China and Mexico: free trade or something better?

A potential free trade agreement between Mexico and China is unlikely, despite indications last week that Beijing likes the idea.

On the other hand, the two countries could effectively do business through Chinese investments in Mexico, which require no changes to existing rules.

The problem with a bilateral FTA is that – while free trade could create opportunities for internationally competitive Mexican sectors, such as food and beverage - gains in this area would likely be more than offset by losses in various labor-intensive production sectors, including chemicals, iron and steel, apparel, and automotive, as Chinese products face lower barriers to entry.

Even without a trade agreement, the commercial balance between the two countries is heavily weighted in favor of China, whose annual exports of goods to Mexico during the past three years averaged just under $70 billion.

Meanwhile, Mexican exports to China averaged barely over $5 billion a year.

A better approach could involve Chinese investment in Mexican production facilities, taking advantage of competitive labor costs, combined with locally-available raw materials and proximity to markets in the United States and Canada – including favorable treatment for exports under the North American Free Trade Agreement.