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Mexico faces juggernaut that is China

Mexico faces juggernaut that is China

Even in the darkest days for Mexico's toy industry, when three out of four factories closed their doors in the face of a flood of imported dolls, stuffed animals and games from China, manufacturer Miguel Angel Martin refused to give up.

His toy company, Martin's Juguetes, managed to hold its own by introducing new technology but, even more importantly, because it was protected by special import duties - as high as 500 percent - that Mexico slapped on the cheap Chinese toys filling its markets.

But not all manufacturers have been as agile as Martin since Chinese competition began hammering Mexico's toy, electronic, textile and apparel industries.

Even though the North American Free Trade Agreement, a trade and investment partnership with the United States and Canada that went into effect in 1994, was supposed to cement Mexico's access to the U.S. market and help it attract foreign investment and create jobs, the China effect has begun to erode those benefits.

Two years ago, China pushed Mexico from second to third place as a supplier of imported goods to the United States. And some trade experts predict the Asian country will replace Canada as the No. 1 supplier to the United States by 2007.

China also became Mexico's second-largest trading partner after the United States in 2003 - though the two nations maintain one of the most unequal trade relationships in the world. China sent US$14 billion worth of goods to Mexico in 2004 while buying a mere US$400 million of Mexican goods.

China is also competing with Mexico for foreign investment, and Mexican factories that were supposed to churn out jobs find it hard to keep up with low labor costs in China where wages are about a quarter of what they are in Mexico.

"NAFTA gave us an advantage for some time," said Eduardo Ramos, who heads up Asian trade relations at the Mexican Ministry of the Economy. But he points out the high point of Mexican exports was in 2000. And cheap Chinese imports continue to pour in.

This season Chinese-made Christmas lights and other ornaments were selling like hotcakes in downtown Mexico City. "That's US$4.50 if you buy three," Jessica Alvarez told customers as they picked up boxes of blinking lights one day in early December. In a matter of minutes, she had sold a half dozen.

Although the street vendors operate in the informal economy and shun paying taxes, their operations are highly organized, explained Alvarez, who has run a stand for more than a decade.

Chinese and Mexican wholesalers bring Alvarez the seasonal goods, providing them on credit and returning to collect the payments. "If you work hard, you can earn good money," she explained.

In the warren of stalls that spread out from the center of Mexico City, Chinese-made products abound - from illuminated wall plaques of Mexico's patron saint, the Virgin of Guadalupe, and children's backpacks to hair accessories and cosmetics.

But in a country where jobs are desperately needed, Chinese goods supplanting products turned out by Mexican workers are a worrisome trend.

Still, China trade is benefiting some Mexican industries - especially those dealing in commodities where China's growing demand for raw materials, including oil and minerals, has pushed up world prices.

"The huge demand from China is the main reason that we are selling our copper at almost US$2 a pound," said Juan Rebolledo, vice president of international relations at Grupo Mexico, the country's largest mining group.

Focusing on niches

Slowly, Mexico has begun to evolve a strategy to counteract an emerging Chinese conquest by competing in certain niches in the U.S. market and applying high duties to protect Mexican industry. The country's Foreign Trade Bank has also opened an office in Beijing to boost Mexican exports.

"Mexico has an advantage over China in two sectors, transportation equipment vehicles and agriculture," said Ramos, who worked on the NAFTA negotiations. "We cannot compete with China on cheap labor.

"The anti-dumping duties have put the brakes on legal imports," he said.

But the high tariffs have spurred the smuggling of Chinese goods that crowd the street stalls and are found in stores - often relabeled as products of countries that have free trade agreements with Mexico, according to Mexican industry groups.

Now the government is starting to address the China problem.

On a recent morning, the Mexican Business Council for Foreign Trade, Investment and Technology hosted a breakfast in the Club of Industrialists in the swank Polanco neighborhood to outline the government's strategy to boost ties with China.

"We are trying to identify new opportunities for Mexican companies," said Humberto Molina, who is in charge of export development at the National Foreign Trade Bank. "The only way to enter the market is to combine our efforts."

The bank is taking small steps, helping to facilitate deals of under US$10 million to export agricultural products, and working to promote Mexican products like avocados.

At the breakfast, Chinese Ambassador Ren Jingyu listened closely as Mexican business executives complained about the difficulties of competing with Chinese goods as well as the high Mexican duties that complicate importing from China.

Ren diplomatically told the meeting that the high duties have been coming down in the past few years and China has been encouraging Mexico in this direction. "We have hope because our government is collaborating in this," he said.

Also at the breakfast, Manuel Uribe, the former Mexican ambassador to Singapore and Japan, reminded the small group that China's trade with the world is centuries old.

"There's a lot of talk about the Chinese miracle," Uribe said. "There is no such thing. China is recovering the place it had in world trade for 2,000 years."

Nearly 200 years ago, Mexico served as a land bridge for Chinese trade with Spain. From 1565 to 1815, Spanish galleons transported Chinese silk goods, porcelain, ivory and lacquerware once or twice a year from Manila, the Philippines, to Acapulco, Mexico, and then from Veracruz, Mexico, across the Atlantic to Spain.

Today "buying in China is easy. Importing into Mexico is the hard part," noted Garen Chu, a native of Hong Kong who is now a manager at Industrias H-24 in Mexico.

Another industry hit hard by Chinese competition is the textiles and apparel business. Since 2000, the textile industry lost 35 percent of its jobs.

"It is not that so many firms closed down, but the majority reduced their production," said Rosendo Valles, president of the National Textile Industry Chamber. Although the steep decline bottomed out last year, textile factories have added a mere 6,000 jobs this year.

"China is a very difficult competitor," said Adolfo Kalach, vice president of Grupo Kaltex, the largest textile and apparel group in Mexico. "This affects us, it affects everyone, but it doesn't kill everyone. Mexico will keep its textile industry."

Kaltex spins cotton yarn and weaves fabric in a cavernous mill in Tepeji del Rio north of Mexico City.

"This is the size of the mills like those in the United States," Kalach said as he walked through the modern, mostly automated plant - one of the privately held group's half dozen textile and apparel assembly operations.

Kalach said Mexico must continue modernizing its economy, including labor law reform and allowing foreign investment in the energy sector. "The world is very global. No one can change this world," he said.

The Mexican textile sector eagerly awaits the implementation of the Central American Free Trade Agreement, Kalach said, because Mexican woven or knit cloth can be used without paying duties by Central American assembly plants stitching clothing for the U.S. market.

Whether potential CAFTA benefits will prove any longer lasting than NAFTA advantages did against Chinese competition remains in question.

"Two-thirds of the clothing sold in Mexico is sold in the streets," said Valles, noting that despite stepped-up efforts to halt the smuggling of cheap Chinese apparel, it is still flowing into the country.

Maribel Fernandez, who designs and manufactures stained glass windows, recently returned from a three-week business mission to China determined that the Mexican government must protect the country's industry and jobs.

"I am very angry, but not with China, but rather with my government ... because of the contraband goods and the trade agreements," said Fernandez, who sits on the board of the National Chamber of Industry, the Canacintra, which is one of the country's largest private sector groups.

"Do you remember when we were all afraid of Japan?" Fernandez asked. "Well, China is too big for the world. China is not going to disappear."

Updated : 2021-05-06 20:40 GMT+08:00