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China, Mexico and NAFTA

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25 Apr 2014

China is beginning to export more of its steel and other goods to Mexico, according to Wharton University. In October of 2012, Chinese steelmakers sent nearly $3.52 billion worth of steel to Latin America. Exports of steel to Mexico rose by 140.6 percent year-over-year between January and November of 2012.

Mexico does not have a free trade agreement with China like it does with the U.S. and Canada. One of the reasons for the greater supply of Chinese steel to Mexico is the increase in Mexican demand, according to Wharton. There is a large number of car manufacturers in China, which export much of their product north to the U.S. According to Fausto Cuevas Mesa, director of the Mexican automotive industry association, output from the Mexican auto industry will reach 3.9 million units by 2016.

More and more automakers are expanding to Mexico. China is 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.

Mexico-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.

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 decrease as the country's citizens spread out across the nation.

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, the currency fell by 0.3 percent to 13.0931 per one U.S. dollar. This was the biggest drop since April 15. This was in addition to retail concerns cited by Bloomberg. Sales have dropped, prompting some to think that Mexico will falter in the second quarter of 2014. Sales in February fell by 1.7 percent from last year. 

Other major currencies also fell. Mexico predicts that economic growth will grow to 3.9 percent this year.

Mexico and China
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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