Experts Say Mexico Could Benefit More From China Trade War With Infrastructure and Reform
Corruption, poor logistics and overly strict rules of origin are all barriers to Mexico benefiting from companies' decisions to diversify out of China, a panel of experts from Mexico and the U.S. said. Luis de la Calle, a former Mexican trade official who worked on implementing NAFTA and who represented Mexico at the World Trade Organization, said Mexican leaders have a lack of vision to take advantage of this moment, and he said they are also hobbled by what he called "ideological incompetence."
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He said his country needs to work on adding more lanes at border crossings, adding more rail connections to the U.S., improving its ports and airports. But he doesn't have much hope for these investments. He noted that there have been blockades of rail lines that connect to the port of Lazaro Candenas, which could be an alternative for Long Beach and Los Angeles in the U.S. if shippers knew they could get their goods from that port into Houston, Dallas or Memphis. "It's complete madness," he said. De la Calle was also critical of the decision not to build a new airport in Mexico City. "We canceled the large airport for Mexico City for no reason other than politics," he said.
He was speaking during a joint webinar from the Center for Strategic and International Studies and the Peterson Institute for International Economics. PIIE Senior Fellow Jeffery Schott said of Mexico, "While the door is open, you have to take the steps to walk through it."
Schott said that the U.S. regulations on auto rules of origin under USMCA have cast a cloud over the production of automotive parts and cars and trucks in Mexico, calling it a "seeming double-cross" for both the auto industry and Mexico. Mexico has asked for formal consultations over the issue. He asked, "Will there need to be a divestment over time from Mexico into the U.S.?"
PIIE Senior Fellow Mary Lovely said she's asking why investment that would have gone to China before the trade war is moving to Vietnam and Malaysia, rather than Mexico. She said that the U.S. import of tariff-hit goods from China declined by 4%, and Mexico gained market share in those goods of about 2%.
Mexico's market share of U.S. vehicle imports is 30%, she said, and electrical equipment, appliances and components from Mexico have a 25% market share. Those increased by 4% after the trade war, and computer and electronic products' market share increased by 4% as well, she said.
De la Calle said that even though those numbers seem small, the U.S. is such a big market, they are significant. He said that if Mexico captured just 10% of the foreign investment leaving China, that would be enormous. He also noted that everyone thinks NAFTA is the major driver of Mexican manufacturing strength, but Mexico's strengths are not limited to the duty-free access that NAFTA and now USMCA provides.
One of the webinar listeners asked why Central America or Latin America are not benefiting from the nearshoring trend. De la Calle said that the apparel rule of origin for NAFTA and CAFTA "was tremendously restrictive," and so it did not build up the apparel industries in the Dominican Republic or Central American beneficiaries as was expected. He said competitive apparel production is impossible in those countries, partly because of logistics, but also because the restrictions on inputs means the factories cannot offer a wide variety of buttons, colors and patterns or fabric materials.
"The advantage China has in textiles is that a Chinese firm can present to Walmart a set of children’s clothing, with color, zippers, buttons, such variety that you can change it every season," he said. "If you produce with North American textiles, you will have no variety and Walmart will not buy from you."
De la Calle would like to see a new development push for Southern Mexico and for Guatemala, El Salvador and Honduras that would spend money on the Yucatan peninsula, improving roads and energy so that manufacturing can grow in that part of Mexico and the goods could be exported from a port in the Yucatan. Shipping from that location would allow goods to reach New York in two days, he said. He said improving infrastructure at Veracruz's port could link Southern Mexico and Mobile, Alabama. Currently, he noted, all of Mexico's shipments to the U.S. go to California or to the middle of the country, through Texas.
He said that while the high-level economic dialogues between the U.S. and Mexico are very important, "the Biden administration appears to be paralyzed because of the migration threat. Because of the large migration flows, they think they cannot push the [Andrés Manuel López Obrador] administration to do what is right. I think they are mistaken. I think if the Biden administration proposes an ambitious development program, Mexico will follow."