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March 24, 2003 01:00 AM

Mexico balks at growing China `invasion': Part 1 of 2

Barbara Kastelein
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    For most of the past year, Mexico has been jittery about the advance of China.

    Newspaper reports note Chinese products invading the crowded streets of the capital, with dirt-cheap socks, toys, alarm clocks and hairclips.

    Mexico, uncharacteristically, began to bare its teeth. The Latin country threatened briefly to block China's entry into the World Trade Organization, and at October's Pacific Rim summit in Cabo San Lucas, Mexicans tried to turn up the heat on what they saw as unfair competition.

    Mexico complained that China was stealing its factories and then flooding its market with cheap goods. Maquiladora plants along the northern border suddenly found they weren't cheap anymore, with wages roughly at $1.40 per hour compared with 50 cents in China.

    With the recession in the United States, the destination for about 90 percent of all Mexican exports, companies were forced to cut costs. By mid-2002, Mexico estimates, it had lost 230,000 manufacturing jobs since the start of 2001.

    A shoe drops

    Mexico's plastics industry is taking notice.

    ``There is a real fear of losing a slice of the U.S. market,'' said Gustavo Guraieb, owner of a 50-employee company that makes polyethylene bags and packaging.

    ``We wonder, how can a product cost less here than what I have to pay just for the raw material?'' he asked.

    Guraieb is an officer of an industrial chamber, known locally as Canacintra, in León. The region, famed for shoe production, always has competed on cost. The area's plastics sector has about 10,000 jobs, spread out among 400 companies.

    ``Many companies have closed, especially the microsized operations. Of those supplying plastics for the shoe industry, 10-20 percent of microcompanies have closed in the last two years,'' he said.

    The city's industrial leaders - following a visit in March 2002 of the Chinese Ambassador to Mexico - decided it was time to visit China to see how companies work there, especially in plastics.

    Cofose, an organization that promotes foreign trade in the León region, organized a three-week mission that visited six Chinese cities that April. The aim was to generate a comparative analysis of competitiveness in Mexico and in China.

    Guraieb gave a presentation on the trip at a recent conference titled ``Unity Against China.'' The meeting was organized by Mexico's plastics trade group Anipac and the plastics sections of several regional business groups.

    Guraieb's conclusions focused on infrastructure, order and security, pointing out that the Chinese environment was so different that the Mexican visitors came to refer to it as ``Planet China.'' The factors that give China a great advantage over Mexico were:

    * The strong vision of leaders to make China a world power, with long-term planning and continuity through different governments.

    * Clear regulations for investors, and an absence of overwhelming red tape.

    * Real tax incentives.

    * Order and security, with zero tolerance resulting in very low delinquency, making China attractive for foreign investment and operations.

    He found that labor not only is cheaper, but it is very productive, and that some raw materials cost 20-30 percent less than in Mexico. ``In some cases it would be cheaper for us to import them from China,'' he said.

    ``In Mexico we don't have a clear vision of the future as a country. Pending reforms, like electricity and labor, are mired in political maneuvering, and not going anywhere. There is little financial support, and the few incentives there are fail to reach small and medium-size businesses. And we have problems of delinquency and drug trafficking.''

    Julio Millan, president of consulting firm Consultores Internacionales SC, said Mexican industry leaders are fearful and surprised, the latter because ``Mexico is discovering it has to act fast against a threat, and one of Mexico's problems is slow motion.'' Millan said the entrance of China into the World Trade Organization is one of the most important events of the 21st century. He predicts that in 10-15 years China will be among the five main global economic powers.

    ``It is estimated that 190,000 Mexican jobs have been lost to China, of these between 15,000 and 20,000 in the plastics industry,'' he said in an interview. From 1990-2001, China captured $380 billion of direct foreign investment, he said.

    Growth in Chinese exports came in two phases: In the 1980s with labor-intensive industries; and in the 1990s through capital- and technology-intensive sectors. Millan pointed out that China launched itself into foreign trade, but without losing sight of its internal market.

    Despite those achievements, China also presents structural weaknesses that could erupt in future crises. For example, 700 million people from the countryside will be seeking work, China has an aging population, there is a lack of infrastructure in transportation, lack of energy, bankrupt state companies, a weak and under-integrated financial system, a growing budget deficit, and the possibility of social unrest.

    Benefits were clear for Western Europe, the United States and Japan.

    In the next 10 years China will import from those regions $264 billion in capital goods (vehicles, machines, apparatus) and $73 billion in food. China will be the biggest market for personal computer and telecommunications products, and its market for financial services has a promising future.

    China's development also offers opportunities for Mexico, in the growth of manufacturing exports, cement, distilled tequila and mescal, beer, cars, rubber products, cigars and cigarettes, processed seafood, corn flour, fresh agricultural products (leeches, citrus fruits, avocado, tomatoes, melons), pork and chicken, and petroleum.

    For Mexico, niches of competition with China currently are in fibers, textiles, clothing, electronics, leather and shoes, and products derived from etroleum.

    From 2007-2015, those areas are expected to expand to include iron and steel, cars and car parts, biotechnology and tourism.

    Millan noted, however, that neither Mexico's government nor its industrialists seem to know how to make China a long-term partner instead of a competitor.

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