The discourse about the trade war between China and the United States has intensified in recent months not only as an electoral strategy but rather it has extended also into other fronts damaging the bilateral relationship. This means that the decoupling of the global economy is likely to continue during the run-up to the elections in the United States; moreover, it may even accelerate once the winner is announced in November 2020.
The Trump administration has adopted a series of measures to stop the expansion of China, for instance, export prohibitions on a wide variety of sensitive products, tariffs, forced relocation of North American companies, and even threatening to withdraw from the WTO. More recently, the closure of the Chinese consulate in Houston was announced alleging intellectual property violations and espionage. In retaliation, the Chinese government ordered to close the American consulate in the city of Chengdu, measures that clearly raise the level of the conflict.
However, it is relevant to take into account the complexity to untangle the two largest economies in the world. On the one hand, the restructuring the world economy will have major implications from the destruction of business models to the reconstruction of entire industries. On the other hand, there are geopolitical consequences that are already being drawn on the map.
In this regard, Beijing has made significant efforts to strengthen and consolidate economic ties with emerging markets. Just last week, Foreign Minister Wang Yi held meetings with senior officials in Vietnam, while the conclusion of the negotiations of the Cambodia-China FTA negotiations was announced. In response to the crisis caused by the COVID-19 pandemic, it was also announced an important economic aid package for Latin America, which is one of many other ways China is offering support to emerging countries to combat the virus.
On the technological side, despite the fact that several countries have excluded or banned Huawei and other Chinese applications from their telecommunications system, the expansion of information giants, such as Alibaba and Tencent, in different commercial formats has not been stopped. Furthermore, the country continues to promote the local development of 5G and semiconductors, as well as technological infrastructure, to reduce its dependence on other countries.
Regardless of the current internal discussions of the WTO, Mexican companies can continue to depend on the rules and preferential access that Mexico enjoys under its free trade and investment agreements with more than 50 countries. This allows Mexican companies to continue expanding their operation across borders under clear rules.
However, this scenario of trade tensions between China and the United States may have a short and medium-term impact on Mexico’s promotion strategy as an investment destination for the manufacturing sector that seeks to export to the North American markets.
Although it is true that Chinese companies will continue to develop new markets for their products and technologies, it is also clear that there is opposition to US policies within China. This situation is not exclusive to mainland China, but it has also spread to the Hong Kong Special Administrative Region, which has been damaged by recent announcements by the Trump administration.
This week the Global Times newspaper shared the results of a quick online poll asking readers which American consulate would most likely close. 80% of the responses supported the closure of the United States consulate in Hong Kong. Said result reflects a clear anti-American feeling as a result of the US government’s interference in China’s internal affairs.
In this context of political and commercial tensions, it is evident that our closeness and preferential access to the North American market are not enough arguments for Chinese companies to invest in Mexico. By contrast, it is very necessary to update our approach strategy towards Chinese companies and investors, not only positioning the benefits of the USMCA, but also doing an in-depth job of identifying complementation opportunities in commercial, industrial, technological, and investment projects.
On the other hand, it is essential to offer guarantees for Chinese investments in sectors of interest such as mining, energy, infrastructure, and manufacturing; as well as incentives in sectors where there is still very little Chinese presence.
As the US elections approach, the candidates’ speech will intensify and so will the tensions rise between China and the United States and, in consequence, retaliatory measures between both economies. If Mexico, therefore, does not update its strategy and approach with a new speech, such as highlighting our economic openness, commitment to free trade, supply chain integration, privileged geographical location, and legal certainty for investors, our country runs the risk of disappearing from the Chinese map as an attractive investment destination under this scenario.
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As reported in a news portal, in 2019 Mexico surpassed China in the commercial exchange with the US, taking into account imports and exports according to US figures. As a result, Mexico became the main trading partner of the US in 2019; accordingly, since 2005 Mexico has not been in said position. Obviously, this displacement is due to the Chinese and US trade conflict, as well as the growth of the US economy.
This is not a novelty, UNCTAD conducted a study on the effects of the US-China trade war on trade flows last year. In short, several countries have occupied part of the “void” that China has left, including Mexico, Taiwan, Vietnam, among others. See our summary of the UNCTAD report for more details here.
According to the figures from the Department of Commerce, Mexico increased its exports to the US 3.47% in 2019 compared to 2018, while China’s exports decreased by 17%, the above is reflected in the following table:
In this regard, the president of the National Association of Importers and Exporters of the Mexican Republic (ANIEM), Gerardo Tejonar Castro, acknowledged that there was no way for the national industry to completely fill the void left by China and said that these results may be temporary because, on the one hand, China has already reached the Phase 1 Agreement.
Legal Amendments & International Trade
After a series of steps to reform Mexico’s Harmonized Tariff Schedule (MHTS) that included public consultations, yesterday the Commission on Economy, Commerce, and Competitiveness of the Chamber of Deputies discussed the new Law on General Import and Export Taxes (LIGIE), as well as reforms and additions to the Customs Law.
The new LIGIE will implement the sixth amendment of the Harmonized System of the World Customs Organization to improve the identification and classification of the goods. In particular, the sixth amendment addresses the classification of the following goods: fishery products, forest products, anti-malaria, chemicals, and technology advances.
Needless to say, the MHTS has not been revised comprehensively since its creation, therefore, the Ministry of Economy took the task of conducting an exhaustive review. In that sense, it is planned to eliminate tariff items by low trade and, therefore, to compact tariff items, and unfolding tariff items for statistical purposes into 10 digits, which will be called Commercial Identification Number, instead of the current 8 digits.
(Download the PDF version: here)
The United Nations Conference on Trade and Development (UNCTAD) submitted a paper entitled “Trade and trade diversion effects of United States tariffs on China.” The paper presents interesting facts or findings regarding the US-China trade war, which began early summer 2018. We highlight the following:
Though this may be “positive news” for Mexico, Mexican officials have cautioned that the US-China trade war impacts negatively the global economy and, particularly, the US, Mexico’s most important trading partner.
The Informal Ministerial Meeting of the WTO was held this Tuesday in Shanghai, China, where topics such as investment facilitation and WTO reform were discussed.
The Minister of Economy, Graciela Márquez, supported the initiative regarding investment facilitation, mainly through the streamlining of administrative procedures, as well as the assurance of favorable legal conditions for investors. The Minister stressed that this initiative is consistent with the current administration’s position that seeks to create an investment-friendly environment.
On WTO reform, the Minister shared her thoughts in the journal El Financiero, pointing out the proposed lines of action of the Mexican government.
We highlight that the Minister pointed out that the moment the WTO is going through reflects the crisis of multilateralism and the need to “redefine” the rules of international trade. While the WTO reform is the responsibility of the 164 members, she perceives that it will be “complicated” by the lack of commitment of main actors. The Minister proposes the following three lines of action for the WTO reform:
Today, the reform to the General Health Law, regarding overweight, obesity, and labeling of food and non-alcoholic beverages, was published in the Official Gazette. This reform introduces the Front Warning Labels of food and non-alcoholic beverages that we have reported in our alerts (see Frontal Warning Label and Modification of NOM-051 on Labeling of Food and Non-Alcoholic Beverages).
According to the second transitory article, regulatory adjustments shall be published in the following 180 days.
This Tuesday Hyun Joon Cho, president of Hyosung Corporation, a Korean Industrial conglomerate, had a private meeting with Mexican President, AMLO, after his morning press conference. Hyosung Corporation’s business lines entail the chemical industry, industrial materials, IT, textiles and construction. News outlets note that the Office of the President did not provide details regarding the meeting. We wonder whether this Korean company is planning to invest in Mexico.