Competition with China: if you can’t beat it, join it

Inter Press Service | 1 Nov 2007

Competition With China - If You Can’t Beat It, Join It

By Diego Cevallos

MEXICO CITY, Nov 1 (IPS) — China has beaten Mexico hands down in terms of trade in the past few years, and may do even better after December, when a "peace clause" expires.

The Asian giant took Mexico’s place as the second largest supplier of the United States in 2003. At the same time, its products are flooding the Mexican market at such a pace that by 2012 nearly half of Mexican imports are expected to be from China.

On Dec. 12, an agreement granting Mexico compensatory quotas (imposed to discourage illegal imports) and other temporary protectionist measures, restricting Chinese imports under 26 tariff categories, will come to an end.

This is the so-called "peace clause" that was signed in 2000 when China was admitted to the World Trade Organisation (WTO). Now that the time is up, China could require Mexico to eliminate all the restrictions.

The government of conservative President Felipe Calderón announced that it is reviewing the system of quotas and tariffs, in consultation with local producers, to decide which ones it wishes to retain. It will have to present to the WTO its arguments for keeping them.

"It’s possible that they may win a victory at the WTO and maintain a number of quotas, but that won’t curb the flood of Chinese imports to Mexico. There’s no going back on that," the owner of a footwear manufacturing company, Ramón Rivera, told IPS.

"Any and every protectionist strategy only postpones real solutions," said the businessman, who in 2002, because of competition from China, decided to specialise in orthopaedic shoes and work-related footwear.

The restrictions on Chinese imports to Mexico have hindered the mass entry of toys, tools, organic chemicals, pencils, crockery, textiles and footwear, giving local producers a respite over the past few years.

But in spite of the barriers, Chinese exports to this country are growing at a rate of 38 percent a year, without even taking into account the flood of contraband goods from China, which according to local business leaders in the textile and footwear industries outstrip legally imported products.

If this rate of growth is maintained, in another five years 44 percent of imported goods in Mexico will come from China. At present, Chinese imports account for 10.2 percent of the total, compared to just 1.6 percent in 2000.

Mexico’s total trade is worth about 400 billion dollars a year. Ninety percent of its trade is with the United States, with which it has a positive trade balance, but China is overtaking it in many sectors of the U.S. market.

And while other Latin American countries, such as Argentina, Brazil, Chile and Venezuela, have flocked to supply the increasingly attractive Chinese market with commodities like iron, soybeans and copper, Mexico has been hard-hit by China’s growth. The problem is that China and Mexico are competitors because they make similar manufactured products, and China can produce them at lower cost.

China replaced Mexico as the U.S.’s second largest source of imports in 2003, a position Mexico had attained partly because of the North American Free Trade Agreement (NAFTA), in effect since 1994, to which Canada also belongs.

Canada, presently the top supplier of the United States, is expected to be displaced from that position by China in 2008.

The Calderón administration, academics and some members of the business community have been urging Mexican industrialists for more than five years to give up the idea of competing with China and to specialise in products with more technological inputs and greater value-added.

Another recommendation is to put a heavier emphasis on trade in farm products, in which Mexico is more competitive and has the advantage of being the United States’ neighbour. And a third is to negotiate business partnerships with China, in order to benefit jointly.

But as time goes by, no definite change of focus is apparent in Mexican manufacturing sectors, which are merely asking the government to maintain the tariff quotas and restrictive policies against China.

Enrique Quintana, an economic analyst and columnist for the local newspaper Reforma, warned that if the Mexican business community "attempts to armour itself by means of compensatory quotas, the only thing it will achieve is to prolong its death throes."

"There are only two ways to deal with Chinese competition. The first is to avoid it, and the second is to make alliances with it," said Quintana.

source: IPS