Competition with China

Mexico appears to be losing ground in U.S. markets. Its share of U.S. imports peaked at 11.5 percent in 2001 and has slipped since then. Meanwhile, China’s share of U.S. imports has grown steadily and now exceeds Mexico’s. To Mexican officials and producers this is no mere coincidence, China’s gains are being made at Mexico’s expense. China’s exports-to-GDP ratio has risen from 2 percent to 25 percent since 1970. While China’s GDP has grown at about 10 percent a year in real terms over the past 20 years, exports have grown twice as fast. Not only is China producing more than ever for export, its ability to access U.S. markets is improving with the expansion of free trade. China is making strides in many areas important to Mexico. However, there is little correlation between China’s gains and Mexico’s losses. There are many markets in which China is gaining a lot of ground but Mexico is not losing any. In such areas as computers and electrical machinery, China’s gains are being made at other countries’ expense. There are also many industries in which China is making no gains. Whatever is happening to Mexico in those areas cannot be explained by China. Among these commodities are vehicles, vehicle engines and parts, agricultural goods and oil products.

There are, of course, industries in which China’s gains are associated with Mexico’s losses. These at-risk sectors, which include TV sets and textiles and apparel, have several characteristics in common. First, they are unskilled and labor-intensive, which makes China a very attractive place to produce. Second, commodities in these sectors tend to have a high value-to-weight ratio, which makes transportation costs reasonable. Third, many products in these at-risk areas are standardized and can be mass produced. But notwithstanding these sectors in which Mexico is most exposed to Chinese competition, there is overall little correlation between China’s gains and Mexico’s losses.

The countries that appear to be bearing the brunt of China’s competition are other Asian exporters. Japan, Korea, Taiwan, Singapore, Malaysia and Thailand have lost market share in many sectors since 1999, and the losses experienced by that group of countries have been highly correlated with China’s gains. This correlation between China and the Asian tigers is exactly what we would see for Mexico if China’s advance were happening at Mexico’s expense. Instead, Mexico’s recent export difficulties are best explained by Mexico’s dependence on U.S. manufacturing activity. When a deep manufacturing recession began in the United States in 2000, no other country was hit harder than Mexico. Intermediate and capital goods account for almost 80 percent of Mexico’s exports. Mexico is a key supplier for the U.S. manufacturing sector. China, on the other hand, remains predominantly a consumption goods exporter. This greatly mitigated the impact of the recent U.S. recession on China’s export sector and largely explains China’s and Mexico’s differing fortunes since 2000.

The real problem facing Mexico is that Mexico has yet to find a way to accumulate physical and human resources the way fast-growing countries do. Its educational attainments continue to markedly lag those of industrialized nations. Its institutions do not function well, which discourages investment. Mexico’s tax system raises little revenue, which makes needed infrastructure and education investments impossible.

Mexico’s failure to marshal its physical and human resources effectively is most dramatic when compared to the Asian tigers. South Korea’s investment-to-GDP ratio reached almost 40 percent in the late '80s, very high by international standards. Interestingly, foreign investment did not play a big role in this. The investment surge was financed through exceptionally high private and public domestic savings. By contrast, Mexico's investment rate, in spite of the recent influx of foreign money, has hovered around 20 percent for most of the past 30 years. South Korea's fastest growing resource has been human capital. In 1960, almost half the working population lacked a primary school education. Today, 70 percent of working Koreans have at least some secondary education. Mexico's achievements in this area remain dismal. A third of the working population has not completed primary school, and the country today stands roughly where Korea did 40 years ago.