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Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?. Ernesto López-Córdova , Inter-American Development Bank 2004 LAEBA Annual Conference Beijing, China, 3-4 December 2004.

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Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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  1. Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame? Ernesto López-Córdova, Inter-American Development Bank 2004 LAEBA Annual Conference Beijing, China, 3-4 December 2004 The opinions expressed herein are those of the author and do not necessarily reflect the official position of the IDB or its member countries.

  2. Questions • How has trade policy after NAFTA affected Mexico’s manufacturing sector? • What additional factors affect the behavior of the sector? • How do China and Mexico compare?

  3. Overview • Mexico’s trade policy since the 1990s: Distorting, favoring low-wage industries • Protection of low-wage jobs in less productive companies • Trade liberalization favors productivity • Instead of protectionism, consider policies that promote productivity growth and competitiveness

  4. Trade Policy in the 1990s • Reduction of average tariffs • However, tariff increases in ... • Labor intensive industries • Trade with low-wage countries

  5. Trade Policy in the 1990s • NAFTA • Preferential access to the US market • Specially in low-wage industries • More recently, erosion of NAFTA preferences

  6. Implications • Jobs and output growth in low-wage industries • NAFTA favors export in those industries • Specialization in industries without comparative advantage vis-a-vis China

  7. Competition in US market • MX competes more directly with CHN than the rest of Latin America • Comparable with Asian countries • Increased during the last 30 years • Concentration in manufacturing • In which industries do MX and CHN compete? • “Gain”- MX gains market share in US, CHN loses • “Loss” – MX loses market share in US, CHN gains • “Compete” – Both gain share in US market

  8. Gains, 1995-2000

  9. Losses, 1995-2000

  10. Increased competition, 1995-2000

  11. Trade Policy in the1990s • Evidence of: • Expansion of low-wages industries • Greater exports and FDI in such industries • Also, export growth in high-wages / high-tech industries • But China’s exports grew faster • Higher competition with China in such industries

  12. Plant-level impact • Look at panel of approximately 6000 plants over the 1993-2000 period • What would happen to plant-level employment if import competition fell? • Protection benefits mainly least productive firms in low-wages industries • More productive firms in better position to compete with imports

  13. Employment and imports among Mexican plants, 1993-2000

  14. Trade and Productivity • Productivity not only allows plants to face foreign competition successfully • In addition, trade liberalization and FDI favor productivity growth • Both at the plant level • And in the sector as a whole

  15. Mexico: TFP growth 1993-2000 ( By industry or plant characteristic)

  16. Is Chinese competition to blame? • In spite of its undeniable accomplishments, trade policy in the 1990s also created distortions in favor of low-wage industries and protected inefficient producers • China has become a manufacturing powerhouse in international markets and competes directly with Mexico. • Why? Fast productivity growth

  17. What can Mexico do? • Protectionism is not a long-term answer to Chinese competition • Important to review what factors inhibit competitiveness and productivity in Mexico • Business climate • Production costs • Research and development

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