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.

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?

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

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

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

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

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

Gains,

Losses,

Increased competition,

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

Plant-level impact Look at panel of approximately 6000 plants over the 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

Employment and imports among Mexican plants,

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

Mexico: TFP growth ( By industry or plant characteristic)

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

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