The Belt & Road Initiative In Mexico & Central America
Op/Ed by Chris Devonshire-Ellis
China’s Belt & Road Initiative has been making significant inroads in the Caribbean and Latin America, and in this article we take a look at the impact on Mexico and Central America. Mexico in fact has not signed a MoU with China concerning the Belt & Road, yet its regional impact upon Central America is huge. To date, just three Central American countries have joined the Belt & Road Initiative, being El Salvador, Costa Rica & Panama.
China has however signed off Bilateral Investment Treaties (BIT) with Belize, Costa Rica, Honduras and Mexico. Bilateral Investment Treaties are a low end agreement that essentially codify the mechanisms for investing into each others countries and protect the rights of each others nationals in doing so. They do cater for some tax reductions, but only in a broad sense. They are however a platform for the later negotiation of more substantial Double Tax Agreements (DTA) which are more product specific and cater for a wider range of goods and services, as well as containing mechanisms for reducing profits tax by use of withholding taxes. To date, neither Mexico nor any of the Central American countries has signed off such an agreement, although Mexico does have a DTA with Hong Kong, which came into effect in April 2014 and deals mainly within the aviation services field.
The position of Mexico and Central America in being Belt & Road light is in direct contrast to what has been happening just across the Caribbean, where numerous island nations have signed up to China’s Belt & Road MoU.
The close proximity of the United States is partially what is keeping China’s profile low, where US influence runs deep. Belize, El Salvador, Guatemala, Honduras, and Nicaragua all at present recognize Taiwan rather than China, a diplomatic issue that China is surely continuing to pressure to change and the United States will unofficially push to maintain.
Mexico, despite President Trumps promises to “build a wall” has already effectively created one in renegotiating a Free Trade Agreement with the United States that limits the scope of trade deals Mexico can conclude with other parties. The United States-Mexico-Canada Agreement replaces the previous North American Free Trade Agreement (NAFTA) although it is still to be ratified. Should USMCA come into effect, Mexico will be limited in its ability to make separate agreements with China as this has been built into the USMCA deal. Washington does not want Mexico to be a source on cheap imported Chinese products.
That leaves the Central American nations in something of a bind – USMCA is probably about to happen, meaning trade with Mexico will be directly affected. This is because rules of origin and minimum wage level regulations have been raised to US$16 per hour in USCMA, leaving the Central American nations out of the loop and unable to provide labor legally to Mexican production. The USMCA effectively cuts Central America away from being able to service the North American market by imposing a minimum wage that is unachievable for Central American low skilled workers. The wall to keep people out, at least in trade terms, has been placed on Mexico’s borders with Central America, not on the border with the United States.
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China will be aware of this, however probably won’t make any moves until the USMCA agreement is ratified by the respective governments Parliaments. As and when they do – and it almost certain that discussions are already underway – the Central American nations will be looking to China to assist. That will mean a mass of diplomatic defections from Taiwan to Beijing, and the Chinese will not be looking to rush that issue for the sake of antagonizing Washington or causing too much upset in Taipei. Yet the USMCA deal looks certain to push them into Beijing’s arms.
This timeframe goes hand-in-hand with a little noted anniversary – the 25 year concession that Hong Kong based Hutchison Whampoa secured to operate the Panama Canal comes to an end in 2024. With the Chinese having already purchased the major European port of Piraeus – and made significant investments in doubling its capacity – similar overtures are sure to be taking place with the Panamanian government concerning the Canal operations.
That already looks like being a done deal – China Landbridge, a privately owned company based in the northern Chinese port of Rizhao, bought Panama’s largest port, at Margarita Island, to the Atlantic entrance of the Panama Canal in May 2016. Named the Panama Colón Container Port (PCCP) the project has cost over US$1.1 billion and will capitalize on the doubling of the capacity of the canal, which can now handle the New Panamax container ships that can transport up to 14,500 teu (twenty-foot equivalent units).
Costa Rica and Panama meanwhile, which do recognize China, can understandably point to some significant investments the Chinese have been making. Apart from the Colon Container Port, in Costa Rica, China is financing the building of a new airport in Orotina, expanding the road route to Puerto Caldera, building the San José-San Ramón highway, and are discussing the setting up a Free Trade Development Zone for Chinese companies to manufacture goods for the region, and this is understood to include cars and solar panels amongst other products. However, relations between the two countries in terms of getting some of this infrastructure build have been patchy.
Panama meanwhile can also point to some significant Chinese investment. Chinese investment in Panama grew 10-fold in 2016, with total investment reaching $1.27 billion last year, more than ten times the $140 million invested in 2015, according to The American Enterprise Institute. On the real estate side, China Construction America (CCA), a subsidiary of China State Construction Engineering, sees Panama as having unique appeal, hence its decision to develop Panama’s biggest ever residential project in Vista Alegre, the so-called “City of Hope”. Valued at US$137-million and boasting 2,250 units, CCA has definite plans to market City of Hope to Chinese buyers. The prospects look good too, Chinese buyers accounted for 20% of all transactions for Punta Pacifica Realty in 2017. There are specific reasons for this: Panama puts no restrictions on foreigner’s real estate investments, and that greatly appeals to Chinese investors who highly value the possibility to buy and own titled land that can be passed down to future generations to come. This is a huge attraction for Chinese buyers because mainland Chinese are not allowed to take full ownership of their property in China due to the Chinese government’s rulings that all land is state-owned.
Clearly, changes are afoot. While Mexico does itself have a Free Trade Agreement with Central America, it also values the USMCA deal as the more significant which in dollar and trade volume terms it certainly is. But what it also does, although this is a consequence rather than deliberate, is to draw a distinct trade line at the southern borders of North America with Guatemala and Belize. From the northwestern border near Tijuana-San Diego down to the southwestern border with Guatemala is around 3220 kilometers. The distance between the northeastern Matamoros-Brownsville border and the southeastern border with Belize is 1232 kilometers. Beyond that is Central America. It is almost certainly only a matter of time when Chinese diplomatic efforts and the impact of the USMCA deal will start to see Central American states align with Beijing and sign off Double Tax Treaties and Belt & Road MoU agreements with China.
Silk Road Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm has 26 years of China operations with offices throughout China, Asia and Europe. Please refer to our Belt & Road desk or visit our website at www.dezshira.com for further information.
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