TCS Daily


The Emerging Sino-LatAm Strategy

By Fred Stakelbeck - April 7, 2006 12:00 AM

On a three-day visit to Beijing last month, Mexican Foreign Minister Luis Ernesto Derbez addressed growing speculation by some observers that China-Mexico bilateral relations were strained, due in large part to China's existing trade practices and its cautious policy concerning the revaluation of its currency the yuan. "China is Mexico's strategic ally, not an economic rival," Derbez said. The foreign minister's emphatic comment points to a surprising about-face in relations between the two countries that could lead to the development of a new cooperative "Sino-Mexican" economic and energy arrangement.

Over the past two decades, Mexico has repeatedly identified Chinese exports as a key contributor for its stagnant economic growth. According to Mexican officials, cheap Chinese exports have saturated the U.S. market, reducing the country's overall exports to its largest trading partner. Especially hard hit by increased Chinese exports have been Mexican textile producers. Lower textile shipments to the U.S. confirm that the country is hemorrhaging important jobs. Total Mexican apparel shipments to the U.S. fell approximately 10 percent from 2004 to 2005 with 35 percent of all jobs in the Mexican textile and apparel industry lost to competition from China and Southeast Asia. Unable to compete, employers in Mexico have cut domestic payrolls to maintain profitability. Making matters worse for Mexico City, its $15 billion trade deficit with China is growing at a steady pace and shows no signs of receding.

The much-hyped North American Free Trade Agreement (NAFTA), touted as a remedy for Mexico's economic ills, has been something of a disappointment by many lights. Hopes that the agreement would rescue Mexico's economy by providing sustained economic growth and an improved quality of life for Mexican workers have been dashed by the recent market gains made by China. Chinese workers earn a quarter of what Mexican workers earn with steep Chinese price cuts a frequent occurrence. Even with Chinese wage inflation, changes in the country's trade policy, and a revaluated yuan, the argument that Mexico will be able to regain ground already lost to China becomes less compelling by the day. This development has placed enormous competitive pressures on Mexican textile manufacturers who often have limited access to capital, few opportunities for market expansion and little flexibility in terms of product pricing.

Even more frightening for the country's embattled textile manufacturers, Mexico City seems to be slowly capitulating to Beijing; accepting growing manufacturing job losses as an inevitable result of globalization. While in New York City in September, foreign minister Derbez noted that Mexico could no longer compete with the Chinese on labor costs for manufactured exports like textiles. "There are 1.3 billion Chinese and 105 million Mexicans, and as I keep telling my people in Mexico, when you put them on a line, there's going to be 1.2 billion Chinese willing to take a lower wage for the job than the Mexican," Derbez said.

But China's meteoric impact on Mexico's critical textile industry is only part of the story. The other part involves increasing bilateral energy relations and the future of the state-controlled Mexican oil and natural gas industries. In 2005, Mexico reported 14.6 billion barrels of proven oil reserves and 14.9 trillion cubic feet of natural gas reserves with several refineries producing over 300,000 barrels per day (bpd). For an energy-starved China, the combination of dependable production and enormous reserves makes Mexico an attractive partner.

Recently, Pemex, Mexico's giant oil and natural gas monopoly has been mentioned as a possible target for Chinese investment. The company produced record amounts of crude oil and natural gas in 2004, averaging 3.8 million bpd. The likelihood of a Chinese purchase in the near future, however, is remote, since existing constitutional barriers which explicitly prohibit Mexico City from entering into production-sharing contracts with foreign energy conglomerates would need to be removed.

But Mexico may be forced to seek Chinese investment to initiate further exploration and modernization projects. Although high oil prices provided Pemex with $10 billion for infrastructure development in 2005; there remains a need for additional investment to initiate exploration and development projects in order to offset the company's rising long-term debt. Moreover, most of the country's oil comes from one field, Cantarell in the Gulf of Mexico. As a result, Mexico's energy sector lacks diversification and is vulnerable to sudden fluctuations in production. Some industry experts have predicted that the country could run out of oil in the next 11 years, if discoveries do not materialize. Making matters more urgent, the Mexican government relies heavily on energy revenues to drive its national economy. Taken collectively, these developments could provide China with a unique opportunity to secure bilateral energy agreements with Mexico. In the meantime, Beijing will likely seek collaborative development and exploration opportunities and wait patiently until constitutional changes are approved by Mexico City.

Mexico is in a particularly tough position right now, forced to foster closer economic and energy ties with China for its survival -- but with increased cooperation brings hidden challenges. Many Mexican citizens have become increasingly concerned regarding China's influence in the country and Beijing's growing influence on the country's vital textile and energy sectors presents national security concerns that are unlikely to go away anytime soon, as Beijing continues to push Mexico City for greater market access and energy cooperation.

While on a visit to Mexico in 2005, Chinese President Hu Jintao noted that China needed to pay more attention to Sino-Latin American relations making it a part of an "emerging Sino-Latin American strategy." The benefits and risks associated with China's new Mexican strategy are still open for debate. Some experts believe such a strategy is a natural progression for an emerging world economy, while others see China's actions as a way to counter U.S. moves in Central and Southeast Asia. Whatever the reason, China has given greater importance to nurturing relations with Mexico and its Latin American neighbors which merits close attention in the future.

Fred Stakelbeck Jr. is an expert on bilateral and trilateral alliances as they relate to China foreign policy. Comments can be forwarded to Frederick.Stakelbeck@verizon.net.

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