Tortilla Plants in Shanghai? Warming Trade Relations Between Mexico and China

by: Tim Iacono

Maybe this helps to explain why inflation is only 4 percent in Mexico. They must be importing lots of inexpensive apparel and electronics just like the U.S.

This story from yesterday's WSJ is mostly about the growing trade relations between the two countries, but it's hard not to notice the dramatic increase in goods imported from China and the growing trade deficit.

Mexico has viewed China as an economic rival for more than 10 years, more so after losing significant market share to China in electronics manufacturing in the late 1990s. China surpassed Mexico as the second leading exporter to the U.S. in 2003, behind Canada. Shortly thereafter, Mexico's attitude started to change.

In 2005, the two sides began trade-development talks and, with their government's urging, Mexican companies started trying to reposition themselves.

"China is an important market today, and tomorrow will be a more-important market for exporters all over the world. Mexico has to start developing that presence" there, says Roberto Zapata, director general of Multilateral and Regional Trade Negotiations in Mexico.

While Mexico remains competitive in textile manufacturing, the government is encouraging investment in products of higher value, as other competitors such as Japan have done.

"We have come to the conclusion that we cannot compete with China in labor costs," Mr. Zapata says. "The lesson, I believe, is very clear -- to move to the upper end of the value chain."

Luis de la Calle, who was Mexico's negotiator for China's World Trade Organization bid, says Mexican companies are beginning to feel more confident they can compete with China, invest successfully there and even attract Chinese investment.

At the lead are companies like tortilla-maker Gruma S.A.B. de C.V., which opened a $20 million tortilla plant in Shanghai in September to better sell to Asian markets. Auto-parts producer Nemak -- a subsidiary of Mexican concern ALFA S.A.B. de C.V. -- said it would build a plant in China but scrapped those plans and took a shortcut, announcing in November it would acquire a company that owned a parts-production facility there.

"The Chinese market has the greatest potential for growth, given its current underdevelopment and the possibility to manufacture cars for the export market, particularly with Asia," says Enrique Flores, an ALFA spokesman. The company already has a contract with GM Shanghai to produce engine heads for cars sold in the Chinese market.

Tortilla plants in Shanghai - there is irony in that somehow.

While they're getting the kinks worked out with the new tortilla factory, all those imported TV sets will help to offset the rising price for corn and other food staples at home when they tally the official inflation statistics.