Survival Tactics

China trade jumps with NAFTA under threat

In response to threats by the Trump administration to scrap NAFTA, Mexican exporters are increasingly looking toward China.

An employee works on the assembly line at the Volkswagen (VW) automobile manufacturing factory in Puebla

The election of Donald Trump has been a wakeup call for Mexican exporters. Before the billionaire’s electoral victory, Mexican firms were comfortably sending their goods to the lucrative neighboring US market under the wing of the North American Free Trade Agreement (NAFTA). As a result, foreign sales to the US have risen from USD50 billion in 1994, when the accord was signed, to USD300 billion in 2016, a six-fold increase.

But whereas NAFTA has allowed Mexico to exercise its export muscles, the treaty has forged a deep economic dependency on the US. Over 80% of Mexican goods are currently being shipped to the US, a reliance that apparently nobody realized until Trump took office.

But the new president has bluntly expressed his negative views on NAFTA, an agreement he has deemed the “worst treaty in history.”

The harsh reality is that the agreement, which wipes out trade tariffs from Alaska to Chiapas, is the main force driving international investment into Mexico. It is absolutely crucial for Mexican exports, leaving the economy heavily reliant on what happens in the US.

Thus, Mexican companies and the government have started to gaze Asia, and particularly China, as the new market to tackle in order to reduce its reliance on its northern neighbor. However, although China is its third biggest trading partner, Mexican firms barely export to the Asian giant.

While Mexico imported USD70 billion worth of goods from China in 2016, it sold just USD5 billion, a full 14 times less. “Mexican exports to China are still in a nascent stage,” said Karla Loyo, General Manager of the Chinese Chamber of Commerce in Mexico, in a TBY interview.

Most of the products that Mexico buys from China are supplies for its car industry. China is the largest producer of motor vehicles in the world, while Mexico holds the seventh position.

The latter has a nearly 3,000km border with the US, the world’s largest automotive market, and as a result Mexico imports many crucial parts from China to meet demand north of the Rio Grande. Many pieces are manufactured to a high degree of quality and at a vastly reduced price in the Asian nation.

On the other hand, Mexican exports to China are mainly primary products, ranging from exotic fruits to meat—pork and beef—in order to feed its population of roughly 1.3 billion people. For instance, avocado sales in China are increasing by around 250% YoY, according to the importer Fruitday.

Mexico currently has about 15 agreements that permit the export of agricultural goods to China, and most have been signed over the past five years. Nevertheless, Loyo insists that “these are still too few,” and that more are needed if Mexico wants to dramatically increase its sales there. “We need more agreements, but the good news is that the Secretariat of Agriculture is in conversation with the Chinese authorities to reach more protocols in the short-run,” she continued.

As for processed goods, ProMéxico—the government agency tasked with increasing foreign trade—has been pushing tequila sales to China.

Mexican liquor sales in the largest market in the world have risen by nearly 300% in the last six years, according to the Tequila Regulatory Council (TRC). But in China, tequileros are promoting the brand as a premium liquor instead of selling it as a college party drink, trying to tap into the wealthiest strata of society. China now has the second-highest number of millionaires in the world, and tequila companies want them to toast with the world-famous agave beverage.

“The country’s plan is to use agriculture as a spearhead to open the country up to Mexican products,” Loyo added. Other manufactured goods could follow, although firms will have to be very sharp about figuring out which industries they could compete in best against the Chinese.

“However, the biggest challenge to overcome if we want to diversify our exports to China is the US market,” said Jesús Valdés, economist at the Universidad Iberoamericana. In a TBY interview, he noted that the attractiveness of the US market, and the ease of doing business there, is likely to deter Mexican entrepreneurs from going to China.

He also cast some doubt on the level of diversification taking place. “China is a very difficult market, as the language is completely different, there are no free trade agreements (FTA), and the culture is another animal,” said the professor. “In contrast, connecting with partners in the US involves just a two to five-hour flight, there is an FTA still in place, and the culture and the language are familiar. Unfortunately, I believe that because of that we are going to still be extremely reliant on the US market for years to come.”