Mexico Plays the ‘China Card’

This week, while his country is renegotiating the North American Free Trade Agreement, Mexican President Enrique Peña Nieto was in China to pursue his country’s Plan B. Rumblings of a free-trade deal between the two nations have grown since President Trump took office this year, but they’ve mostly been seen as political posturing. But with Trump threatening regularly to dump the deal—even taking time last Sunday, during Hurricane Harvey, to say he “may have to terminate” NAFTA—the possibility of Mexico opening up to China seems ever more real.

Trump’s stated goal to end NAFTA is to raise tariffs and incentivize U.S. companies to stop outsourcing jobs. Whether or not that will work is a separate matter, but what he has done is to push Mexico, which counts the U.S. as its largest trading partner by far, into pursuing other options. Peña Nieto’s will participate in the BRICS summit in China, named for its participants, Brazil, Russia, India, China, and South Africa. And he also met with Chinese President Xi Jinping, a sign the two countries are seeking a closer trading relationship.

NAFTA’s collapse would likely put the U.S. and Mexico on unstable ground, but economists say they doubt it would devastate either country in the short term. Without NAFTA, trade between Mexico and the U.S. would fall back on World Trade Organization(WTO) tariff standards. Signatories to the pact have agreed to “bound rates” for tariffs, which establish a ceiling. These rates differ by industry, but items like agricultural products can have high limits. NAFTA changed the way the U.S. eats, and without NAFTA, consumers stand to lose their perennially fresh and cheap vegetables. But the sector that stand to lose the most is auto manufacturing, because U.S. companies have invested heavily on being able to send car parts to Mexico, assemble them there, then bring them to the U.S. to be sold. The WTO tariffs for the auto sector are much higher than for most other industries, so not only would consumers have to pay more for cars, but it would likely disrupt the current chain of manufacturing. Collectively, however, the average applied tariff for the U.S. is 3.51 percent for all products imported from WTO member countries. Trump has threatened to raise tariffs to 35 percent in order to push companies to build products in the U.S., but this is unlikely because it could spark a trade war. So if NAFTA did end, it’s trade would likely continue at WTO tariff rates, making many products from Mexico more expensive, but leaving intact the flow of trade.

That’s not to say Mexico isn’t concerned about losing NAFTA, or that it isn’t looking for more trading partners. Mexico sends about 75 percent of its exports to the U.S., which comes to about $290 billion. By way of comparison, Canada is its second-largest export market at $23 billion, and China its third at $7 billion.

“It is a very fashionable discussion in Mexico that we should diversify trade since we are having problems with the United States, or more specifically with Trump,” Enrique Dussel Peters, an economics professor at the National Autonomous University of Mexico, told me. “And China has become the most fashionable to talk about.”

China and Mexico increased trade from $4.9 billion in 2015 to $5.4 billion in 2016. The Chinese market is opening up to products like tequila, beer, plantains, and avocados. But, Dussel points out, Mexico has been trying to redirect trade with Chin for years, but has not enjoyed the kind of success it has had with the U.S. through NAFTA.

Since late last year, Mexico and China have talked about strengthening their trading relationship. And as recently as June, China’s ambassador to Mexico, Qiu Xiaoqi, said his country was open to a free-trade agreement. But while a deal like that could benefit China (and scare the U.S.), it probably wouldn’t benefit Mexico that much. Dussel told me Mexico imports about 14 Chinese products for every one product it exports. So scaling that up to account for pulling back from the U.S. would create a huge trade imbalance. And while not all imbalances are bad, Mexico and China are both competing largely for who has the cheapest labor, and that makes them less than ideal trading partners. For example, some of Mexico’s largest exports are electronics, cars, and car parts. China’s largest export is also electronics and it is surrounded by countries that specialize in car manufacturing.

“The thing you want to think about is what is Mexico’s competitive advantage,” Adam Collins, a Latin America economist with Capital Economics, a London-based research and consultancy group, told me. “In both cases it’s low wages. So really the place Mexico should look to are other developed countries, like in Europe, and richer East Asian countries. But even that is an uphill battle because of geography, by which I mean Mexico’s other competitive advantage is its location next to America.”

All that is not to say that Mexico’s overall Plan B, that of diversification, won’t happen. Every U.S. president from George H.W. Bush to Barack Obama has looked at NAFTA as a success, and in that time Mexico grew reliant on its neighbor’s market. The biggest realization under Trump is that perhaps it is too reliant. This is why Mexico, the largest importer of U.S. corn, is openly talking with Brazil and Argentina for corn. But the flip side of Peña Nieto’s move could also be all politics.

Just as Trump uses Twitter to skewer policy and people he disagrees with, Peña Nieto, by courting China during the NAFTA renegotiations, is telling Trump he has his own recourse, the “China card.” This would have been considered too drastic in the past, but as Franklin Foer wrote in this magazine in May, “Unfortunately, Trump has elevated machismo to foreign-policy doctrine … .”