FORUM HIGHLIGHS CHALLENGES, OPPORTUNITIES IN MEXICO-

UNCLAS SECTION 01 OF 03 MEXICO 001656

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STATE FOR WHA/MEX, WHA/EPSC
STATE PASS USAID FOR LAC:MARK CARRATO
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV MX CH
SUBJECT: FORUM HIGHLIGHS CHALLENGES, OPPORTUNITIES IN MEXICO-
CHINA ECONOMIC RELATIONSHIP

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SUMMARY
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1. The UN Economic Commission for Latin America, the
Mexican Senate, and Mexico's Secretary of Foreign Relations
hosted a bilateral forum March 6-7 on Sino-Mexican economic
relations. Participants in "Opportunities in the Economic
and Commercial Relations: China - Mexico in the Latin
American Context," urged Mexicans to start viewing China as
a potential partner instead of a threat. The forum began
with Autonomous University of Mexico (UNAM) professor
Enrique Dussel Peters emphasizing that Mexico must devote
more energy to developing the relationship, something in
which it has not put much effort up to this point. Yin
Xingmin, Professor at the Fundan University in Shanghai,
pointed out that as an emerging world power, China has taken
an interest in its prospects in Latin America. While other
countries, such as Brazil, Argentina, and Chile are leading
the way in commerce with Asia, Mexico has fallen behind.
Participants considered the prospects for bilateral trade,
focusing on Mexico's comparative advantages and weaknesses.
Chinese exhibitors Yin Xingmin and Li Jian Hua, President of
Sinatex, a Chinese textile company with investments in
Mexico, suggested ways in which Mexico could work with China
to complement its trade and attract Chinese investment.
Participants paid special attention to the textile,
electronics, and tourism sectors comparing strengths and
weaknesses of the Mexican and Chinese economies. End
summary.

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PAYING MORE ATTENTION TO CHINA
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2. Head official of the International Trade and Investment
Promotion Office of the Secretary of the Economy, Eduardo
Solis Sanchez, emphasized that Mexico must devote more
energy to developing its relationship with China, a point
all three major candidates for the Mexican Presidency have
mentioned in their platforms. While Solis said Mexico did
not want to negotiate an FTA with China, other exhibitors
promoted the idea of an Agreement for the Protection and
Reciprocal Promotion of Investments, (APPRI) as a step
towards improving commercial relations.


3. While Mexico is the top importer of Chinese goods in
Latin America, its exports to China fall far behind those of
its counterparts. Solis argued that "the U.S. and EU did
not wait for China to join the WTO, they anticipated it.
Mexico has to anticipate further developments in China," but
suggested that it may be too late. Moreover, China has been
participating as an observer of many Latin American
institutions, and some exhibitors called for Mexico to pay
more attention to Asian banks and organizations.


4. Other participants, however, including Valentin Diez,
President of the Mexican Chamber for Foreign Trade, and
Mexican Senator Dulce Maria Sauri who heads the Asia-Pacific
Relations Committee, hinted that Mexico has missed its
window of opportunity by depending too heavily on trade with
North America and ignoring options for diversifying exports.


5. Fulbright scholar Carol Wise and UNAM Professor Enique
Dussel Peters presented viewpoints on the Mexico-China
economic relationship. While Wise believed Mexico still had
time to close the gap with China, Dussel felt that Mexico
has recognized too late the importance of China. Although
Mexico could still find niches for cooperation with China,
advocating its position as a platform to reach the western
hemisphere will be difficult since China has stronger ties
to South American countries. Several exhibitors at the
conference made suggestions: Mexico must exploit its
advantage of being a member of NAFTA and the U.S.'s southern
neighbor to compete with Asia. Instead of focusing on jobs
lost in the manufacturing sector, Mexico needs to turn its
attention to increasing the global services it offers and
developing high value added products to move into the next
stage of economic development.

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MEXICO'S POTENTIAL BENEFITS AND LOSSES
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6. Participants discussed the prospects for bilateral
trade, focusing on Mexico's comparative advantages and
weaknesses. Mexico's proximity to the U.S. reduces
logistics and transport costs. China-U.S. transport costs
increased seven per cent in 2005. Mexico could offer
alternative ports south of the border such as Manzanillo or
Lazaro Cardenas to take advantage of overburdened facilities
in the western U.S. One participant argued that Mexico
could also offer a base to produce or finish Chinese goods
for the U.S. market to minimize shipping costs.


7. Exhibitors also noted that Mexico's intellectual
property rights record, while spotty, is much better than
China's, making it a better option for the production of
easily copied technical goods, such as printer cartridges.
Custom made products such as individually designed PCs
require a quick turnaround time and are therefore easier to
manufacture south of the border than overseas. For some
products such as medical supplies and measuring instruments,
quality outweighs price and production has remained in
Mexico. Larger products with a high weight to value ratio,
such as refrigerators or automobiles benefit from Mexico's
lower shipping costs.


8. Conversely, cheap, easily shipped, labor intensive goods
such as textiles, toys, games, dolls, counter-top
appliances, sporting goods, and footwear lend themselves to
production in China. Mexican manufacturers of these
products are losing market share in the U.S. to Chinese
exports. Additionally, China benefits from knowledge
spillover from manufacturing high tech products and uses
foreign investment to promote fast learning techniques which
allow China to catch up on the latest technology, while
Mexico does not. Mexican competitors complain that China
reaps unfair advantages by neglecting human rights,
subsidizing production, and violating property rights, which
allows the Chinese to export cheap, illegal copies of high
value products to flood the Mexican market.

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RECOMMENDATIONS TO BOOST MEXICO'S COMPETITIVENESS
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9. Chinese participant Li Jian Hua, President of Sinatex, a
Chinese textile firm operating in Mexico, suggested ways in
which Mexico could work with China to complement its trade
and attract Chinese investment. According to Chinese
businesses investing in production in Mexico, tax and fiscal
policies hamper their efforts to expand investment. They
suggest simplifying the bureaucracy to facilitate opening a
business, which takes much longer than in other countries
and varies greatly from state to state. Moreover, they
complained about lack of loyalty of employees and the
restrictions on the number of foreign employees permitted
per company, which decreases their productivity.

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TARGET SECTORS FOR COOPERATION
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10. Beyond the general discussion, the conference focused
on the textile, electronics, and tourism sectors to
illustrate strengths and weaknesses of the Mexican economy
in comparison with China. Textile producers noted the
upcoming decline of Mexican textile exports as the U.S.
drops import quotas and exports from China and other Asian
countries take market share due to cheaper labor costs.
Producers will consolidate supply chains to five or six
countries versus as many as twenty. Rafael Zaga, President
of Canaintex, the Mexican National Chamber of the Textile
Industry, and Tony Kuri of the Mexican National Dress
Industry Chamber, criticized China's human rights abuses and
the non-transparent manner in which China supplies its
factories with resources. They noted Mexico's time-to-
market advantage was a niche and suggested that Mexican
producers switch to heavier items, such as jeans, or high
quality designer clothing.


11. Participants commented that the electronics sector will
face several challenges from increasing Chinese competition.
Plants along the border will confront a decreasing pool of
skilled and unskilled labor as the Mexican birthrate
declines and a number of eligible applicants migrate north.
Mexico must further develop talent in basic technical skills

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and encourage the development of regional clusters to
exploit economies of scale as Chinese producers make up lost
ground. China has also invested in R&D, but bureaucracy and
frequent personnel shuffling behind R&D efforts in China
have hindered the innovation process. The electronics
producers suggested that Mexico could exploit this weakness
by aggressively pursuing comprehensive R&D policies in order
to sustain an advantage in the sector over a longer period.


12. Gabriel Szekely, Chief of Staff to the Mexican Tourism
Secretary, noted that many affluent Chinese tourists have

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already traveled to Mexico for leisure following its
approval as an "acceptable" destination. He added that
Mexico would exploit its tourist infrastructure to attract
the growing Chinese market, which is expected to become the
world's 4th largest provider of tourists by 2020. Szekely
added that tourism can be a tool to help bridge the gap
between the two countries and help alleviate Mexicans'
suspicions of Chinese culture. Problem areas for increased
Chinese tourism in Mexico include visa regulations and the
lack of information available in the Chinese language.
Presenter Vivian Lee of Omega International Group suggested
a training program for Mexican tour guides in China, a
multilingual tourist assistance hotline, and that Mexicans
direct themselves to the appropriate regulating officials
and target consumers of China's tourism market.

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COMMENT
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13. Mexico's difficulties raising its level of exports to
China are no different than its problems expanding exports
globally. While rising fuel, and hence rising transport
costs have given Mexico a temporary pause in the growing
onslaught of Chinese products destined for the U.S. market,
Mexico is far from achieving the level of innovation
necessary to compete with the Chinese.
GARZA