Mexico's China Obsession

Martha Tovar never really thought much about her Chinese visitors until she came to see them as industrial spies and job thieves. In May, Tovar was approached by David Yu, a California recruiter working on behalf of Chinese firms. Yu was attracted by the contacts Tovar, owner of an American market-research firm, had cultivated among the maquiladora export factories along the U.S. border. He sent Tovar a confidential package detailing how companies struggling in Mexico would do better to move across the Pacific. Developed by the Chinese, the program was called "One Stop Shop" and it detailed how China could provide the answer to all their complaints about Mexico, from tax rates to land costs and red tape.

Tovar was taken aback. Over the years, she had played host to numerous delegations of Chinese businessmen and officials who wanted to see how the border maquiladora system worked. When they came, translators and writing pads in hand, they took copious notes, and asked a lot of questions. What they were looking for, Tovar now believes, were target areas where Mexico was weak and vulnerable. "They were doing their homework," says Tovar. "It was very involved. You can see [the Chinese] put a lot of work and time into it." During their discussions, Yu told Tovar the Chinese were hoping to capture 50 percent of the maquiladora business from Mexico. Yu regrets that he couldn't recruit Tovar to the cause, too. "We take care of everything," says Yu, head of I.O. Interconnect, a California firm that normally finds foreign factories to produce for U.S. companies. In this case, Yu says his company's job was "to try to draw companies from Mexico to China."

Mexico has a unique obsession with the Middle Kingdom, and it's not hard to see why. After signing on to the North American Free Trade Agreement in 1993, Mexico began pursuing an economic strategy that was more Asian than Latin American, and that would put it on a collision course with China. By transforming itself into a platform for low-cost exports to the rich nations of the world--particularly the United States--Mexico has become, in effect, the China of Latin America.

Therein lies the conflict. Among the world's top 10 trading nations, there are now two developing countries: Mexico and China. In a recent report, the World Trade Organization's list of the top five exporters included four Asian nations, and Mexico. Of those top five, only two have seen their exports grow five times faster than the pace of world trade in the 1990s: Mexico and China. Their growing rivalry is helping to reshape transpacific relations and enlivened the Asia Pacific Economic Conference summit in Baja over the weekend. During a break, Henry Tang, Hong Kong's secretary for Commerce, Industry and Technology, said, "Mexico and China are competing directly. But China is sucking in so much foreign direct investment that they are winning the race."

Slowly, it is dawning on Mexico that as an economy (if not a culture), it has more in common with China's neighbors than its own. Like Pacific Rim nations from South Korea to Indonesia, Mexico is threatened by a rising tide of increasingly cheap and sophisticated exports from China, which is rapidly becoming the factory to the world. The two countries' paths finally collided last fall when Mexico emerged as the last and most stubborn obstacle to China's accession to the World Trade Organization. The last-minute confrontation between China and Mexico was a major topic of backroom gossip at the landmark summit last year in Doha, Qatar, where China's entry into the WTO became official. Among the sticking points: Mexican complaints that China was dumping goods on the Mexican market and subsidizing exports to Mexico's economic lifeline, the United States. "In China, they always thought the most difficult negotiations would be with the U.S. and the EU," says Luis de la Calle, Mexico's chief negotiator for China's WTO bid, "not with a developing country."

Now, in ways that echo the public debate in Tokyo or Seoul, China has become an object of fearful speculation for all of Mexico, not only among trade negotiators but in factories, union halls, radio talk shows and the pages of glossy magazines. One doesn't hear this kind of talk in other Latin American nations, which don't compete head-on with China for exports to America, at least not the way Mexico does. Mexico traded three times what Brazil traded with the United States last year. It trades in a single day with the United States what Argentina trades in a year. And it was Mexico's Economy minister, Ernesto Derbez, who recently warned of a "red tide" from across the Pacific, and who advocated launching a "counterattack."

Looking back, Mexico and China have been on a collision course for some time. When President Carlos Salinas de Gortari edged Mexico further down the path to economic liberalization in the late 1980s, he was actually more concerned about Eastern Europe, which had recently opened up. Salinas had truly global visions for Mexico's trading future. At the time of NAFTA's passage, he believed trade with the United States would so bolster Mexican companies that the country could itself become a factory to the world. In the 10 years since, trade has tripled between the United States and Mexico, which now sends 90 percent of its exports to America, a share at least three times higher than any Asian or Latin American competitor. In 2001 Mexico overtook Japan as the world's second biggest exporter to the United States. At the same time, though, China was gaining fast. Panicky business leaders made it clear to de la Calle that Chinese membership in the WTO would be disastrous. "The only thing business people were thinking about was how to defend themselves from China," says Antonio Ortiz Mena, an economist at the Mexican think tank CIDE. "They didn't want to negotiate, they didn't want to compete. They just didn't want anything to change."

Mexico had already been bloodied in trade competition with China. Since the 1980s, several Mexican industries, including toys and shoes, have been fighting a losing battle against cheap imports, often smuggled from the mainland. Now those industries are losing export jobs, too. Of the 3,000 jobs lost last year in the toy industry, estimates Helios Eguiluz Adam, president of Mexico's biggest toymaker's association, 85 percent were with companies that moved production facilities to China. In 1989 there were 600 toy manufacturers in Mexico; today there are 47. From a shabby office in downtown Mexico City where a toy .44 magnum and an F-16 vie for primacy on an office shelf, like testaments to a battle never waged, Adam is quietly desperate. "The Chinese are going to invade us," he says calmly. Then he adds, "No. No. They're already here."

The picture is now all too clear. For the past decade Mexico was becoming increasingly dependent on exports from one small region (the maquiladoras) to one big customer (the United States), which made it increasingly vulnerable to one major rival (China). The mounting risks became a public issue last year when Mexico's maquiladora industry hit a crisis. A quarter of a million maquiladora jobs were lost in 2001, after more than 15 years of steady economic growth and booming employment. There are no reliable statistics on exactly how many of those were lost directly to China, but most estimates put the figure at around 70 percent. The rest went to Indonesia, Malaysia and Central America. In Tijuana, deep in maquiladora country, Sony and Philips recently shut factories and moved them to China. The mood is grim. "Now, in every conference, in every meeting, the topic is China," says Jorge Carillo, an economist at the Colegio del Norte in Tijuana. "This crisis with China was visible five years ago. But it wasn't until the maquiladora crisis that people started to think seriously about it."

The one point Mexicans agree on is that they are losing out to China. But why? Some feared that rising Mexican wages were pricing the country out of the market, but the wages have not been rising dramatically relative to China's, experts say. Today the average maquiladora worker in Mexico earns about $1.40 an hour, compared with 50 cents in China. Some top Mexican officials now believe that China's aggressive factory-recruiting campaign played an important role. A delegation of deputies from China's Trade Ministry visited the north of Mexico in 1999 to study the maquiladora industry, recalls Juan Bueno Torio, a senior official at the Ministry of Economics. "Then he went back to China. He copied it. The Chinese made it better, and now investors are leaving us, and it's up to us to defend ourselves."

In the late 1990s John Hardt was running a maquiladora in Coahuila, near the New Mexico border. His company, Southwest Plastic Binding Co., was approached by the Chinese. "The Chinese brought samples of their products over and they were excellent quality," he says. Hardt's company shut down most operations in Mexico and moved to China, where all his fabrication is done now. The finished products get shipped back to the United States at a fraction of what it was costing the company in Mexico. "There will always be maquiladoras in Mexico, but not for everyone," says Hardt. "The honeymoon is over."

In Mexican border cities like Ciudad Juarez, many people are convinced that the Chinese are out to "steal" Mexican jobs. The complaints grew increasingly strident this year, as Mexico' s exports to America fell 1 percent between January and May, while China's rose 15 percent. The Chinese see it as simple competition. China's One Stop Shop program deliberately offered to give companies what they were not getting in Mexico, says Yu, who ticks off a list too long to recount in full: income-tax breaks, help with raw material supplies, technical support, land and ready-made factories at low lease rates or even free land for big companies that create lots of jobs. "The Mexican government is so complacent," says Yu. "They're happy."

Many Mexican economists agree that Mexico is largely to blame for the dulling of its competitive advantage. According to a recent World Economic Forum report judging the competitiveness of countries, Mexico has fallen 17 places from last year, from 34th to 51st out of 75. Both reports looked at things like government and business efficiency, regulation and infrastructure to determine the rankings. "The problem isn't the low wages in China," says Rene Villarreal of the Institute of Intellectual Capital and Competitiveness, "it's that [the Chinese] are more competitive at an institutional level." "It is kind of amazing," says economist Alejandro Villa-Gomez. "China may be communist, but they are a lot more pragmatic than we are."

Mexico's official line is defensive. It has complained to the WTO, claiming China is subsidizing competition. Meanwhile the hemorrhaging continues. Last month A.T. Kearney reported that China had become the world's leader for foreign direct investment, while Mexico's rating fell from 5th to 9th place. At the Economics Ministry, Bueno Torio concludes his rueful tale on this note: "Now we're just trying to keep [the companies already here] from leaving."

Awareness of Mexico's untenable position is growing. The answer is a direct echo of what Asian nations like Taiwan and Korea have known (and worried about) for years: the only way to compete with China is to stay one step ahead of it in technology. That's increasingly difficult. China now makes everything from low tech (toys and textiles) to high tech (fast computer chips), leaving few niches empty for the taking.

Earlier this month the Mexican government launched a program to boost credit financing and improve technology in 12 sectors that Mexico sees as particularly threatened by China, including software, aeronautics and electronics. Other industries are in deep trouble already, and they know it. Eduardo Mizrahi Shapiro's shoe factory in Mexico City is nearly empty. In 1989 he was making 40,000 pairs of shoes a day. Now he's lucky if he turns out 2,000. He fired 500 people in the first six months of this year. In an office overlooking the factory floor, he leans forward over his desk, hand raised in the air. China, he says, represents "the revenge of the invisible hand," Adam Smith's famous metaphor for the supposedly magical benefits of competitive free markets. "We are sure that the Chinese are going to kill us," says Shapiro, letting his hand slump back into his lap.

Smith, of course, would have responded that China will simply force Mexico to do what it must to survive: abandon such industries and move more rapidly into high-end software, electronics and the like. In Mexico City, radio talk-show host Jose Gutierrez Vivio ran a recent series of shows in which he explored with listeners what China was offering investors that Mexico is not. On one program, Villarreal railed that Mexico needed to catch up not just to China but to the rest of Asia, or "we'll be playing with our future." On the same show, Secretary Derbez warned that the necessary development could take 15 years, bringing astonished sighs from the host, guests and callers. "People were very worried," says Vivio. "They're not economists or experts on China; the majority don't even know China, but they're realizing that we' re losing our position and that in the future we don't have any other cards to play."

Mexico seems almost paralyzed by the challenge, and has produced very few substantive ideas about how to respond. In part, Mexico is trapped by its recent proud achievement of a balanced budget, which made it the only nation in Latin America with an investment-grade sovereign credit rating from Standard & Poor's. That makes it complicated to greatly increase public spending on competition with China. Building high-tech industrial parks (like those in China, Hong Kong and Malaysia) could break the budget. So could a campaign to match the financial incentives China uses to lure foreign factories. "The competition they offer is really very hard to compete with," laments one official at the Mexican Treasury, which has been scraping up funds to try to at least begin to address the China threat. "We're making sure to turn off the lights here. We're nearly working with candles. Before the year ends, we're going to come up with something." But he can't say what it might be.

Some economists believe the geographic advantage Mexico has will end up saving it in the long run. For companies in higher-tech areas such as aerospace or software, training engineers and dealing with the logistics of complex equipment is less daunting if you have to cross only the Rio Grande, not the Pacific. And in lower-tech fields, some Mexicans are on the attack. Come Dec. 31, a handful of Mexican leather-making companies plan to expand their operations into China, hoping to take advantage of the country's market the way China has Mexico's. "We are counterattacking our worst enemy," Alejandro Gutierrez de Velasco, head of a footwear union, told a Mexican daily.

More and more, economists are looking at how other Asian nations deal with competition from China. Taiwan has emerged as a favorite model. It offers a middle way between Hong Kong, which is perhaps just a bit too laissez faire for Mexico (with its socialist roots), and Korea, where capitalism was centrally planned. De la Calle says that while Korea relied on huge conglomerates like Daewoo and Hyundai, Taiwan built a broader base of small- and medium-size companies that concentrate on high-tech goods for export to China. "Taiwan followed the Italian recipe," says de la Calle, "Mexico needs to do the same and become more specialized."

Perhaps Mexico also needs to relax. Korea and Taiwan have been worrying about the rising China threat for decades, and have managed to thrive nonetheless. Trade is not a zero-sum game, and fortunes rise and fall. Since Chinese exports to Mexico rose 60 percent this year, it's perhaps natural that Mexico is starting to worry about balance with China. Americans used to worry about Japan for the same reason, though that seems like a long time ago. (And now Japanese express similar worries about China.)

The People's Republic itself is reacting with the calm of a nation that knows its emerging strength. In response to all the Mexican talk of Chinese invaders' "stealing jobs," Qiyue Zhang, a spokeswoman for China's APEC delegation, said, "Mexicans will find out that China is more of an opportunity than a threat. The business leaders haven't understood that yet." No Mexican has.