Chinese manufacturing is keen to invest in Mexico

International Business News  –  China’s manufacturing majors are launching investments in Mexico as a base for exports to the United States. Chinese direct investment in Mexico reached a record high of $606.3 million in 2021, a 76% increase over the previous year. It seems to hope that by moving into Mexico, which has a trade agreement with the United States, it will circumvent the tariffs on China raised by the former Trump regime in the United States.

In the northern Mexican state of Nuevo León, which borders the United States. About two and a half hours drive from the border, huge red and silver gates suddenly appear in the wilderness.

Trucks carry supplies to the vast acreage that exceeds seven times the size of the Japanese imperial residence, and cranes assemble the skeleton. Rapidly moving forward with construction is the Hofusan Industrial Park, an industrial park with Chinese capital investment.

This industrial park is a joint venture between Huali Group, a comprehensive company headquartered in Zhejiang, China, which is involved in industrial park operations in Japan and abroad, and a Mexican company, etc. Construction started in 2017, and some of the factories have already been completed.

Twenty Chinese companies have decided to move in, and 10 of these factories have already started production. Restaurants, hotels and apartments have also been built. The total investment is expected to be US$1.2 billion at this stage.

Statistics from the Mexican Ministry of Economy show that direct investment from China (including Hong Kong) to Mexico reached US$606.3 million in 2021, an increase of 76% over the previous year. This is a record high since 1999 for which comparable data are available. It ranks 9th by country, close to South Korea (US$684.7 million), which is in 8th place. The total number of Chinese companies making direct investments in Mexico will reach 1,289 by 2022.

The USMCA (U.S.-Mexico-Canada Agreement), which takes effect in 2020, allows for exports to the U.S. at zero tariffs as long as companies setting up bases in Mexico meet conditions such as the rate of components sourced in North America.

The former Trump regime raised tariffs on a wide range of products imported from China to up to 25 percent since July 2018. Statistics from the U.S. Petersen Institute for International Economics (PIIE) show that U.S. tariffs on China reached an average of 19.3 percent, raising them to more than five times what they were before the U.S.-China trade friction started.

The head of Invest Monterrey, an investment promotion agency in Monterrey, the state capital of Nuevo León, recalled that “after the U.S.-China trade friction in 2018, Chinese companies quickly became interested in investing in Mexico.”

In terms of moving into Mexico from China is of interest to consumer goods companies such as home appliances and furniture, which have been hit hard by higher tariffs.

Large Chinese appliance company Hisense is investing $260 million to build a factory near Monterrey to produce refrigerators and air conditioning equipment for the U.S. market. Mass production of refrigerators is expected to start as early as within 2022.

In April 2022, sofa company Zhongyuan Home, which is building a new production base in Nuevo León, said it can effectively avoid international trade barriers.

Ningbo Daye Garden Equipment, a lawn mower company for which the U.S. is one of the main sales markets, also announced in early August that it would build a factory in Nuevo León, stating that it would address future trade risks, as if the uncertainty of the future of U.S.-China relations contributed to the investment decision.

As companies move in, China’s trade with Mexico is increasing. Mexico’s Ministry of Economy statistics show that China is the 2nd largest source of imports after the United States. China’s exports to Mexico reached $ 101 billion in 2021, a 50% increase over 5 years ago, approaching about half of the United States.

The extent to which Chinese companies contribute remains unclear, but Mexico’s exports to the United States reached 3989 billion U.S. dollars, an increase of 30% over five years ago.

In the future, even if the U.S. Biden administration lowered tariffs on China, Mexico will remain an attractive investment target for Chinese companies.

Mexico’s general minimum wage is about 170 Mexican pesos per day (about 60 yuan), and the northern border zone is about 260 pesos per day. The federal minimum wage in the U.S. is $7.25 per hour, and in many states it is even higher. As labor costs within China are increasing, there are huge advantages to establishing a production base in the neighboring country of the United States.

Mexico has traditionally placed the greatest emphasis on diplomacy with its largest trading partner, the United States. However, the country’s president, Lopez Ovrador, has reiterated “respect for sovereignty and avoidance of interference” in diplomatic issues and has not imposed economic sanctions against Russia for its invasion of Ukraine.

Mexico is not in step with the U.S., which has deepened its antagonism with China, making it a suitable political environment for Chinese companies to invest.