By Jeffrey Towson
Professor of Investment at Peking University Guanghua, Author & Keynote Speaker
When it comes to the USA, Chinese and Mexican manufacturers have long been rivals. Both groups export fairly similar types of goods. Both have advantages in lower cost labor. And they are now the No 1 and No 2 exporters to the US.
But while Chinese manufacturers have become dominant in most product categories, Mexican manufacturers have been more successful in a few key sectors, especially in cars and autoparts. And this has a lot to do with NAFTA (the North American Free Trade Agreement).
That is why US President Donald Trump’s recent statements about wanting to renegotiate NAFTA and US-Mexico trade are so important. It looks like the existing China-Mexico manufacturing competitive dynamic could change – and mostly in China’s favor.
My argument for this is three points:
Point 1: Chinese manufacturers have pretty soundly beaten Mexican manufacturers.
The types of exports coming out of China and Mexico are fairly similar.
- In 2015, electronic equipment was 26% of China’s exports (about $600 billion) and 21% of Mexico’s (about $81 billion).
- Machines, engines and pumps were 16% of China’s exports ($364 billion) and 16% of Mexico’s ($59 billion).
- The other major export 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 when you look at these numbers is that China’s exports in most all categories now dwarf Mexico’s. And this was not the case 15 years ago.
Back in 2000, Mexico was already six years into the enactment of NAFTA and China had yet to join the World Trade Organization. According to the US Census Bureau, Mexico’s exports to the US in 2000 totaled $136 billion. 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’s $230 billion. And between 2000 to 2006, Mexico’s export growth rate fell to 6%, from its previous 15% between 1995-2000 (i.e., prior to China joining the WTO). By 2016, China’s exports to the US had reached $423 billion, compared with $271 billion for Mexico.
One can certainly argue that Mexico was actually increasing in overall exports to the US during this time. China was just doing better. However, the quote that comes to my mind is by Warren Buffett’s partner Charlie Munger, who said: “At Berkshire Hathaway, we do not like to compete against Chinese manufacturers.” I think Mexican manufacturers now probably say the same thing.
Point 2: A big exception to this situation is in cars and autoparts, where Mexican manufacturers have done far better.
In 2016, Mexican global exports in cars and autoparts reached $90 billion, making it the country’s single largest export at 23.7%. And the US was the primary destination for their rapidly growing autoparts-automotive industry. In contrast, China’s global exports in this space represented only 2.7% of their exports, and totalled $62.7 billion.
The reasons for this are, unsurprisingly, NAFTA and Mexico’s close proximity to the US. NAFTA has removed most trade and investment barriers between the US, Canada and Mexico. And it is much cheaper to transport cars and other heavy items from Mexico to the US due to proximity. Most final car assembly is done close to the end market. Although autoparts do have less of a geographic factor and there is a fairly complicated pattern of parts, components and assembly happening across Mexico, America and Canada.
But the key point is that automotive-auto parts is a real bright spot for Mexican manufacturing for today. Virtually all of the major automakers have now centralized some or all of their production for North America to Mexico.
The importance of the automobile-auto parts industry to Mexico cannot be overstated.
- Mexican car production has reached record numbers with more than 3 million cars produced each year.
- Automobile-autoparts is one of the biggest drivers for foreign investment into the country. Note: Since 2010, nine of the major automakers have announced more than $24 billion in investments in Mexico, with most stating the US is their primary end-market.
- The industry is now the country’s single biggest export and source of foreign dollars (surpassing money sent home by migrants to the US).
Point 3: If US President Trump renegotiates NAFTA and US-Mexican trade, this will be very bad for Mexico. And could be very good for Chinese manufacturers.
US President Trump’s recent announcements of an intended renegotiation (or cancellation?) of NAFTA has sent shockwaves through Mexico. And it should. More than 70-80% 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, one of the most rapidly growing areas of Mexican manufacturing. Trump has specifically called for a 35% tax on cars imported from Mexico.
Trump has also explicitly criticized Ford, General Motors and Toyota for moving facilities to Mexico. Ford had the unfortunate luck of announcing an end to all their US production of small cars in the middle of the election, which got a response from then candidate Trump. Ford has now canceled their planned $1.6 billion plant in Mexico.
However, for Chinese manufacturers this could be a positive development. For them, it looks like their biggest competitor for exports to the US may be about to lose their biggest advantage, a largely tariff-free border.
Plus, Mexican exports to the US are weighted to automobile-auto parts, the one area President Trump seems to be focusing most on. For China, broad changes to NAFTA or auto exports could result in a tilting (or leveling?) of the playing field. Is President Trump about to take out China’s biggest manufacturing competitor for the US market?
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. So even before the recent trade issue, Mexican manufacturers were already worried that China might be granted a lower tariff.
Ultimately, there are a lot factors in each sub-sector when it comes to trade and exports, whether its tariffs, shipping costs, changing currencies or whatever. So it’s difficult to generalize too much when it comes to Mexico and Chinese manufacturers.
However, I think we can conclude that Trump’s recent pronouncements about auto imports and NAFTA are very bad for Mexico. And potentially good for China. Plus they raise a very interesting question: Without NAFTA, can Mexican manufacturers successfully compete with China? We may find out.