Will China be a Factor in the Upcoming NAFTA Negotiations?

Anchored container ships and with other vessels sit offshore near the ports of Los Angeles and Long Beach December 2, 2012. REUTERS/Jonathan Alcorn

Beijing is incentivizing Mexico City and others in Latin American to rethink their traditional trading relationships.

The first round of NAFTA renegotiations is set to take place in Washington, DC August 16–20 and one of the primary U.S. objectives is reducing its $63 billion trade deficit with Mexico. Mexico is in a position to drive a harder bargain than many would think, however. Unlike thirty years ago, Mexico today can leverage China’s growing foreign direct investment interest in the region. China, by increasing and diversifying its Latin American investments beyond resource extraction, is incentivizing Mexico and other Latin American countries to rethink their traditional trading relationships.

Courting China as a strong trading partner could give Mexico another large market for a host of exports, diminishing to some degree the importance of the U.S. market. NAFTA helped increase Mexican exports to the United States sevenfold, and foreign direct investment jumped to four times pre-NAFTA levels. For several reasons, China will never replace the U.S. market, but it will provide to Mexico greater export diversity and significant trading growth opportunities.

Brazil and Venezuela may be the most prominent Latin American countries in the news when it comes to recent trade deals with China, but according to the Atlantic Council, from 2014–16 Mexico signed more than forty deals with China valued at over $4 billion. This may seem negligible compared to the 180 deals worth $61 billion Brazil signed with China from 2003–16, but prior to 2014 Mexico signed no more than five deals in any one year with China. China is increasingly interested in Mexico, particularly in the automotive and energy industries.

The automotive industry has for some time been a primary focus for Chinese investment in Latin America. Mexico is a strong manufacturing country, well integrated in the production supply chain with competitive wages for factory workers. Chinese State Owned Enterprises currently own three automotive companies in Mexico. But given the uncertainty over NAFTA renegotiations and potential tariffs on automobiles going into the United States, these companies are not targeting the American market. Instead, they are filling growing demand for cars in Mexico and the rest of Latin America. “Right now, (Mexico is) making one in five vehicles for non-NAFTA export, and we see that rising in just three or four years to one in three,” said Kristin Dziczek, an analyst with the Center for Automotive Research in Ann Arbor, Michigan. Mexico has seen policies for attracting FDI (through ProMexico fund, PRODIAT and other programs) to the automotive sector pay off. Beyond the U.S. market and big Latin American markets, like Brazil, Mexico’s biggest export markets for cars are China and India.

Regarding energy, China is interested in both the traditional extractive and emerging alternative energy sectors. For example, one of China’s state-owned oil firms, China National Offshore Oil Corporation, won two of ten deep-water blocks auctioned by the Mexican government in December 2016, each worth an estimated several billion dollars. Recently, however, China committed to investing more aggressively in alternative energy as a way to diversify its ever-expanding electricity sector. Mexico is emphasizing solar and wind projects, and Latin America more broadly is becoming a significant solar energy player on the world stage, accounting for 10 percent of the global industry. And Mexico is now home to the lowest priced solar energy in Latin America.

While the prospect of a bigger trading relationship with China will help Mexico in the upcoming NAFTA negotiations, it will not give Mexico unlimited flexibility. Chinese president Xi Jinping has pledged to increase trade with Latin America by $500 billion and increase foreign investment by $250 billion by 2025, yet China is still only Mexico’s third largest trading partner with not even 2 percent of total exports. About 74 percent of Mexican exports still go to the United States. And although China-Mexico trade ties have grown significantly—up to $43 billion last year—this is much smaller than the $580 billion in trade between the United States and Mexico. Additionally, as of 2016, China was not one of Mexico’s top eight FDI countries, and accounted for less than 3 percent of the total.