is a clear indication of the impact of escalating trade disputes between Washington and Beijing.

These results seem to be a consequence of the successful application in some Latin American countries of new investment strategies like so-called "nearshoring" and "friendshoring". In the first case, a company changes, in whole or in part, its production structure to another country, or is associated with third parties located in it, with the condition that both must be geographically located in areas close to its main clients.

"friendshoring", in turn, is a variant of the previous strategy that gives priority to diplomatic, economic or commercial friendly relations between the country of origin of a company and the radiation of its productive investments. In both cases, the fundamentals are economic, but what will define the choice of one or other alternative has an unhealthy political component. In the case where we are concerned it is clear that it is difficult to think of a Chinese corporation developing its products in the United States, at lower costs to sell them later in the country at lower prices than that of local manufacturing. China has the ability to do so, but what government would pay the political and economic cost of such a decision?

The above does not prevent a country like China, for example, from competing commercially in the domestic market of another, in addition to the distance that separates them. In fact, if we analyze the composition of the U.S. tax deficit, we can see that the trade balance with China (exports less imports) provides a deficit of US$ 427 billion, according to data from the Department of Commerce. A very significant number, although the smallest registered since 2020, reflecting a drop in imports from the Asian country. Are you joining less Chinese products to the United States really? Or what happens is that they make it from another country?

As we expressed at the beginning, the Department of Commerce data showed that the U.S. bought in 2023 more goods to Mexico than China. We also highlight that the trade balance deficit between both countries is the lowest since 2020, ̈casually in the year when the Covid 19 pandemic fell heavily the distribution logistics chains used for international trade which, together with the increase in energy cost and the self-imposed quarantines by most countries, generated desupply, price increases and strongly damaged, economically and financially. An extraordinary fact that required a geopolitical look to reverse these effects. And China had it through "nearshoring" and "friendshoring". Cercania e aamistad. Economics and politics.

What is the role of Mexico in China's strategic drive? The "citizens" companies that evaluate productive investments in countries other than that of their origin, in addition to the economic and financial theme, pay much attention to the legal security they offer. It is basically respect for the rights arising from the ownership of trademarks, patents and production processes; and equality before the law in relation to local companies in matters of social and fiscal legislation. It does not seem to be the ideal scenario for Chinese investments. Why Mexico, then?

The Mexican authorities believed to see a great opportunity to develop their economy after the Pandemic of Covid 19, for its proximity to the large market that represents the United States. It was not the first, the Xi Jinping government was already working on it. The strategy was very simple: they first offered funding for the development of local companies, and then, when growth outweighed their ability to supply aggregate demand, directly acquired or pressured them to install their own subsidiaries that began to have an increasing importance in key areas of the Mexican economy, such as automotive and lithium industrialization. The vehicle manufacturer Cherey Automobile Co. Ltd, internationally known for its brands ̈Chery ̈ (Chirey in Mexico), ̈Arrizo ̈ andÂTiggo has invested billions of dollars in the last three years to increase its production. The mining company “Bacanora Lithium” (a branch of Ganfeng Lithium, China), was about to undertake an investment of 800 million dollars to expand its project in the state of Sonora, when the concession was cancelled by a decision of the government of López Obrador to create the state company “Litio Mx”, which still has no budget. A move to join China in the exploitation and industrialization of this precious element? Does the late U.S. pressures, which have the Jefa of strategic South Command, General Laura Richardson, traversing all the countries where lithium has been discovered? Shein, a leading Chinese company in online sales, the favorite fashion brand of centennials and millennials that is devouring the industry, has its best markets in Mexico and Chile.

The laxitude of the conditions that Mexico imposed on the installation of Chinese companies in its territory wants to be reverted now by a change in the rules of play. The government of Antonio Manuel López Obrador (AMLO) realized that they were faster in identifying and exploring the resources and commercial advantages that Mexico offers, and intends to impose new conditions on the already agreed one. Difficult task when you have to face a millennial country, which plans your strategies carefully for years, without pressure from the times of internal politics, and has billionaire resources to achieve your goals. The contempt and lack of respect that AMLO demonstrated to the figure of the President of the United States, Joe Biden, also played in favor of China.

In June, general elections will be held in Mexico, where the strong dish is the presidential replacement. López Obrador will not be a candidate, but it was who nominated the representative of his political party "Movimento de Regeneration Nacional" (MORENA), Claudia Sheinbaum, ex Jefa de Governo da Cidade de Mexico between 2018 and 2023. The government of China does not see any damage to its investments, nor is it willing to lose its strategic position in the Central American country. In fact, your concern is across the border.

Five months later, in November, the United States will elect a new president. Although the Republican Party has not yet chosen its candidate, the primary held so far in Iowa, New Hampshire and Nevada; and opinion polls mark Donald Trump as the great favorite to be nominated in the Party Convention, to be held between July 15 and 18, 2024. Your opponent will be the current president, Joe Biden. During his first term, Trump established clear limits to trade relations between the US and China, in defense of the interests of companies and products of American origin. The foreign policy erratic of the Biden Administration and the lack of a strategy to stop China's expansion anticipate a more complicated relationship with the US in the face of Trump's eventual triumph. What about Mexico?

The contempt that López Obrador expresses for Biden contrasts with respect, almost fearful we could say, who professes for Trump. Your government's sudden change of attitude towards the conditions of establishing Chinese companies in Mexico or granting concessions such as lithium has different interpretations among analysts. Some say this is a maneuver to improve their position in the negotiation of the economic conditions of the agreements. For others, he's trying to get away from China's dependence and send a signal to Trump himself. Finally, there are those who say they are the two sides of the same coin: to show themselves refractory with China, to ratify the trade alliances, but in better condition and to have a powerful ally if it comes to the time to face commercially with the US under a new mandate of Donald Trump.

One question that many of us do is because Mexico expels so many people from their territory to the South border of the United States, if a boom of Chinese productive investments is living. Narcotrafficking and growing violence is the most listened response. Although the most suspicious believe to see behind this uncontrolled exodus certain complicity between China and Mexico to complicate American domestic policy. While in the United States, Democrats doubt Joe Biden's physical and mental skills to face a new presidential term, China's geopolitical vision, this time based in Mexico, is doing its job. Time plays for you.

When the next president of the United States takes over his term in January 2025, there will be little more than six months since in Mexico the same happened. More than enough for a country like China, which has already defined its political and economic strategies by at least 2030, the date for which Xi Jinping not only expects it to be the world's first economy, but also to have installed a new global order breaking the US hegemony.

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Jose Daniel Salinardi

Jose Daniel Salinardi

Jose Daniel Salinardi is a Certified Public Accountant graduated from the School of Economics of the University of Buenos Aires.

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