Mex­ico’s losses could be China’s gains

Trump’s re­cent pro­nounce­ments about auto im­ports and NAFTA may knock out na­tion’s big­gest com­pe­ti­tion

China Daily European Weekly - - Cover Story - By JEF­FREY TOW­SON The au­thor is the pro­fes­sor of in­vest­ment, Guanghua School of Man­age­ment. The views do not nec­es­sar­ily re­flect those of China Daily.

When it comes to the United States mar­ket, Chi­nese and Mex­i­can man­u­fac­tur­ers have long been ri­vals. Both groups ex­port fairly sim­i­lar types of goods. Both have ad­van­tages in lower la­bor costs. And they are now the No 1 and No 2 ex­porters to the US.

In most sec­tors, whether it is toys or lap­tops, Chi­nese man­u­fac­tur­ers have be­come dom­i­nant.

How­ever, in a few key sec­tors, most no­tably cars and au­toparts, Mex­i­can man­u­fac­tur­ers have been more suc­cess­ful, and most fre­quently be­cause of the North Amer­i­can Free Trade Agree­ment. That is why US Pres­i­dent Don­ald Trump’s state­ments about want­ing to rene­go­ti­ate or dis­man­tle NAFTA and USMex­ico trade are so im­por­tant. This could be very bad for Mex­i­can man­u­fac­tur­ers but pos­si­bly quite good for China. Ei­ther way, it looks like it will change the ex­ist­ing dy­namic. My ar­gu­ment for this is three points: Point 1: In the US mar­ket, Chi­nese man­u­fac­tur­ers have con­sis­tently beaten Mex­i­can man­u­fac­tur­ers.

The types of ex­ports com­ing from China and Mex­ico are fairly sim­i­lar. In 2015, elec­tronic equip­ment was 26 per­cent of China’s ex­ports (about $600 bil­lion) and 21 per­cent of Mex­ico’s (about $81 bil­lion). Ma­chines, en­gines and pumps were 16 per­cent of China’s ($364 bil­lion) and 16 per­cent of Mex­ico’s ($59 bil­lion). The other ma­jor cat­e­gories such as fur­ni­ture, light­ing, signs; plas­tics; and med­i­cal and tech­ni­cal equip­ment are also sim­i­lar be­tween the two coun­tries. The big­gest dif­fer­ences you see be­tween Chi­nese and Mex­i­can ex­ports are in oil and ve­hi­cles. And what is most no­tice­able is that China’s ex­ports in al­most all of th­ese sec­tors now dwarf Mex­ico’s.

This was not the case 15 years ago. In 2000, Mex­ico was al­ready six years into the en­act­ment of NAFTA but China had yet to join the World Trade Or­ga­ni­za­tion. Ac­cord­ing to the US Cen­sus Bureau, Mex­ico’s ex­ports to the US to­taled $136 bil­lion in 2000. At the same time, China’s ex­ports to the US were $100 bil­lion.

Yet by 2010, China’s ex­ports to the US had soared to $365 bil­lion, far sur­pass­ing Mex­ico at $230 bil­lion. Also dur­ing 2000 to 2006, Mex­ico’s ex­port growth rate fell to 6 per­cent, from its pre­vi­ous 15 per­cent dur­ing 19952000 and prior to China join­ing the WTO. In 2016, China’s ex­ports to the US reached $423 bil­lion, com­pared with $271 bil­lion from Mex­ico.

One can cer­tainly ar­gue that Mex­ico was ac­tu­ally in­creas­ing in over­all ex­ports to the US dur­ing this pe­riod. China was just do­ing bet­ter. How­ever, the quote that comes to mind is by War­ren Buf­fett’s part­ner Char­lie Munger, who said: “At Berk­shire Hath­away, we do not like to com­pete against Chi­nese man­u­fac­tur­ers.”

Mex­i­can man­u­fac­tur­ers prob­a­bly now say the same thing.

Point 2: A big ex­cep­tion to this trend is in cars and au­toparts, where Mex­i­can man­u­fac­tur­ers have done con­sis­tently bet­ter.

The big­gest ex­cep­tion to this China and Mex­ico ex­port story is in ve­hi­cles and au­toparts. In 2016, Mex­i­can global ex­ports in this sec­tor reached $90 bil­lion, mak­ing it the coun­try’s sin­gle largest ex­port at 23.7 per­cent. And the US was the pri­mary des­ti­na­tion for a rapidly grow­ing au­toparts-au­to­mo­tive in­dus­try. In con­trast, China’s global ex­ports in this space rep­re­sented only 2.7 per­cent of their ex­ports, and to­talled $62.7 bil­lion.

The rea­sons for this are, un­sur­pris­ingly, NAFTA and Mex­ico’s close prox­im­ity to the US. It is sim­ply much cheaper to trans­port cars and other heavy items from Mex­ico to the US and most fi­nal car as­sem­bly is done close to mar­ket. How­ever, au­toparts have less of a geo­graphic fac­tor and there is fairly com­pli­cated move­ment of parts, com­po­nents and var­i­ous stages of as­sem­bly across Mex­ico, Amer­ica and Canada. NAFTA is the other fac­tor, which has re­moved most trade and in­vest­ment bar­ri­ers be­tween the US, Canada and Mex­ico. Vir­tu­ally all of the ma­jor au­tomak­ers have now cen­tral­ized some or all of their pro­duc­tion for North Amer­ica to Mex­ico.

To­day, the im­por­tance of the au­to­mo­bileauto parts in­dus­try to Mex­ico can­not be over­stated. It is the coun­try’s sin­gle big­gest ex­port and source of dol­lars (now sur­pass­ing money sent home by mi­grants to the US).

Mex­i­can car pro­duc­tion has reached record num­bers with more than 3 mil­lion cars pro­duced each year. Au­to­mo­bile-au­toparts are also one of the big­gest driv­ers for for­eign in­vest­ment into the coun­try. Since 2010, nine of the ma­jor au­tomak­ers have an­nounced more than $24 bil­lion in in­vest­ments in Mex­ico, with most tar­get­ing the US as their pri­mary end-mar­ket.

Point 3: US Pres­i­dent Trump may now be chang­ing NAFTA and the rules of USMex­i­can trade. This could be very good for Chi­nese man­u­fac­tur­ers.

US Pres­i­dent Trump’s re­cent an­nounce­ments of an in­tended rene­go­ti­a­tion or can­cel­la­tion of NAFTA have sent shock­waves through Mex­ico. More than 70-80 per­cent of all Mex­i­can ex­ports are go­ing to the US and Canada (i.e., the NAFTA mem­bers). And what’s worse, Trump has specif­i­cally fo­cused on Mex­i­can pro­duced au­to­mo­biles and auto parts, one of the most rapidly grow­ing ar­eas of Mex­i­can man­u­fac­tur­ing. Trump has specif­i­cally called for a 35 per­cent tax on cars im­ported from Mex­ico.

Trump has also al­ready crit­i­cized Ford, Gen­eral Mo­tors and Toy­ota for mov­ing fa­cil­i­ties to Mex­ico and has stated they will have to pay this 35 per­cent tax to bring their cars into the US. Ford had the un­for­tu­nate luck of an­nounc­ing an end to all of their US pro­duc­tion of small cars in the mid­dle of the elec­tion, which got a re­sponse from can­di­date Trump. Ford have now can­celed their planned $1.6 bil­lion plant in Mex­ico. With­out ques­tion, the po­ten­tial for up­com­ing changes to NAFTA and car im­ports is al­ready hav­ing a chill­ing ef­fect on in­vest­ment into Mex­ico.

How­ever, for Chi­nese man­u­fac­tur­ers this could be a pos­i­tive de­vel­op­ment. For them, this looks like their big­gest com­peti­tor for ex­ports to the US may be about to lose its big­gest ad­van­tage, a largely tar­iff-free bor­der. Plus, Mex­i­can ex­ports to the US are heav­ily weighted to au­to­mo­bile-auto parts, the area Trump is fo­cus­ing most on. For China, broad changes to NAFTA could re­sult in a lev­el­ing of the play­ing field in cer­tain sec­tors in terms of tar­iffs.

It is also worth not­ing that Chi­nese man­u­fac­tur­ers have al­ready been catch­ing up with Mex­i­can man­u­fac­tur­ers in au­to­mo­bile-auto parts, just as they have in most other in­dus­tries. In 2014, China passed Canada and be­came the sec­ond-largest ex­porter of au­to­mo­tive parts into the US af­ter Mex­ico. Even be­fore the re­cent com­ments, Mex­i­can man­u­fac­tur­ers were wor­ried that China might be granted a lower tar­iff.

Ul­ti­mately, there are a lot fac­tors in each sub-sec­tor when it comes to trade, whether its tar­iffs, ship­ping costs, chang­ing cur­ren­cies or others. So it’s dif­fi­cult to gen­er­al­ize too much when it comes to Mex­ico and Chi­nese man­u­fac­tur­ers.

How­ever, we can con­clude that Trump’s re­cent pro­nounce­ments about auto im­ports and NAFTA are much worse for Mex­ico than China. And they raise a very in­trigu­ing ques­tion: With­out NAFTA, can Mex­i­can man­u­fac­tur­ers suc­cess­fully com­pete with China?

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