Mexico

Arizona illustrates a dangerous new trend regarding Mexico. In addition to its U.S. dollar funding needs, competition with China for U.S. market share, and its failing government, it now faces a rise in protectionism from neighboring U.S. jurisdictions.

This could not come at a worse time for a country which is gradually being phased out by China, who has realized very quickly that Mexico is an easy mark from which to gain export market share and has most likely "suggested" that U.S. policy be balanced to a more malevolent bent south of the border. This will be obvious to me if China surprises and revalues the Yuan. If China faces decreasing profits by revaluing the Yuan, they WILL attempt to make it up on VOLUME by increasing market share. There is a large volume of business literature on the subject of market share capture, and this activity is not for the faint of heart or weak of stomach. China has no choice but to engage as its entire model of social cohesion is based on export-driven mercantilism. Of the top five U.S. trading partners, Mexico is the weakest hand and China must sense this.

So Mexico is now being squeezed economically and geographically. It is losing connectivity while internal strife erodes the ability to govern. This is not good.

Mexico's exports to China are comprised mostly of building materials and services related to the construction industry. The level of export in this area will subside with the popping of the construction bubble.

More ominously, China has taken great pains to build its own construction materials enterprises and is now directly competing with Mexico. Businesses who supply China suddenly find themselves in direct competition for market share in the U.S.

And now, logistic concerns and risks will increase costs and uncertainty with the import of Mexican goods. A container from China and a container from Mexico will receive very different treatment from customs officials (on average). This unfortunately is a socialized cost to Mexico and the U.S. from the disaster of drug prohibition.

The Peso, Bonds, and select equities will see precipitous declines in the coming months.

MEXICO CITY, Apr 14, 2010 (IPS) - China has replaced Mexico as the top supplier of goods to the United States, and experts say that a specific trade strategy is needed for this Latin American country to compete successfully with Beijing in the U.S. market, the world's largest.

"What is lacking is an active trade policy to try to cut down imports of many inessential articles, and a policy to boost national exports," Arturo Ortiz, of the Institute of Economic Research at the state National Autonomous University of Mexico, told IPS.

Since 2003, China rather than Mexico has been the chief source of U.S. imports, a situation maintained by the artificially low value of China's currency, the yuan, which drives that country's exports, according to local and international analysts.

The U.S. Department of Commerce reported Tuesday that China had a trade surplus of 16.5 billion dollars with the United States in February, having sold 23.4 billion dollars' worth of goods and purchased 6.9 billion dollars' worth.

Mexico also had a positive trade balance with the United States, of 4.8 billion dollars in February, with exports worth 16.4 billion dollars and imports worth 11.6 billion dollars from its northern neighbour, according to the report.

"Mexico can regard China as a partner, and not necessarily as a competitor," Chilean economist Osvaldo Rosales, head of the Division of International Trade and Integration at the Economic Commission for Latin America and the Caribbean (ECLAC), told IPS. "There is room to sell any category of goods, but the relationship must be approached with a forward-looking vision, for the medium term."

Also on Tuesday, ECLAC published its report, "La República Popular de China y América Latina y el Caribe: hacia una relación estratégica" (The People's Republic of China and Latin America and the Caribbean: Towards a Strategic Relationship), just ahead of Chinese President Hu Jintao's trip to Brazil, Venezuela and Chile, this Wednesday to Sunday Apr. 18.

Hu visited Mexico in 2005 and Mexican President Felipe Calderón travelled to Beijing in 2008.

The report says that over the present decade, Latin America and the Caribbean have recorded an overall trade deficit with China, mainly due to the increasingly negative trade balances of Mexico and Central America with the Asian giant.