Source: World Politics Review

Mexico’s recent decision to cancel a high-speed rail contract with the China Railway Construction Company (CRCC) is the latest example of the unsettled relationship between two of the largest emerging economies. In an email interview, Matt Ferchen, associate professor at Tsinghua University in Beijing and resident scholar at the Carnegie-Tsinghua Center for Global Policy, discussed China’s economic ties with Mexico.

How have Mexico’s economic relations with China developed in recent years, particularly since China joined the World Trade Organization in 2001?

The takeoff in China-Latin America commercial and diplomatic relations began just about a decade ago in response to booming Chinese demand for the region’s commodities. Chilean copper, Brazilian iron ore, Argentine soybeans and Venezuelan oil were all flowing to China to feed Chinese industry and consumers.

However, these were all resource-rich South American countries, and Mexico was the one major Latin American country that was conspicuously left out of the excitement. This is because even before China’s accession to the WTO, the Mexican and Chinese economies had become direct competitors, including for production and export to the U.S. Until recently, Mexico was losing that competition, as seen in Mexico’s massive trade deficits with China. However, in the last couple of years these imbalances have begun to change, due in part to rising labor costs in China and increased Mexican competitiveness. At the same time, under Presidents Enrique Pena Nieto in Mexico and Xi Jinping in China, both countries have made a concerted effort to deepen Chinese investment in Mexico, including in the reformed energy sector.

Given that Mexico is one of a dozen countries in the proposed Trans-Pacific Partnership (TPP)—and China conspicuously is not—how would that free trade deal impact Mexico and China’s economic ties?

In the near term, TPP is probably less important for China-Mexico economic ties than the outcome of Mexico’s ongoing economic reforms and Mexico’s role in the Pacific Alliance. In a sense, all of these reflect a Mexican commitment to further domestic and regional economic liberalization and integration, processes that have been underway since the 1980s. For China, interest in increased investment in Mexican manufacturing, in the automobile sector for instance, is on the rise. But the primary source of excitement and interest is in the Mexican energy sector, where Chinese financial and energy firms hope to be a major player.

Regionally, Mexico’s role in the liberal Pacific Alliance—along with Chile, Peru, Colombia and soon Costa Rica—symbolizes how for China, Latin America’s Pacific coast is the most dynamic and open regional grouping in terms of trade and investment. For China-Mexico ties, Mexico’s role in that bloc would mostly be an extension of these trends toward greater domestic and regional openness and integration.

How do you expect China to react to Pena Nieto’s decision last week to cancel the CRCC’s contract to build a bullet train in Mexico?

From the point of view of Mexico’s diplomatic ties to China, the cancellation of the train contract amounts to a major faux pas and a blow to the positive momentum of China-Mexico ties built during the last couple of years. The Chinese firms and government ministries involved in the deal have been clear to declare that they did nothing wrong in the bidding process.

However, whatever the final story of why exactly the contract was canceled, there are two important lessons for China. First, Chinese firms, especially those that are state-owned, must work extra hard to guarantee that the legal and public relations aspects of such high-profile contracts both adhere to local laws and are seen to do so. Second, and more difficult, Chinese foreign policy in Latin America and elsewhere in the developing world is keen to emphasize the win-win benefits of infrastructure investment and cooperation. Yet in this case, as in other much more unstable parts of the world, domestic concerns about good governance will require China to have a much more sophisticated understanding of local politics.

This interview was originally published by World Politics Review.