Now that the United States is loudly breaking up with Mexico on social, Mexico is suddenly on the prowl for hot rebound trade with other markets. This is how it looks from here anyway, with Mexican officials popping up all over the media saying some country or other is going to be a big new market for Mexican exports. The new U.S. administration’s threats to dismantle the North American Free Trade Agreement (NAFTA) are currently stoking the flames of economic terror in Mexico, but we all know that Mexico’s dependency on the U.S. export market has been the stuff of economists’ nightmares for decades. To put it in perspective, the share of Mexico’s annual exports shipped to the USA has not dropped below 79% since some time before 1993, if it ever has. From 1998 to 2001, the concentration of Mexican exports destined for the U.S. market hovered near a truly bloodcurdling 89%. So it’s not like we didn’t know we were exposed to risk from overdependence on one market, but after 25 years of trade-loving U.S. governments, we became accustomed to living in denial. Read the rest of this entry »
Posts Tagged China
Mexico’s long-running effort to defend its domestic manufacturing industries against cheap Chinese imports is about to take another hit. The struggle goes back to China’s admission into the World Trade Organization (WTO) in 2001, which Mexico was highly reluctant to accept. In return for Mexico’s vote to admit China, the two countries agreed to extend an existing Mexican program of compensatory import duties on key-sector products from the Asian giant. Focusing largely on textiles, apparel and footwear, the duties ranged from over 100% to over 1,000% depending on the product. The high tariffs helped stave off the inevitable for a while, but the extension was originally agreed to last only six years. As the expiration date neared in 2007, the Mexican government heeded the frantic entreaties of the affected sectors, particularly the Guanajuato footwear industry centered around the city of León, and dived back into negotiations with the Chinese. The result was elimination of the compensatory duties on 749 Harmonized Tariff System (HTS) product classifications, but the extension of the duties on some 200 remaining classifications. The tariff rates on the remaining products have been reduced annually since 2008, but are still substantial, ranging approximately from 65% to 130%. Read the rest of this entry »
In the run-up to this weekend’s G20 meeting in Huntsville, Ontario, much ink has been spilled regarding the value of the Chinese currency. Economists, pundits and observers of all stripes have taken positions on various sides regarding the question of how much and how fast the yuan (or Renminbi, if you prefer) needs to appreciate against other major currencies. And, of course, how willing Chinese authorities are to allow this to happen.
Hypothetical scenarios projected in some circles of a rapid appreciation of 40% have China’s export competitors salivating. Basic trade theory holds that by hiking the value of the yuan, Chinese exports become more expensive, making competing products made in countries such as Mexico that much more cost competitive. Gaining ground of this type is seen as critical in the hotly disputed U.S. market for goods such as appliances and electronics. Trade data for 2009 suggests that Mexico is already gaining some overall market share from China in the United States, and we have touched on the relative cost competitiveness between Mexico and China in this space before.
Mexico has taken a drubbing from China over the past decade in the attraction of foreign investment in manufacturing, maquiladora and otherwise. While Mexico has by no means been abandoned by North American and Asian manufacturers, China became a veritable Klondike for foreign manufactures seeking to lower production costs in the early 2000’s. But a recent story in Reforma reinforces our own anecdotal evidence that Mexico may be in the process of recovering some of the FDI that drank the China Kool-Aid over the past few years.
Throughout the early and mid-‘00s, in the course of participating in export promotion events in the United States, we were struck by the stampede of prospective exporters and manufacturers begging to be led to China. And not just blender manufacturers either – we had little old ladies knitting doilies looking to offshore to Guangzhou to boost margin. While there’s no question that China offered a lot of manufacturers very attractive opportunities for cost reductions, we suspect that some portion of those who went tearing off to China with stars in their eyes looking for “money for nothing” probably wound up with more of the latter than the former. The big attraction, of course, was the low cost of labor.
According to a report by Boston Consulting Group cited by Reforma, in 2002 China’s average daily manufacturing wage was USD0.80, far below Mexico’s comparatively lavish USD3.00 at the time. Double-digit average annual GDP growth since then, however, has helped drive wages steadily upward in China, while manufacturing pay has remained relatively stable in Mexico over the same period. As a result, a gap in labor costs of over 250% between Mexico and China just a few years ago is projected to drop to under 20% in 2010. When factoring in 4:00 a.m. conference calls, frustrating communications and the cost and time of shipping, China may now be losing some of its former luster for manufacturers looking to offshore to serve the North American and South American markets. Mexico would do well to keep a close eye on items such as electricity costs, targeted technical education and other industrial location decision factors in order to take maximum advantage of any opportunities created by China’s unprecedented development surge.