Mexico is taking a hit from the Chinese 'invasion'

Now that a "China Syndrome" is clobbering the Mexican economy, the nation is beginning to wake up to the harsh reality that it is a loser in every way as the Chinese invasion is having "multiple" negative effects — and why not?, a few positive ones, as well.

"Mexico had been the Number Two supplier to the U.S. [after Canada] within the context of the North American Free Trade Agreement (NAFTA)," recalls Raul Rodriguez Barocio, manager of the North American Development Bank (NADB) in Mexico. " However, in 2003, Mexico was displaced by China and seems to have lost that position forever." The NADB is the bank in charge of financing the development and integration of the NAFTA region.

After NAFTA went into effect in 1994, notes Rodriguez, Mexico enjoyed a surge in trade. But successive government administrations have failed to make much-needed structural reforms, and that lack of action has eroded competitive advantages-NAFTA brought.

The trade deficit Mexico faces with China is abysmal, says Rodriguez. Mexico sold to China less than half-ofonepercent of the $560 billion China spent abroad in 2004. On the flip side, Mexico's street stores are flooded with Chinese goods, many of which are imported through the U.S. and repackaged in Mexico in order to make them appear they come from other nations, such as India and Pakistan. Even without these " phantom" goods, Mexico has a $5.6 billion trade deficit with China

"Unlike Chile and Brazil, Mexico has not adopted a clear and aggressive policy to promote business in China," Rodriguez says. "The reaction by the government and businesses as well as economists is very limited. There is a trade deficit because Mexicans have been overly cautious and highly inefficient."

To top it off, China is now Mexico's second most important trading partner when, in 2003, it moved ahead of Japan, which had been the main exporter to Mexico after the U.S.

The core problem is not merely one of trade, Rodriguez points out, but of multi-modal transport and logistics. "The dramatic growth of Asian exports to the U.S. has brought with it serious congestion in ports from the Panama Canal to Seattle, and it is easy to forecast a potential crisis by the end of this decade," he claims "For Mexico to insert itself more efficiently — not merely in regional trade but to the interaction of Asia with North America — the nation must look after important backlogs in transportation infrastructure, in regulations for the management of cargo and Customs systems."

Trade with China is now inevitable, but for Mexico it is extremely challenging given rampant corruption at Mexican Customs that has even street markets laden with Chinese merchandise. To top it off, says economics secretariat Alejandro Gomez, undersecretary of standards and foreign investment, as of early January Mexico had filed 90 complaints with the World Trade Organization alleging dumping by the Chinese government.

"Mexico systematically seeks to inveigh against unfair trade practices. We keep close watch on the enforcement of antidumping agreements so they serve for import control and not as an obstacle for Mexican exports," says Gomez. Imposing countervailing duties is a constant practice of the Mexican government to prevent dumping practices, he says, "even if other nations don't agree with us."

Despite friction between businessmen, both the Chinese and Mexican governments maintain a cordial relationship, claiming, as Chinese Premier Wen Jiabao put it recently, "China and Mexico are partners instead of competitors."

For Mexican industrialists, the Chinese "invasion" can be devastating. Certain industries —- particularly footwear, toys and garments — are feeling the pinch and many Mexican plants have had to shut down.

But according to academician SimÛn Levy-Dabbah, a foreign trade professor at the National Autonomous University of Mexico, the fear and even hatred Mexican industrialists are feeling toward Chinese imports is unwarranted. China is "the factory for the world," he says, and the secret the Chinese have is no secret at all: It's simply good logistics.

"Even though Mexico is improving its logistics infrastructure in ports and roads, it is still lagging. It is no accident that China has increased exports to the U.S. tenfold since 1980 — from $16 to $160 billion — and is continuing to grow," notes Levy-Dabbah.

There is no need for Mexican industrialists to be afraid of "waking the giant," the professor continues. "If our entrepreneurs start seeing the Chinese as creators of opportunities instead of competitors, the answer is in the NAFTA region itself where there are more than 330 million consumers. The Chinese require logistics services to do business here, and therein lies opportunity."

The Chinese see Mexico as a port of entry to North America as well as South America. "Our common destiny lies in the fact that they can be our manufacturing center to export to the world," claims Levy-Dabbah, "while we can be their platform to supply the American continental market."

In short, if you can't beat them, join them.

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