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

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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. - PowerPoint PPT Presentation
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Page 1: 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

The opinions expressed herein are those of the author and do not necessarily reflect the official position of the IDB or its member countries.

Page 2: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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?

Page 3: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

OverviewMexico’s trade policy since the 1990s: Distorting, favoring low-wage industriesProtection of low-wage jobs in less productive companies

Trade liberalization favors productivity

Instead of protectionism, consider policies that promote productivity growth and competitiveness

Page 4: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Trade Policy in the 1990s

Reduction of average tariffs However, tariff increases in ...

Labor intensive industriesTrade with low-wage countries

Page 5: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

05

1015

Per

cent

1993 1994 1995 1996 1997 1998 1999 2000Year

North America World

Rest of the World

Source: Based on Mexico's Ministry of Economy data.

Mexican Average Manufacturing Tariffs

Page 6: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

18.5

27.1

19.317.6

20.2

5.6

010

2030

Per

cent

Low income countries Middle income countries High income countries

1993 2000 1993 2000 1993 2000

Source: Based on Mexico's Ministry of Economy data.

By country income-level groupMexican Tariffs on Low-wage Industry Imports

Page 7: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Trade Policy in the 1990s

NAFTAPreferential access to the US marketSpecially in low-wage industries

More recently, erosion of NAFTA preferences

Page 8: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

02

46

810

Per

cent

1990 1992 1994 1996 1998 2000

China México

Source: Based on U.S. Customs data.

US Average Manufacturing Tariffs

Page 9: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

05

10

1 151 301 451 1 151 301 451

1990 2000

Per

cent

Ranked from lowest to highest hourly-wage industrySource: Based on U.S. Customs and NBER-CES data.

(Difference in applied US tariffs)Mexico's Preferential Tariff Margin vis-a-vis China

Page 10: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

02

46

Pe

rce

nt

1990 1992 1994 1996 1998 2000

95% conf idence interv al ChinaMexico Dif f erence

Source: López-Córdova (2003), 'Economic Integration and Manufacturing Performance in Mexico'.

Average TariffsU.S. Manufacturing Imports from China and Mexico

Page 11: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Implications

Jobs and output growth in low-wage industriesNAFTA favors export in those industries

Specialization in industries without comparative advantage vis-a-vis China

Page 12: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

34.0 28.4 18.9 18.7

31.0 27.3 20.2 21.5

26.9 24.3 20.0 28.8

0 20 40 60 80 100Percent of total

1998

1993

1988

Source: Based on INEGI data.

Distribution across industries, by wage levelManufacturing Employment in Mexico

Low wage Medium low

Medium high high wage

Page 13: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

0.2

.4.6

.8P

erce

nt o

f im

por

ts

China Mexico

Low Med-low Med-hi High Low Med-low Med-hi High

Note: Author's calculation using U.S. Customs data and OECD definitions.

By Hourly WageU.S. Manufacturing Imports from China and Mexico

1990 2000

Page 14: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Competition in US market

MX competes more directly with CHN than the rest of Latin America

Comparable with Asian countriesIncreased during the last 30 yearsConcentration 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

Page 15: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Gains, 1995-2000US SIC Description Mexico China Mexico China Mexico China

High 4 3661 Telephone and telegraph apparatus 2307.0 2253.4 12.0 11.7 6.1 -3.9Low 1 2369 Girls' and children's outerwear, n.e.c. 2217.2 1521.7 16.1 11.1 8.4 -5.3

Low 1 2325 Men's and boys' trousers and slacks 2168.6 388.9 29.6 5.3 10.7 -2.5Low 1 2321 Men's and boys' shirts 1189.3 444.4 13.3 5.0 9.2 -2.0Low 1 2331 Women's and misses' blouses and shirts 862.4 1208.3 9.7 13.6 2.7 -2.0

Medium-hi 3 3612 Transformers, except electronic 701.8 162.2 45.1 10.4 3.4 -1.6High 2 3841 Surgical and medical instruments 612.3 82.6 20.4 2.8 6.4 -3.4

Medium-hi 2 3699 Electrical equipment and supplies, n.e.c 474.3 841.3 12.3 21.8 2.9 -6.4

Low 1 2392 House furnishings, n.e.c. 368.0 766.4 11.5 24.0 6.3 -4.2Low 1 2322 Men's and boys' underwear & nightwear 352.1 56.7 15.9 2.6 0.6 -3.6Low 1 2341 Women's and children's underwear 233.1 245.2 8.8 9.2 0.9 -2.0

Low 1 2311 Men's and boys' suits and coats 209.1 80.9 12.5 4.8 8.8 -0.9Low 1 2329 Men's and boys' clothing, n.e.c. 170.7 540.8 5.2 16.4 2.1 -3.6

Medium-hi 4 3511 Turbines and turbine generator sets 134.9 21.1 5.0 0.8 0.8 0.0Low 2 2033 Canned fruits and vegetables 122.1 101.5 10.0 8.3 3.0 -1.2Low 2 2099 Food preparations, n.e.c. 86.8 73.5 5.1 4.3 1.4 -0.3

Medium-hi 4 2865 Cyclic crudes and intermediates 85.0 131.2 2.1 3.3 1.2 -0.2High 4 3728 Aircraft parts and equipment, n.e.c. 58.2 33.2 1.2 0.7 0.5 -0.3High 4 3724 Aircraft engines and engine parts 52.9 30.9 0.6 0.3 0.0 -0.2Low 1 2391 Curtains and draperies 43.1 85.8 11.9 23.7 5.5 -19.8

Change 2000-1995Technology Hourly-wage quartile

US Imports from US Import Share

Page 16: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Losses, 1995-2000US SIC Description Mexico China Mexico China Mexico China

Medium-low 4 2911 Petroleum refining 1374.7 295.5 3.1 0.7 -0.2 0.6Low 1 2399 Fabricated textile products, n.e.c. 792.8 578.5 41.3 30.1 -11.6 8.6

Medium-hi 2 3643 Current-carrying wiring devices 685.5 315.0 26.5 12.2 -0.7 5.7High 1 3675 Electronic capacitors 647.2 35.0 23.1 1.2 -1.6 1.0High 2 3842 Surgical appliances and supplies 509.3 123.4 22.8 5.5 -5.0 1.3

High 1 3672 Printed circuit boards 423.9 313.7 12.7 9.4 -11.4 7.3Low 1 3944 Games, toys, and children's vehicles 396.4 5511.1 4.2 58.9 -3.6 9.9

Medium-hi 2 3564 Blowers and fans 319.3 212.2 23.0 15.3 -14.6 9.9

Low 1 2037 Frozen fruits and vegetables 255.8 55.4 16.7 3.6 -5.3 1.9Medium-hi 4 3641 Electric lamps 243.7 165.7 17.6 12.0 -0.7 5.4

High 2 3845 Electromedical equipment 238.9 49.9 8.7 1.8 0.0 0.6

Medium-hi 4 2869 Industrial organic chemicals, n.e.c. 233.1 401.6 1.8 3.1 -1.4 1.2Medium-hi 4 3632 Household refrigerators and freezers 213.1 99.0 36.1 16.8 -4.3 11.3

Medium-hi 3 3546 Power-driven handtools 170.3 538.6 9.1 28.7 -0.4 18.8Medium-low 3 3261 Vitreous plumbing fixtures 165.2 16.3 53.3 5.3 -0.2 5.2Medium-hi 2 3569 General industrial machinery, n.e.c. 163.9 214.5 2.3 3.0 -0.2 0.2

Low 1 2389 Apparel and accessories, n.e.c. 163.4 272.4 22.6 37.6 -5.5 15.2Medium-hi 3 3635 Household vacuum cleaners 157.0 195.3 27.5 34.2 -7.0 14.7

Low 2 2431 Millwork 146.6 55.0 12.7 4.8 -12.2 3.2Low 1 2514 Metal household furniture 140.2 869.3 9.1 56.4 -0.6 38.0

Technology Hourly-wage quartile

US Imports from US Import Share Change 2000-1995

Page 17: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Increased competition, 1995-2000US SIC Description Mexico China Mexico China Mexico China

High 3 3651 Household audio and video equipment 7490.0 5919.9 26.8 21.2 4.8 5.9

Medium-hi 4 3714 Motor vehicle parts and accessories 6579.8 551.0 17.9 1.5 3.3 0.7

High 3 3571 Electronic computers 4956.8 3130.5 13.2 8.4 8.6 5.4

High 3 3663 Radio and tv communications equipment 4875.6 825.0 28.6 4.8 13.0 1.0

Medium-hi 4 3694 Engine electrical equipment 4578.4 192.9 66.3 2.8 3.9 1.0

High 3 3577 Computer peripheral equipment, n.e.c. 3570.7 5558.3 10.5 16.4 6.5 11.7

Low 2 2599 Furniture and fixtures, n.e.c. 2842.0 3157.9 18.0 20.0 2.9 11.5

Medium-hi 3 3621 Motors and generators 1897.8 354.2 35.9 6.7 9.6 0.2

Medium-hi 3 3357 Nonferrous wiredrawing and insulating 1601.2 698.6 27.7 12.1 1.6 0.5

High 2 3679 Electronic components, n.e.c. 1510.6 2176.3 12.7 18.4 1.8 8.5

High 3 3674 Semiconductors 1499.7 719.8 3.1 1.5 1.3 1.2

High 3 3823 Process control instruments 1180.2 88.3 35.9 2.7 15.0 1.7

Medium-hi 4 3585 Refrigeration and heating equipment 1163.0 241.2 29.3 6.1 9.5 5.5

Medium-hi 2 3625 Relays and industrial controls 1132.8 248.4 28.4 6.2 12.2 2.0

Medium-low 4 3312 Blast furnaces and steel mills 1128.8 549.2 7.4 3.6 0.3 1.4

Medium-hi 3 3494 Valves and pipe fittings, n.e.c. 960.2 260.7 20.6 5.6 7.5 2.9

Medium-hi 3 3678 Electronic connectors 957.7 311.5 32.7 10.6 14.2 2.0

Medium-hi 1 3677 Electronic coils and transformers 872.4 430.5 40.7 20.1 10.1 6.3

High 4 3861 Photographic equipment and supplies 716.4 1212.5 9.4 15.9 6.3 8.0High 3 3824 Fluid meters and counting devices 709.6 13.9 63.9 1.3 3.4 0.8

Change 2000-1995Technology Hourly-wage quartile

US Imports from US Import Share

Page 18: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

010

2030

40D

istr

ibu

tion

of i

mp

orts

(%)

Low Med-low Med-hi High

Note: Including imports from Hong Kong.

By industry wage levelMexican Manufacturing Imports from China

1993 2000

Page 19: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

02

46

8P

erc

en

t

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Note: Based on BEA data.

(Percent of total US Manufacturing FDI Stock)US Manufacturing FDI in China and Mexico, 1982-2002

Mexico China

Page 20: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

10.1%

24.7%

1.2%

12.3%27.1%

24.6% 23.0%

19.3%

1.2%8.5%

27.4%

20.6%

1990 2000

Textiles/Apparel Auto industry

Non-electr equipment Electr equipmentElectr components Other

Note: Based on INEGI's BIE data.

Maquiladora Employment in Mexico

Page 21: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Trade Policy in the1990s

Evidence of:Expansion of low-wages industriesGreater exports and FDI in such industries

Also, export growth in high-wages / high-tech industries

But China’s exports grew fasterHigher competition with China in such industries

Page 22: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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

Page 23: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

Employment and imports among Mexican plants, 1993-2000

0

2

4

6

8

10

12

%

Low wage Medium-lowwage

Medium-high wage

High wage

Increase in plant employment if imports fall by 1%

Low productivity Medium-low Medium-high High productivity

Page 24: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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

Page 25: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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

0.9

1.4

1.9

1.4

1.2

0.8

1.5

0.2

1.7

-0.1

2.0

1.2

-0.2 0.3 0.8 1.3 1.8 2.3

Nacionales

ETN: Resto del mundo

ETN: América del Norte

No usuarios de insumos importados

Usuarios de insumos importados

No exportadoras

Exportadoras

Industria no tranzable en América del Norte

Industria tranzable en América del Norte

Industria no tranzable

Industria tranzable

Sector manufacturero (total)

Tasa de crecimiento promedio annual (%)

Page 26: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

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 producersChina has become a manufacturing powerhouse in international markets and competes directly with Mexico.Why? Fast productivity growth

Page 27: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

What can Mexico do?Protectionism is not a long-term answer to Chinese competitionImportant to review what factors inhibit competitiveness and productivity in Mexico

Business climateProduction costsResearch and development

Page 28: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

15

16

27

28

30

30

30

30

31

35

0 10 20 30 40Highest marginal corporate tax, 2002

Brazil

Chile

Korea

Malaysia

CHINA

Costa Rica

Indonesia

Thailand

Czech Rep.

MEXICO

Source: Banco Mundial, Indicadores del Desarrollo Mundial

High Corporate Taxes

Page 29: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

146

136

116

103

68

35

33

30

22

13

0 50 100 150Domestic credit to private sector (% of GDP), 2002

Malaysia

CHINA

Korea

Thailand

Chile

Brazil

Czech Rep.

Costa Rica

Indonesia

MEXICO

Source: World Bank, World Development Indicators

Scarce Banking Credit

Page 30: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

75

180

200

210

225

270

270

325

370

380

0 100 200 300 400Days to enforce a contract, 2003

Korea

CHINA

Chile

Thailand

Indonesia

Czech Rep.

Malaysia

MEXICO

Costa Rica

Brazil

Source: World Bank, World Development Indicators

Weak Contract Protection

Page 31: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

3

3

3

2

2

2

2

1

1

0

0 1 2 3Creditor rights index (0=weak to 4=strong), 2003

Thailand

Korea

Czech Rep.

Malaysia

Indonesia

Chile

CHINA

Costa Rica

Brazil

MEXICO

Source: World Bank, World Development Indicators

Weak Creditor Protection

Page 32: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

0.97

1.93

1.93

2.19

2.37

2.45

3.01

0 1 2 3Telephone average cost of call to US (US$ per 3 minutes), 2000

Czech Rep.

Costa Rica

Korea

Thailand

Malaysia

Chile

MEXICO

Source: World Bank, World Development Indicators

High Telecommunications Costs

Page 33: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

7.0

8.4

9.7

10.1

20.8

21.8

22.3

22.6

25.8

28.0

0 10 20 30Internet total monthly price ($ per 20 hours of use), 2003

Thailand

Malaysia

Korea

CHINA

Czech Rep.

Chile

Indonesia

MEXICO

Costa Rica

Brazil

Source: World Bank, World Development Indicators

High Internet Costs

Page 34: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

79.5

3.1

2.3

2.3

1.0

0.9

0.8

0.7

0.2

0.1

0 20 40 60 80Patent applications granted in the US (per million people), 2000

Korea

Costa Rica

Malaysia

Czech Rep.

Chile

MEXICO

Thailand

Brazil

CHINA

Indonesia

Source: World Bank, World Development Indicators

Limited Patents

Page 35: Economic Integration and Mexico’s Manufacturing Performance: Is Chinese Competition to Blame?

2882

1469

584

533

419

324

227

154

130

74

0 1,000 2,000 3,000Researchers in R&D (per million people), 1999

Korea

Czech Rep.

CHINA

Costa Rica

Chile

Brazil

MEXICO

Malaysia

Indonesia

Thailand

Source: World Bank, World Development Indicators

Low R&D Efforts