The Isthmus of Tehuantepec rail line; Interest from China and backbone of the Special Economic Zones (ZEES

With López Obrador, China may have another shot at a big project in Mexico

Since establishing diplomatic relations in 1972, Mexico and China have maintained a cordial political relationship.

However, economically the two countries have remained competitive for the last three decades. Consider that in 2001 Mexico was the last country to withdraw objections against China’s accession to the WTO.

Times have changed though. Recently, the bilateral engagement between Beijing and Mexico City has become more complimentary.

In September 2017, President Enrique Peña Nieto held another round of bilateral meetings with Chinese President Xi Jinping, the seventh such meeting since 2013, when both leaders agreed to declare the status of the Sino-Mexican relationship as a “comprehensive strategic partnership.”

With Andrés Manuel López Obrador’s landslide victory in the Mexican election on July 1, the Sino-Mexican partnership will almost certainly deepen further for three reasons.

First, Mexico may not feel that waiting for NAFTA is a winning economic strategy. As of May 17, United States House Speaker Paul Ryan’s informal deadline, NAFTA renegotiations were still in limbo. Worse, on June 1 the Trump administration delivered a gut punch to America’s closest allies, imposing tariffs on steel and aluminum from Europe, Mexico, and Canada.

Four days later, Mexico retaliated with new tariffs on U.S. products. The list of taxed goods includes whiskey, cheese, steel, bourbon, and pork. Canada has even been pushing the trans-mountain pipeline to sell oil directly to China.

“Mexico is realizing that it has been overexposed to the U.S., and it’s now trying to hedge its bets,” according to Kevin Gallagher, a professor at Boston University. Currently, China is Mexico’s fourth-largest trading partner, accounting for US $6.7 billion of Mexico’s annual exports.

These numbers are far smaller than Mexico’s exports to the United States, which account for $372.4 billion of Mexico’s annual exports. Recognizing that Mexico is overly reliant on the U.S., there have already been moves towards deeper integration with China.

In early 2017, while the U.S. and Mexico were preparing for NAFTA renegotiations, billionaire Carlos Slim went ahead and established joint ventures with China’s JAC Motors, one of three automotive companies owned by the Chinese government with a presence in Mexico.

The Chinese have reciprocated as well. Last September, Xi Jinping called Mexico an “important pivot of the natural extension of Belt and Road construction in Latin America” and said both countries should synergize development strategies.

In fact, China invited Mexico as one of five nations to consider a “BRICS plus” arrangement, which would add new members of the global South to the now five-country grouping. López Obrador can easily jump on the bandwagon of China’s Belt and Road Initiative (BRI) should he want to more fully pivot towards Beijing and away from Washington.

Second, López Obrador can also take advantage of China’s patient capital, an important form of state-led capitalism and characterized by a longer-term horizon. Historically, Chinese efforts at major projects in Mexico have not been fruitful.

Beijing tried to champion a high-speed rail link to connect Mexico City and the city of Querétaro. However, President Enrique Peña Nieto was forced to scrap a contract awarded to a consortium led by China Railway Construction Corp. after an outcry over transparency.

With López Obrador, China may have another shot at a big project in Mexico. The new Mexican president has ambitions to revitalize a rail corridor across the Isthmus of Tehuantepec, where the Atlantic and Pacific oceans are just 200 kilometers apart. In theory, this would serve as a Panama Canal-lite, opening up a shortcut to the Atlantic.

The rail corridor of the Isthmus of Tehuantepec will be the backbone of the Special Economic Zones (ZEEs) established in the southeast of the country and will make the region competitive with the Panama Canal, experts said.

Marcos Theurel, director of the Port of Coatzacoalcos, said that with the rail corridor the southeast of the country can become the commercial hinge between the United States and China, in addition to the train would connect that terminal with Salina Cruz where two ZEEs are established.

Theurel pointed out that if the project were to reach its maximum capacity, there would be an international advantage and it would increase the per capita income in the area.

The expert stressed that in the ZEEs there are tax benefits of non-payment of ISR for 10 years and zero rates of VAT when companies located in the Zones buy items from the rest of the national territory. Also, there is no VAT for transactions within the same ZEEs.

” The rail corridor would provide logistics to the Economic Zones; currently only one freight train passes a week if that corridor is extended to two roads, as is the plan of López Obrador, could pass up to 16 trains in a day, “estimated Theurel.

Alejandro Álvarez, director of Arrecife and member of the Transport Infrastructure Committee of the College of Civil Engineers of Mexico, pointed out that the rail corridor is an integral strategy to promote development in an area lagging behind in development; the line exists and is in charge of the Railroad of the Isthmus of Tehuantepec, but it does not have the optimal conditions than the rest of the infrastructure.

“This route would be used for the installation of industry and would serve to move goods and provide good conditions to potential companies interested in settling in that region, ” said Álvarez.

Source El financiero

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