The year was 1994, and with NAFTA in effect, Mexico began to enjoy a profusion of growth in its manufacturing sector. This period of prosperity, however, was cut short by the arrival of an unexpected manufacturing competitor: China. After China entered the World Trade Organization in 2001, American manufacturers flocked there due to its extremely low costs of production, with which Mexico could not compete.
For the past few years Mexico has begun to reclaim what it once lost. According to the ex-ambassador of Mexico, Arturo Sarukhan, “Mexico and the U.S. now trade $1.4 billion per day, and North America has seen the rise of integrated supply chains and joint-production platforms between Mexico, the U.S. and Canada.”
Since 2010, Chinese manufacturing wages began to pass that of Mexico, and this trend has steadily continued. According to a press release from the Boston Consulting Group, “Chinese manufacturing wages have nearly quintupled since 2004, while Mexican wages have risen by less than 50 percent in U.S. dollar terms. Adjusted for productivity, Mexican labor costs are now estimated to be 13 percent lower than those of China.”
“We have had some American costumers leave us for a Chinese manufacturer, only to come back to us a few months later,” says Carolina Martinez, marketing manager at Calzado Velmar, a large shoe manufacturing company in León, Mexico. According to Martinez, the cause is a mix of costs, logistics, ease of doing business, and quality. In fact, shipping a 40-foot container from China to the U.S., on average, takes five weeks and costs $4,300, versus just one week at a cost of $1,800 from Mexico.
Eighty-three percent of total exports from Mexico are manufactured products. Its increased competiveness in manufacturing has allowed Mexico’s exports to skyrocket. The following chart demonstrates how Mexican exports have more than doubled from 2009 through the end of 2014:
But as much as Mexican exports have grown, China continues to be the overwhelming leader in manufactured exports. Therefore, if Mexico wishes to take full advantage of its competiveness with China in the future, there are some policy changes that need to be made.
According to Sarukhan, NAFTA needs to be changed in two ways to increase the scale of Mexican exportation to the U.S.
“Firstly, NAFTA was a 1.0 free-trade agreement, the first of its kind,” Sarukhan says. “Today, global trade flows, the international economy and how society interacts with these issues have fundamentally altered that landscape.” Negotiations are currently underway, however, for the Trans-Pacific Partnership trade agreement and Mexico, the U.S. and Canada are participants, thus allowing them “to upgrade NAFTA via the back door, without having to renegotiate NAFTA itself. “
The second issue is that “trade facilitation in a post-9/11 world continues to be the Gordian knot in NAFTA,” Sarukhan continues. “Outdated border infrastructure and regulatory and customs bottlenecks need to be tackled. Modernizing ports of entry on both sides of the border and moving forward to implement pre-inspection of goods are key components in pulling up our border infrastructure by the boot straps.”
If Mexican economic policy can shift to account for the more globalized economy of the world today, Mexico has the potential to not only become the largest player in the game of trade with the U.S., but could one day overtake China as the winner worldwide.
As the old saying goes, to the victor go the spoils.