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19 Jul 2013

Mexican opportunity

Alan Beattie

by Alan Beattie

Head of Commercial Banking, Latin America

Mexican opportunity

Mexico wants to export more to China and is working to improve relations

In the late 1990s Mexican assembly lines producing appliances and other goods for export to the US started to leave for China. The Chinese economy was beginning to open up with low wages and a controlled currency. It became worthwhile to move manufacturing across the globe and ship goods back.

But the days of empty plants in Mexico are over and the tables have started to turn. Wages in China have quadrupled since the country joined the World Trade Organisation in 2001 and are higher than in Mexico, when fuel and logistics costs are added.

China has transformed itself from a low-cost manufacturing hub
to a sophisticated
industrial park

The Chinese currency, although still not free to float like other major currencies, has since appreciated, reaching a 19-year high against the dollar this year.

In the meantime China has transformed itself from a low-cost manufacturing hub to a sophisticated industrial park. It is becoming a large exporter of cash with direct investments overseas projected to increase by 15 per cent to USD90 billion in 2013.

Chinese investments are increasing across the globe, including substantial business interests in the US and Europe. It is now turning its attention to Mexico which is being considered as a manufacturing base with relatively low costs.

The recent visit by the Chinese President Xi Jinping to Mexico underscored the growing importance of this relationship.

The country is close to the US, the largest consumer market, and its exports arrive free of tariffs because of the North America Free Trade Agreement, signed in 1994. Data from the World Trade Organisation shows that the North America trade bloc still has a larger footprint within global trade than China. Cross-border commerce between the US and Mexico reached half a trillion dollars in 2012.

Mexico is also part of the Pacific Alliance, a trade group linking Latin America’s fastest-growing economies of Chile, Colombia and Peru. Mexico is an open nation with free-trade agreements that reach 43 countries and 60 per cent of the world´s GDP.

A survey by mfg.com, an online marketplace for manufacturers, shows that the cost of fuels and logistics are growing concerns among North American businesses and that 25 per cent of US companies plan to bring manufacturing closer to home in 2013. This “nearshoring” may mean more companies base operations in Mexico.

President Pena Nieto of Mexico is also keen to improve ties with China. During his trip earlier this year, he said that he wanted the country to become a lower cost centre to enable it to sell more goods to China. The two countries have recently made agreements on oil shipments and tequila imports, which had been restricted in China.

Closer ties are likely to benefit both nations. As Mexico seeks to export more to China, the country may increasingly look to Mexico as a place to invest.

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