News, Insights and Best Practices for Manufacturing in Mexico

Manufacturing in Mexico and China after NAFTA

28 Aug 2017

Category: Labor & Economics

More and more automakers are expanding to Mexico. Companies that manufacture in China are taking advantage of this demand by sending Mexico as much of its steel and other industrial goods as possible. The result of an influx of auto manufacturing supplies and parts is that many of the products shipped via the North American Free Trade Agreement (NAFTA) are made from Chinese wares.

"In a way, China is a part of NAFTA because China contributes a lot to the goods that wind up" in the United States and Canada, said Margaret Myers, director of the China-Latin America program of the Inter-American Dialogue. Despite NAFTA's Rules of Origin that states 50%-60% of goods must originate from a North American country, there is still room for foreign parts to find themselves on the production line.

Mexico and China Tensions
Some tensions that exist between Mexico and China began when NAFTA was first established in 1994, according to Enrique Dussel Peters, professor of economics at UNAM, the Mexican National University. Although China has been Mexico's second largest trading partner behind the U.S., the Mexican government has not yet established a clear strategy for its deals with China.

China is NAFTA's univited guest

In essence, China is "NAFTA's uninvited guest," Peters said. "China is of critical importance to the region, but NAFTA has not been able to formalize relationships between the NAFTA countries and China."

Room to Grow
Mexico is the 14th largest economy in the world, according to the Daily Texan Online. However, it still has issues to sort out as it develops from one form of economy to another.

"Economic development goes hand in hand with urbanization," said Mexican politician Gabriel Quadri. "Almost every developed country [has] almost 95 percent of its population in cities. The only way to become a developed country is to urbanize very quickly."

Most of Mexico's inhabitants live outside of cities, according to the article. Population densities have begun to increase as the country's citizens spread out across the nation in looking for work.

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The Mexican Peso and China
Mexico recently saw its peso lose ground against the U.S. dollar after economic data showed that China was not growing fast enough, according to The Wall Street Journal. On April 23, 2014, the currency fell by 0.3 percent to 13.0931 per one U.S. dollar. This was in addition to retail concerns cited by Bloomberg. There was a pick-up in the peso's value during 2015, and then a huge drop at the end of 2016, 22 pesos per 1 USD, because of political uncertainties. The first half of 2017 proved to be a stabalization period for the currency, and the country.

As Mexico struggles to meet expectations of growth, China continues to benefit from the NAFTA agreement, since any goods made by Chinese companies can be shipped from Mexico to the U.S. without tariffs because the rules of origin for goods do not involve the origin of the firm that made the product.

How this will shape out for Mexico, the U.S. and China remains to be seen.

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