Mexican manufacturing on a fast boat to China

Feb. 3, 2004
Mexican manufacturing on a a fast boat to China First there was the North American Free Trade Agreement (NAFTA) in 1994, which brought an economic boom

Mexican manufacturing on a a fast boat to China

First there was the North American Free Trade Agreement (NAFTA) in 1994, which brought an economic boom to Mexico.

Then came China's formal entry into the World Trade Organization in 2001 which, coupled with the emergence of global trade logistics, helped stall Mexico's momentary success as the third largest trading partner for the U.S. When China opened its borders to global trade, North American companies didn't think twice about going to the Far East with their business.

In fact, over the past three years — coincidentally, since current President Vicente Fox took over — Mexico has lost 355,476 jobs (34,790 in 2003) when maquiladoras either shut down as uncompetitive units or moved to China to take advantage of cheaper labor and better facilities. With sophisticated global logistics available in the pipe- line, distance no longer had a meaning-ful cost impact.

Many companies that have left Mexico are either Japanese or South Korean, which have made massive investments in China over the past three years. Numerous maquiladoras have left Mexico-U. S. border industrial sites. Today cities like Baja California's Mexicali look like ghost towns.

Worse, with free trade, Mexico is being flooded with Chinese merchandise; this despite the fact that over the next six years Mexico has the right to impose as much as a 500% countervailing duty to stop such dumping tactics.

Still, Mexican retail stores, supermarkets and other markets are being inundated with “Made In China” products. These enter the nation both legally and illegally, as corruption still beleaguers the nation's Customs Directorate and contraband is a common problem. Even with antidumping duties, products keep flowing into Mexico.

“The weakness of Mexican manufacturing is alarming,” says Yeidckol Polevnsky Gurdwicz, president of the National Manufacturing Chamber. “President Fox's campaign promise was to bring a million new jobs to Mexico every year. Instead, Mexico's largest production measure now is unemployed people.”

Polevnsky points out that many members of the manufacturing chamber are going broke. In order to stay in their chosen lines of business, many companies are opting to import from China virtually the same products they used to be manufacturing in Mexico.

“Instead of having 500 employees, many manufacturers have decided it's easier and more profitable to import from China or elsewhere, so they only have to deal with a five- or six-employee payroll while they maximize their already-existing distribution chains,” says Polevnsky.

Hardest hit have been some of the staple industries in which Mexico was king during the 1980s and '90s. This is particularly true of textiles, in which Mexico has been unable to compete against the flood of Chinese garments, which are virtually disposable. According to the country's Garment Industry Chamber, 58% of all available clothing in Mexico is imported from China. As an example, the Chamber says in 2000 there were 148 denim clothing sewing companies. By the end of 2003, 128 had left Mexico, and the exodus continues.

The shoe industry has also collapsed as, according to the Shoe Manufacturing Chamber, 70% of the small Mexican factories have shut down and the local marketplace is being replenished with low-priced shoes manufactured in China.

Luis de la Calle, an economist who was one of the negotiators of NAFTA, says China is threatening the life of many producers “not just in Mexico, but in other nations, as well. Mexican industry will only survive the Chinese competition if it can stay alive in an expanded regional market.”

China also represents deep concern for the Mexican government as a competitor for capital. In 2003 Mexico's direct foreign investment dropped 23%, to $10.4 billion. Mexico's Private Sector Economics Studies Center says much of the money went to China, a nation with $57 billion in direct foreign investment. This is money that may never return to Mexico.

Economist Pedro Tello says that only “a strong internal growth market and a competitive cost economy — one which is efficient in management procedures and diversified in its foreign markets — may raise the profitability foreign investors are expecting from Mexican [producers].”

Economic growth forecasts for Mexico for the coming years are slender — the most optimistic figure is 3.5%. China, meanwhile, experienced a 9.1% GDP growth in 2003.

Many economists perceive Mexico having no long distance vision, in contrast to the Chinese, who have a very clear vision of where they are going.

In 10 years China is going to be the world's fourth biggest economy, after the U.S., Germany and Japan, predicts Yin Xingmin of Fudan University in Shanghai, who recently visited scholars in Mexico to make a comparative economics study.

Antonio Ortiz Mena, who shared notes with Xingmin on the study, observes, “China has stopped being a threat just for Mexico. The reality is that it has the potential to outdo not only Mexico, but Japan as well as an exporter by 2005.” LT

February, 2004

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