The Sino-Mexican Influence in America's Backyard

After receiving approval this past week, the Bank of China will become the second Chinese-owned financial institution with a presence in Mexico after the Industrial and Commercial Bank of China (ICBC) began operations in June 2016. The Bank of China -- Mexico and ICBC (Mexico) both state their strategic purpose as providing comprehensive financial services to support Chinese (largely state owned) enterprises operating in Mexico, which are expanding at a rate that should cause alarm within the national security community.

When China and Mexico established diplomatic relations in 1972, trade between the two countries barely tipped the scales at $13 million. By 2016, trade had exploded to almost $75 billion with Mexico being China’s second largest Latin American trading partner behind Brazil, and China being the second most important export market for the Mexican economy.

Between 2014 and 2016, Mexico signed more than 40 investment deals with Chinese firms valued at more than $4 billion. Just this week, the Chinese ambassador to Mexico described increasing trade ties coming at a time when relations between the two countries were at an all time high: “[p]olitically these relations are at their best.. China considers Mexico as a strategic partner, a very important partner not only in Latin America, but globally.”

Historically, Chinese firms focused their investments in Latin America on raw materials. Increasingly, however, they are engaging in foreign direct investment targeting the transportation, finance, electricity, information and communications technology (IT), and alternative energy sectors. This shift has coincided with the opening of Mexico’s energy, electric power, telecom, and related infrastructure markets to foreign investment, which has attracted Chinese enterprises to invest heavily in the automotive, IT, and alternative energy industries in the country. And while Mexico continues to run a significant trade deficit with China, the extent of the deficit has been declining in recent years.

China National Offshore Oil Corporation (CNOOC) successfully bid for two of eight deep water blocks in Mexican territory in the Gulf of Mexico in 2016. China is thought to be considering involvement in the development of the Trans-Isthmus Rail Corridor in the Tehuantepec region of southern Mexico as part of its broader global Belt and Road Initiative. Estimated at a cost of $7 billion for the first year of construction alone, this would mark a significant increase in infrastructure investment into Mexico from China. These ventures confirm the ongoing transition from raw material extraction to infrastructure investment that is part of China’s longer term Latin American strategy.

Due in no small measure to the North America Free Trade Agreement (NAFTA), Mexico’s strong manufacturing base provides efficiencies for factories and businesses located in the country while also ensuring a ready supply of intermediate goods for the manufacturing process and a well integrated production supply chain. Chinese companies are increasingly recognizing the value this environment provides to investments in the country, taking advantage of the build-up in the Mexican industrial base under NAFTA that came at American and Canadian expense.

With the Unites States’ withdrawal from the Transpacific Partnership and the ongoing NAFTA renegotiations, this shift in balance of trade and foreign direct investment within Mexico represents a consequential realignment of economic influence in the country. Such a blatant and direct move into the United States’ sphere of economic influence should not go unanswered. However, the policy prescriptions are complicated, leaving an unclear path forward.

The U.S. cannot allow Mexico and Canada (which is also being courted by China) to engage in economic blackmail, using threats that they must pivot towards authoritarian communist regimes for their economic survival if the United States will not subsidize their inefficient economies via badly constructed trade arrangements. This is a moral hazard that invites demands for perpetual and ever-increasing wealth transfers from America to its two neighbors. Given the pre-existing and expected future U.S. debt burden, the money simply does not exist to economically prop up two other major economies any longer. Over the long term, the U.S. also cannot outbid China in a direct contest for control of the Mexican and Canadian economies. On purchasing power parity terms, China's economy is already 24% larger than that of the United States, and the gap continues to widen more rapidly over time.

The progressive encroachment of Chinese interests on the U.S. southern and northern borders represents a core national security threat in America's most immediate sphere of influence, particularly with the election of leftist Andrés Manuel López Obrador as president of Mexico on Sunday. What remains as the only viable long-term option to keep U.S. adversaries from gradually purchasing control of Mexico and Canada is one that a war-weary America undoubtedly does not like to hear: demands for Mexico and Canada to exclude foreign influence from American adversaries, to be backed up by the use of military force if they do not comply. If this sounds unappealing, consider that the alternative is even less desirable -- a 2,000-mile U.S.-Mexico border and a 5,500 mile U.S.-Canada border, with geopolitical adversaries controlling much of what is happening on the other side.

After receiving approval this past week, the Bank of China will become the second Chinese-owned financial institution with a presence in Mexico after the Industrial and Commercial Bank of China (ICBC) began operations in June 2016. The Bank of China -- Mexico and ICBC (Mexico) both state their strategic purpose as providing comprehensive financial services to support Chinese (largely state owned) enterprises operating in Mexico, which are expanding at a rate that should cause alarm within the national security community.

When China and Mexico established diplomatic relations in 1972, trade between the two countries barely tipped the scales at $13 million. By 2016, trade had exploded to almost $75 billion with Mexico being China’s second largest Latin American trading partner behind Brazil, and China being the second most important export market for the Mexican economy.

Between 2014 and 2016, Mexico signed more than 40 investment deals with Chinese firms valued at more than $4 billion. Just this week, the Chinese ambassador to Mexico described increasing trade ties coming at a time when relations between the two countries were at an all time high: “[p]olitically these relations are at their best.. China considers Mexico as a strategic partner, a very important partner not only in Latin America, but globally.”

Historically, Chinese firms focused their investments in Latin America on raw materials. Increasingly, however, they are engaging in foreign direct investment targeting the transportation, finance, electricity, information and communications technology (IT), and alternative energy sectors. This shift has coincided with the opening of Mexico’s energy, electric power, telecom, and related infrastructure markets to foreign investment, which has attracted Chinese enterprises to invest heavily in the automotive, IT, and alternative energy industries in the country. And while Mexico continues to run a significant trade deficit with China, the extent of the deficit has been declining in recent years.

China National Offshore Oil Corporation (CNOOC) successfully bid for two of eight deep water blocks in Mexican territory in the Gulf of Mexico in 2016. China is thought to be considering involvement in the development of the Trans-Isthmus Rail Corridor in the Tehuantepec region of southern Mexico as part of its broader global Belt and Road Initiative. Estimated at a cost of $7 billion for the first year of construction alone, this would mark a significant increase in infrastructure investment into Mexico from China. These ventures confirm the ongoing transition from raw material extraction to infrastructure investment that is part of China’s longer term Latin American strategy.

Due in no small measure to the North America Free Trade Agreement (NAFTA), Mexico’s strong manufacturing base provides efficiencies for factories and businesses located in the country while also ensuring a ready supply of intermediate goods for the manufacturing process and a well integrated production supply chain. Chinese companies are increasingly recognizing the value this environment provides to investments in the country, taking advantage of the build-up in the Mexican industrial base under NAFTA that came at American and Canadian expense.

With the Unites States’ withdrawal from the Transpacific Partnership and the ongoing NAFTA renegotiations, this shift in balance of trade and foreign direct investment within Mexico represents a consequential realignment of economic influence in the country. Such a blatant and direct move into the United States’ sphere of economic influence should not go unanswered. However, the policy prescriptions are complicated, leaving an unclear path forward.

The U.S. cannot allow Mexico and Canada (which is also being courted by China) to engage in economic blackmail, using threats that they must pivot towards authoritarian communist regimes for their economic survival if the United States will not subsidize their inefficient economies via badly constructed trade arrangements. This is a moral hazard that invites demands for perpetual and ever-increasing wealth transfers from America to its two neighbors. Given the pre-existing and expected future U.S. debt burden, the money simply does not exist to economically prop up two other major economies any longer. Over the long term, the U.S. also cannot outbid China in a direct contest for control of the Mexican and Canadian economies. On purchasing power parity terms, China's economy is already 24% larger than that of the United States, and the gap continues to widen more rapidly over time.

The progressive encroachment of Chinese interests on the U.S. southern and northern borders represents a core national security threat in America's most immediate sphere of influence, particularly with the election of leftist Andrés Manuel López Obrador as president of Mexico on Sunday. What remains as the only viable long-term option to keep U.S. adversaries from gradually purchasing control of Mexico and Canada is one that a war-weary America undoubtedly does not like to hear: demands for Mexico and Canada to exclude foreign influence from American adversaries, to be backed up by the use of military force if they do not comply. If this sounds unappealing, consider that the alternative is even less desirable -- a 2,000-mile U.S.-Mexico border and a 5,500 mile U.S.-Canada border, with geopolitical adversaries controlling much of what is happening on the other side.