CONNECTING TEXAS AND MEXICO VIA BEIJING
By Pippa Malmgren, Ph.D.
Mexico is the new China, and Texas is the fastest-growing economy in the industrialized world. While all the headlines assume Trump’s wall will keep them apart, the reality is that no wall will stop the Texas-Mexico border from being the most productive spot on the planet for some years to come. We can only expect more growth and more cross-border deals.
How did Mexico jump in front of China? Labor and geography both play a part.
In terms of labor, China’s wages have risen so fast and so high that Mexican labor is now 30 to 40 percent cheaper than Chinese labor, a difference that’s only highlighted by the declining value of the Mexican Peso. And, as Chinese workers have realized they aren’t likely to become rich before they get old, the country’s quality control standards have slipped. Mexico’s, however, are up to the American standard, keeping the longstanding supply chains between Mexico and the rest of North America strong.
And in terms of geography, China is at a double disadvantage. While it’s a big country, it lacks sufficient arable land and water supplies to grow on the scale that is required. Further, the transpacific voyage makes Chinese wares more costly to deliver to the United States. Mexico, on the other hand, is physically adjacent to the biggest and fastest growing market in the world.
Of course, old problems remain. Mexico’s drug war ranks as the second-deadliest global conflict, surpassed only by the war in Syria, and corruption remains a serious problem. But the Mexican Government is really studying how Columbia overcame corruption and dysfunction to become the cleanest and highest-performing economy in Latin America. Some think Mexico’s journey will be easier now that the United States has begun legalizing marijuana. Mexico has said they’ll follow suit if California does, and that would be a first step in reducing enforcement spend and reaping the tax revenues legalization provides. As Columbia discovered, legalizing drugs wounds the profit margins and kills the trafficking business.
China’s Existential Problem & Proposed Solution
China’s leadership is well aware that the country won’t benefit from an upturn in the world economy if it is not competitive. That’s why China has announced a grand strategy called One Belt, One Road, One Circle (OBOR), designed to forge a new path to China’s future.
The idea is simple: China is going to build a “belt” of roads, highways, bridges and railway links across China and Central Asia and into the Middle East and Western Europe. The plan has some precedence, as China has already completed the longest railway links in the world. One runs from Yiwu in Eastern China to London, and the other runs from Yiwu to Madrid.
The country is also planning a maritime “road” of ports that will link China to the world by sea. The so-called “string of pearls” begins in Eastern China and connects to cities in Pakistan, Bangladesh, Sri Lanka, Israel, Oman, Ethiopia, Kenya, Tanzania, Mozambique and Madagascar. The Chinese are building or substantially upgrading every port on the road, and their investments continue into Western Europe through Greece, Italy, Belgium and the Netherlands. China is now the largest investor in the Suez Canal, which they are widening to permit two-way traffic and much larger ships.
“One Circle” is a reference to China’s efforts to build a pathway to the West through the Arctic. Their icebreakers can now make the trip from Dalian in China to Rotterdam in the Netherlands in just 26 days.
The Intersection of China And Mexico
What few seem to have noticed is that OBOR is in Mexico and Latin America, too. The Chinese have been upgrading Mexico’s railway links into the United States and across to their coastlines, and they’re getting ready to build a “super port” at Mexico’s Punta Colonet, which will be larger than America’s largest port, Long Beach. China is also expanding Lazaro Cardenas, Mexico’s deepest port, and upgrading the ports at Michoacan, Manzanillo, Veracruz and Ensenada.
China is also expanding Mexico’s access to the Pacific by building an entirely new canal across Nicaragua. It will permit today’s ever-larger ships to access Mexico’s east coast and facilitate the energy trade into and out of The Gulf of Mexico. This matters because China is financing the buildout of five new oil refineries in Mexico that are capable of managing the crude that flows out of the gulf. This new refining capability will be unchallenged except by America’s existing refineries, which are based on 35-year-old technology. It’s no contest. In exchange for the refinery buildout, China will expect to get most of the offtake.
China is also building physical infrastructure across the rest of Latam and from Chile to the Caribbean. Overall, China is now a bigger trade partner to Latam and the Caribbean than the European Union. China plans to spend at least $250 billion over the next decade upgrading infrastructure across the entire region. This will lift Mexican trade and Mexican profit opportunities as well.
The US Perspective
One might think the United States would object to China sidling up to its closest southern neighbor. But President Trump wants China to bring One Belt, One Road to America, too. After all, he promised the American public that he would upgrade the ancient airports, crumbling roads and highways, structurally unsound bridges and decaying ports. And that promise will be easy to keep if Trump can withdraw his threat to label China a “currency manipulator” in exchange for some Chinese investment in American infrastructure.
All this puts Texas smack in the middle of two fast-growing markets. Mexico is the most dynamic emerging market, and the United States is the most dynamic industrialised economy. No wonder Texas is already generating jobs faster than anywhere else in the world.
Texas has a few other striking advantages. As California becomes more aggressive in the hunt for revenue, the techie crowd, from investors to visionaries, is moving to Austin. Texan pragmatism is also a relief to investors who have been less than impressed by Silicon Valley’s arrogance and unsustainable valuations in recent years.
Houston remains the oil and gas capital of the world, and American know-how and technological innovation are unmatched in that sector. Though the collapse of the fracking industry in the United States and rising costs in that sector are discouraging signs for the country’s favor in the market, the recent blockade of Qatar has also reminded everyone that political risk in the Middle East is all too real. Americans always manage to sell the assets down, sort the problems, clean up the balance sheets and start again.
Then there is agribusiness. From cotton to cattle, Texas remains a vibrant producer of commodities. Farm values go up and down, but Texas remains one of the stronger agribusiness locations in the United States.
Taken together, Texas is not only beautifully positioned geographically, but it is also remarkably diversified. Companies will find it difficult not to grow as a result of these auspicious circumstances.
But What About The Wall?
With all this economic activity, the wave of Mexican emigration has subsided. Why leave Mexico when there are so many jobs now? Meanwhile, Americans and Canadians are eager to do more business south of the border, especially given China’s huge new infrastructure investments there. Perhaps China’s cash injection helps offset the loss of NAFTA, after all.
As for the wall, American and Canadian business people don’t like it, but they have a neat solution: a nifty piece of technology called an “airplane” that will fly right over it on the hunt for profits. They’ll be landing at Mexico City Airport, which is undergoing an $11 billion overhaul with China’s help. From there, passengers will be able to choose from several railway links to other parts of the country, which China is also upgrading.
While Washington tries to separate the United States and Mexico with a wall, China is binding these two powerful economies together even stronger than before. Dealmakers should buckle up for the ride.
Dr. Pippa Malmgren is the founder of DRPM Group and @H_Robotics. She is a former Economic Advisor to President George W. Bush and the author of Geopolitcs for Investors and Signals: How Everyday Signs Help Us Navigate the World’s Turbulent Economy. @DrPippaM