NAFTA opens door to Mexico and Canada for China

By Chris Dalby Source:Global Times Published: 2017/7/13 19:18:40

Illustration: Peter C. Espina/GT

US President Donald Trump's pledge to "make America great again" has made diplomats tremble in Ottawa, as well as Mexico City. While trade disputes between the US and Mexico have made headlines, Trump has also slapped tariffs on Canadian lumber and is threatening to do so on Canadian dairy as well. While Mexico has openly turned to China, there is a similar opportunity for Canada to do so as well. Discussions about an FTA between China and Canada are delicately poised, but should talks on the North American Free Trade Agreement (NAFTA) go badly for Ottawa, the chances of this deal with China passing will significantly increase.

Mexico has been using this threat for leverage already. It is in a particularly threatened position ahead of these NAFTA talks. Trade with the US is worth $580 billion a year and any weakening of this relationship would be devastating for the country's already fragile economy.

While trade with China is only worth around $75 billion, Mexico sees this as a trump card. In June, China's ambassador to Mexico, Qiu Xiaoqi, stated that Beijing is willing to discuss a free-trade agreement. "There is no difficulty from China's side. We have great interest in deepening and broadening these ties," said Qiu.

On the surface, this seems like an obvious choice. China has set up close trading ties with most Latin American countries, buying soybeans from Argentina, beef from Brazil, and copper from Peru. Mexico would be a significant addition to these trading relationships.

However, Mexico's wholesale dependence on trading with the US puts it in an odd position. The farm and factory for America, Mexico has traditionally been a competitor for Chinese trade. After China entered the World Trade Organization in 2001, Mexico saw an exodus of jobs that it has only fully replaced in recent years.

An FTA would have to be negotiated very carefully to avoid this repeat as an influx of Chinese goods would hurt Mexican lower-income jobs once again. While Mexico is keen to shore up its trading relations, it is not suicidal. 

In May, Mexican Economy Minister Ildefonso Guajardo gave a peek at just how Mexico wants to use China. "We will use [the China visit] geopolitically as strategic leverage. It sends the signal that we have many alternatives," he explained, adding that Mexico does not send China many of its exports.

It is patently obvious that China cannot replace the US in any foreseeable future. Neither can the bilateral trade relationship grow in any meaningful way to ease the pain of US tariffs on Mexican goods. China will be dangled as a potential alternative to make the US think twice.

Whether this happens or not, China should benefit. Mexico is its weakest partner among the major Latin American economies (Brazil, Argentina, Mexico). Any trade entry points from NAFTA renegotiations will be to its advantage. Chinese automakers such as JAC and BAIC are already on the ground in Mexico and further ground could quickly be gained.

Looking at Canada, the situation poses a different balance. The trading relationship is far more advanced than that between China and Mexico and adjustments have to be made at a far more specific level.

During Premier Li Keqiang's visit to Canada in September 2016, he and Canadian Prime Minister Justin Trudeau vowed to double trade by 2025. Issues surrounding Canadian beef exports to China were resolved and talks for an eventual FTA were announced.

Canada is also taking a far more cautious position toward NAFTA than Mexico as, despite disputes with Washington over the likes of dairy and lumber, it probably has less to lose.

Where a disruptive renegotiation of NAFTA will allow China to gain trading ground in Mexico, stability is key with Canada. 

The author is a Mexico-based analyst of Chinese economics and politics.

Posted in: INSIDER'S EYE

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