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The Mexican Auto Parts Market

Published on Thursday, June 01, 1995

With the precipitous fall of the peso beginning in December 1994, and the financial turbulence that followed in Mexico, many short-term economic projections and business plans have changed.

In the auto industry, Chrysler, Ford, General Motors, Nissan, Mercedes-Benz and Volkswagen currently produce in Mexico. Since the economic crisis, their plans for expansion have been put on hold. Other auto and parts producers, such as BMW; T&N PLC, a British auto parts manufacturer; Daewoo of South Korea; Honda Motor Co.; and Italy's Fiat Auto S.p.A. which had intended to enter the Mexican market, have applied the brakes.

From 1990 to 1994, U.S. exports of auto parts to Mexico increased 58%. This growth trend, however, will not continue into 1995. Domestic automobile consumption in Mexico has slowed considerably. Consequently, U.S. exports of OEM auto parts to Mexican-based automobile manufacturers will also slow. However, some relief will be provided.

In 1993, approximately 10.9 million vehicles were on the road in Mexico. This represented a growth of 63% from 1983 to 1993. About 3.2 million vehicles or 30% were concentrated in the Mexico City metropolitan area. The average span life of these vehicles has decreased during the past decade to 10 - 12 years. With a reduction in buying power caused by a devalued peso, the purchasing of new automobiles will be put off for a later date, raising the average car life span. Consequently, the need to repair older models will increase the demand for auto parts -- but this will not be enough to offset the overall decline in demand projected this year.

Additionally, in order to receive Nafta status on parts shipped between Mexico and Canada, the rules of origin require 60% North American content (62.5% for autos, light trucks, engines and transmissions, and to 60% for other vehicles). To conform, Japanese and other non-North American auto producers will need to increase their North American content if they wish to receive the benefits provided by Nafta.

Exporting to Mexico

U.S. exporters of auto parts to Mexico have enjoyed much success. In 1993, the United States held almost 70% of Mexico's auto parts import market. The United States was followed by Japan, with 7.5%; Germany with 6.2%; Brazil with 5.9%; Italy with 2.7%; China, 1.5%; and Canada with 1.4%. Under Nafta, U.S. market share will increase even more.

There are two major end-users of auto parts in Mexico: the auto makers, which account for 2/3 of the total market, and the aftermarket, which accounts for 1/3 of the total market. The OEM market for auto parts was estimated at $5.4 billion in 1993. Mexican domestic production supplied 49% of demand. The aftermarket auto parts market was estimated at $2.7 billion in 1993. Domestic production supplied 65% of demand for this market, while imports satisfied 35%. In the aftermarket, dealerships, both large and small, and large independent repair shops continue to be the most important buyers of auto parts.

The automotive industry is very important for Mexico. During 1992, it represented 2.5% of GDP and 9.7% of manufacturing GDP. And according to a Mexican government agency, it employed about 504,000 workers, 15% of the total manufacturing work force. The auto parts industry in Mexico employed around 260,000 persons during 1993.

Prior to the economic crisis, the Mexican auto parts sector comprised more than 500 auto parts manufacturers, 165 maquiladoras, over 1,000 new car dealers, and 10,000 replacement parts distributors. The aftermarket has been very dynamic, having grown at an average annual rates of 10% in the past few years.

Next year, when positive growth is once again anticipated in Mexico, the demand for auto parts will pick up. Items in demand will likely include connecting rods; fuel injection tracks; valves; automatic transmissions; turbochargers; electronic engine management systems; power steering; steering wheels, columns and boxes; radiators; anti-lock braking systems; suspension parts; body parts and stampings; insulated wiring sets; engines; tires and tubes; plastic molded products such as bumpers, panels and gas tanks; and emission, exhaust equipment, and catalytic converters.

Japanese Competition Has Affected U.S. Auto Parts Producers

After having controlled its domestic market unchallenged for several decades, U.S.-owned auto makers have seen their domestic market share decline from 95% to 65% over a period of three decades. Consequently, U.S. suppliers of auto parts to U.S.-owned auto manufacturers have and continue to undergo a restructuring perhaps more painful than that of the auto makers.

According to the Office of Technology Assessment, U.S. imports of Japanese parts have grown rapidly in the past decade. Japanese transplant assembly plants in the United States buy from many U.S. suppliers, but mostly low value-added parts, such as gaskets and hoses as opposed to gears and brakes, while continuing to import high value-added parts from suppliers in Japan. Thus, the Big Three models incorporate a U.S. parts content of about 88%, while Japanese transplant models have only a 48% U.S. content.

As a result of greater Japanese competition, the Big Three have put intense pressure on their U.S. parts suppliers to adopt just-in-time delivery, requirements characterized by low inventories and express delivery, and to reduce costs. In an effort to become more efficient and reduce costs, many U.S. suppliers will likely relegate low value-added and labor-intensive production to Mexican maquiladoras.

Since Nafta was implemented, there has been a proliferation of partnerships between U.S. and Mexican companies, many of which have entered into production sharing agreements. This cooperation will be accelerated as a result of the peso devaluation (see "Devalued Peso Will Increase U.S./Mexican Production Sharing" in the March 1995 issue of the Exporter). A sizable portion of this production sharing is likely to be in the manufacturing of auto parts. Thus, U.S. suppliers of auto part components will benefit.

The North American Free Trade Agreement Impact on the U.S. and Mexican Service Sector

Published on Monday, May 01, 1995

The U.S. Service Sector

The United States is one of the world's largest and most advanced exporters of services. Currently, the industry accounts for over half of the U.S. gross domestic product. In 1991, the United States exported $257 billion in services worldwide, and $8.3 billion to Mexico alone. Although Mexico has restricted trade in services, U.S. exports of services to Mexico have increased dramatically, more than doubling since 1987. This is a consequence of the United States' overwhelming competitive advantage in such a specialized and high value-added sector. For example, the U.S. telecommunications services industry is the largest and most competitive in the world, with revenues of over $90 billion in 1991, and a trade surplus of $1.9 billion.

New York City is the dominant producer of services in the United States and home to the largest firms in advertising, accounting, management consulting, engineering, diversified financial services, banking, securities and insurance. In the 1980s, corporate service firms became important export businesses and developed global expertise. The global economy has facilitated a boom in services trade due to the modern technology facilitation of long-distance interaction between the buyer and seller via electronic information flows and other modern telecommunications advances.

The Mexican Service Sector

The Mexican services industry is plagued by two problems that free trade and continued market liberalization will alleviate. First, Mexico's relatively small commercial and industrial sector has not created a large demand for a modern service sector. Mexico's highway system is so dilapidated that truck transportation can take 30 to 40% longer to go the same distance as in the U.S., with 60% higher fuel costs. As a result, the cost of services is significantly higher than in most industrialized nations. Second, extensive government regulation and mismanagement have created a service sector that is in need of modernization and improvements. The level of service that most Mexican entrepreneurs and managers are accustomed to is much lower in quality than would be acceptable in the U.S. This has been a particular disincentive for U.S. firms to do business in Mexico.

Service Rules of Origin and Nafta Provisions

Under the U.S.-Canada FTA, each country agreed to provide national treatment to those persons providing over 150 services. However, this obligation did not require that the treatment has to be the same in all respects. For example, if Canada chooses to treat providers of one service differently than does the United States, it is free to do so, as long as it does not discriminate between Canadians and Americans. In addition, a country may accord different treatment for legitimate purposes, such as consumer protection or safety, as long as the treatment is consistent. Under the U.S.-Canada FTA, regulations cannot be used as a disguised restriction on trade. For example, either government remains free to license and certify providers of a specific service, but must ensure that these requirements are applied consistently and do not discriminate against persons from the other country.

Nafta, in essence, does the same. The substance of the agreement requires each nation to treat the others' service firms no less favorably than its own. An important auxiliary rule incorporated into Nafta maintains that firms providing services cannot be required to establish a residence, office, branch, or subsidiary as a condition for providing a service. If the provider does wish to establish a tangible presence though, Nafta's rules will also prevent discrimination against that firm in the marketplace. Additionally, Nafta would extend this concept of national treatment to include provisions related to professional licensing and certification. The agreement explicitly forbids using such procedures to restrict trade or provide preferential treatment to nationals. Finally, Nafta does endow each country the right to deny benefits to firms which provide the service through a enterprise owned or controlled by a person or business of a non-Nafta country.

Nafta's Impact on the U.S. and Mexican Service Sector

Nafta will substantially add to current U.S. exports of services by further opening Mexico's $146 billion market in services. It levels the playing field, guaranteeing that U.S. service providers get the same treatment in Mexico as Mexican firms, and allows U.S. firms to provide services in Mexico without relocating their operations to Mexico.

The U.S.-Canada Free Trade Agreement established the first comprehensive set of principles governing services trade. Nafta broadens these protections and extends them to Mexico. Canada has retained its cultural exclusion from the U.S.-Canada Free Trade Agreement. Sectors covered under Nafta include: accounting, enhanced telecommunications, advertising, environmental services, architecture, health care management, broadcasting, land transport, commercial education, legal services, construction, publishing, consulting, tourism, and engineering.

According to the Congressional Budget Office, the major services that Nafta would open in Mexico include finance, business services, land transportation and telecommunications. Under Nafta, the licensing of professionals, such as lawyers, doctors, and accountants, will be based on competence, not nationality or residency. Citizenship requirements for licensing of professionals will be eliminated within two years.

Importantly, Nafta requires each country to provide for improved intellectual property protection and enforcement of the rights of inventors, authors, and artists against infringement and piracy, reducing the risk that products of U.S. creativity and innovation could be unfairly exploited in Mexico. By reducing the threat of piracy and other loss, Nafta provides additional incentives for U.S. providers to develop new technologies and products. Also, the Agreement ensures protection for North American producers of computer programs, sound recordings, motion pictures, encrypted satellite signals and other creations, including rental rights for computer programs and sound recordings. Increased protection against copyright/patent violation should lead to increased R&D spending by U.S. firms. This will undoubtedly enhance opportunities for U.S. service providers.

Although a comprehensive set of regulations modify the liberalization of trade and investment in the banking, investment, insurance, transportation, and telecommunications industries, these regulations only cover the transition period of liberalization. Afterwards, these industries will be as open to free trade and international competition as any other. For example, after 2000, Nafta would allow U.S. banks, securities and insurance firms, and other financial institutions to establish wholly-owned subsidiaries in Mexico. All current restrictions discriminating against foreign firms would be lifted for Nafta countries.

New U.S. entrants establishing joint ventures in Mexico will be allowed 100% ownership by 2000. Finally, reciprocal rights would be established for firms based in member nations. U.S. bank's share of the Mexican market is immediately expected to grow under Nafta, thus making the U.S. banking industry more internationally diversified and competitive. Financial institutions particularly stand to gain in the long run as they both finance further Mexican development, and finance and insure the growing volume of trade between the U.S. and Mexico. In insurance alone, industry experts calculate that Mexico could become one of the world's top ten insurance markets by the turn of the century. The liberalization of the financial sector is crucial to Mexico's further development because of the country's absolute necessity to institute a modern system of credit and securities markets.

The benefits to both countries extend to the transportation and telecommunications sectors, too. Since both are essential services for the furthering of business, they will grow exponentially as the volume of trade and investment increases between the Nafta countries. Under Nafta, both nations have agreed to allow reciprocal truck and bus access to the states and regions adjacent to the border by the end of 1995. By the year 2000, Nafta will eliminate restrictions on the U.S. trucking industry -- allowing U.S. rigs to deliver anywhere in Mexico. According the U.S. International Trade Commission, in 1990 two-way trade with Mexico in goods carried was approximately $65 billion, or about 37% of two-way trade with Canada. The International Trade Commission forecasts modest gains in the short run for U.S. trucking firms, with increased gains commensurate with increased trade.

The United States' overwhelming competitive advantage in telecommunications will allow it to gain the majority market share in advanced telecommunications services. In 1991 alone, U.S. exports to Mexico of telecommunications services registered a $30 million trade surplus. Providers of these services stand not only to gain from increased cross-border business with Mexico, but also from increased demand for advanced telecommunications services on the part of multinationals investing in Mexico. As a result, Mexican firms will in turn take advantage of the opportunity to purchase from U.S. providers the establishment of intra-corporate private networks. Increased trade in software and network consulting services is also likely, as Mexican firms become integrated into the North American business communications network. Increased demand for these high value-added services will in turn beget increased demand for the high-tech equipment that facilitates these services, thereby benefiting U.S. telecommunications equipment manufacturers as well.

The list of service providers who will benefit from Nafta is extensive. For example, companies such as AT&T, ITT and MCI International would gain improved access to a $6 billion telecommunications services market. American Express, a global financial services and travel company, sees a number of benefits to the U.S. economy from Nafta. According to the company, U.S. and Canadian financial institutions which have generally been prohibited from operating in Mexico, will be treated like their counterparts in Mexico. This will allow American Express to offer the same range of products and services to Mexican customers that are offered to U.S. customers. As the Mexican and U.S. economies grow as a result of Nafta, business and leisure travel will increase. For example, over 1.5 million Mexicans visited the United States in 1992, comprising the fifth largest tourist group to the United States. U.S. travelers to Mexico account for over three-quarters of all visitors there. As Nafta spurs travel between the United States, Canada and Mexico, travel-related services offered by American Express will also increase.

Firms providing construction and engineering services will benefit. U.S. firms have a competitive advantage over many Mexican firms due to their highly skilled staffs and advanced engineering techniques. Rising demand for services is anticipated due to Mexican infrastructure improvements, stricter enforcement of environmental laws, and potential contracts to be awarded for work on renovations and new construction for Pemex, the Mexican government-owned oil company.

The net effect of Nafta in U.S.-Mexican services trade is the removal of the variety of non-tariff barriers and burgeoning regulations restricting foreign access to the Mexican services market. The preferential access Nafta endows U.S. firms coupled with the U.S.'s highly competitive position creates an unprecedented opportunity for U.S. service providers in one of the world's fastest-growing markets. Continued Mexican growth and development plus Nafta's liberalizing effects will make Mexico a highly attractive market to U.S. services firms in the future.

Export Trends: Northern European Growth Holds Opportunities for New York and New Jersey Exporters

Published on Monday, May 01, 1995

Many of the best markets for companies exporting through the New York/New Jersey Port Authority are located in northern Europe. Whether the goods are shipped by sea or air, the United Kingdom and Germany are top export destinations. This is fairly representative of exports departing from New York State, New Jersey, and the United States as a whole.

Western Europe's period of slow economic growth and recession has ended. Revised figures released from the European Commission in November 1994 project gross domestic product (GDP) of the European Union (EU) to have reached 2.6% in 1994, 2.9% in 1995 and 3.2% in 1996. This is up from -0.4 for 1993 and is good news for New York/New Jersey Port exporters to the EU.

Recent growth in the European Union has already had a positive effect on some U.S. exporters. Stated by Timothy Casey, Traffic Manager for J&J Log and Lumber Corp. based in Dover Plains, New York, "Our exports to the European Union have increased markedly in the past few months." He continued, "With stronger economic growth, we anticipate selling more to the region." About 85% to 90% of J&J's exports depart from the NY/NJ port.

Steve Shyne, International Traffic Manager for Pfizer, Inc., a manufacturer of pharmaceuticals and food chemicals headquartered in New York City, said that it has become difficult getting space on vessels destined for Europe. This is a pretty good indicator of the greater demand for U.S. products.

The Commission sited several factors for the EU's improved performance. These include the passage of the GATT Uruguay Round, an upswing in the U.S. economy, an anticipated decline in EU interest rates and a restoration of business and consumer confidence.

The EU accounts for 40% of the world's GDP. Germany, the largest EU economy, accounts for 24 percent of the EU's GDP. The UK, the United States' biggest European market, accounts for 16%. Per capita income for the EU is roughly $20,000. Former West Germany, the Netherlands and Denmark have the highest per capita incomes, reaching 135% of the average.

Gary Zwiercan, Vice President and Manager of the food products division of National Starch & Chemical Co., is bullish about his company's export prospects to northern Europe. The food products division of the Bridgewater, New Jersey-based manufacturer produces specialty food starches used in food processing. Stated by Zwiercan, now that the recession has ended, "We're very excited about the opportunities in northern Europe." Zwiercan pointed out that both the UK and Germany are major markets for his company.

The Single Market Has Created Opportunities — and New Risks

The European Single Market of 370 million consumers, officially established on January 1, 1993, has significant implications for U.S. companies. The elimination of many EU internal trade barriers has enabled EU-based firms to operate relatively freely, thereby achieving economies of scale and a higher degree of competitiveness. European mergers and acquisitions, and the rationalization of industrial production and distribution systems have enhanced this.

The ongoing harmonization of product standards, labeling, testing and certification requirements simplifies U.S. exporters' ability to offer products throughout the Union, while reducing costs. This also allows U.S. firms to achieve economies of scale and greater competitiveness in Europe, along with other non-EU countries and U.S. competitors, such as Japan, Taiwan, South Korea, Hong Kong and Singapore.

The possibilities always exist that the European and North American trade blocs will become embroiled in trade disputes, the EU will establish protectionist measures or through trade diversion U.S. exports there are curtailed. Trade diversion occurs when members of a trade group buy more goods from each other, due to the elimination of internal trade barriers, displacing non-member goods. As a result, a sound export strategy may involve the eventual targeting of a diversity of markets on global basis.

1994 Exports to the United Kingdom — Our Top European Market — Topped $26.8 billion

The UK economic recession, which began in the third quarter of 1990 and was the UK's longest recession since the 1930s downturn, is over. During the recession, widespread business failures occurred, both blue and white collar workers became unemployed, and consumer and business confidence was undermined. And many of the jobs lost may never be replaced as enterprises adjust. The UK, however, has emerged from recession with leaner, more competitive industries.

In 1992, UK GDP expanded by 2%. It is projected by the European Commission to have reached 3.8% in 1994, to increase by 2.7% in 1995 and 2.8% in 1996.

The UK is the largest importer of U.S. products in Europe. Last year the United States ran a trade surplus with the UK of $1.8 billion, and again ranked as our fourth largest export market after Canada, Japan and Mexico. Given its size and growth potential, the UK represents an extremely important overseas market. Over the next few years, new and current U.S. exporters to the UK can expect to find exceptional trading opportunities.

UK Sectors Present Opportunities for NY/NJ Port Shippers

Britain's telecommunications sector is the most liberal among European countries and offers increasing opportunities for U.S. equipment manufacturers. Although equipment for basic voice services is largely reserved for EU companies, power utilities, transport utilities, and cable TV companies have new transmission equipment requirements that U.S. exporters can fill.

Computer software is one of the fastest growing British market sectors. After the British, U.S. companies are dominant and likely to remain unchallenged by third-country suppliers. The activities of the major U.S. vendors of computers and operating systems software have created a fertile secondary market for applications programs that require little or no adaptation to be acceptable to British users.

The UK health care market is dominated by the state-funded National Health Service (NHS). However, NHS management is becoming decentralized. As a result, Regional Health Authorities are taking on procurement responsibilities. Managerial and financial autonomy is also being granted to many hospitals and general practitioners. With increasing emphasis on cost containment, U.S. suppliers of medical equipment are likely to benefit.

A growing public awareness of environmental pollution and the return to economic growth in the UK is expected to reinvigorate the environmental technology and pollution control equipment market. U.S. advancements in this field have positioned U.S. firms at a competitive advantage.

U.S. consumer goods, especially those considered representative of the American lifestyle, are held in high esteem in the UK. The upturn in consumer spending will present greater opportunities for U.S. suppliers of children's wear and nursery products, sporting goods and exercise equipment designed for the home, garden and outdoor leisure equipment, and general fashion accessories.

Other profitable export markets include auto, electronic components and test equipment, aircraft and parts, computers and peripherals, oil and gas field machinery, hotel and restaurant equipment, biotechnology, apparel, drugs and pharmaceuticals, building products, and security and safety equipment.

U.S. Exports to Germany — the Largest European Economy — Last Year Reached $19.2 Billion

The bonanza that German unification brought to the country's western producers came to an end in early 1992. The surge in product demand in former East Germany dropped and the global economic slowdown negatively impacted the heavily export-oriented economy. In 1993 the bellwether automobile industry, for example, said to account for one in seven German jobs, hit its worst slump in years.

German GDP is projected by the European Commission to have reached 2.5% for 1994, and to increase to 3% in 1995 and 3.4% in 1996. These figures are a vast improvement over Germany's -1.2% GDP incurred in 1993. The growth and sheer economic size of the economy makes for a very profitable export market. And some observers anticipate that eastern Germany may become the fastest growing economy in Europe.

Growing German Sectors Will Benefit NY/NJ Port Exporters

The industrial process controls sector covers measurement and control instrumentation and equipment, counting and recording instruments, testing and monitoring equipment, numerical controls and programmable controllers. German growth estimates for 1995 are favorable. U.S. producers of these products have an excellent reputation in Germany and already account for a sizable portion of imports to Germany.

The majority of German computer distributors and users perceive U.S.- made computer products as of high quality and leading edge technology. The market is growing and presents sound opportunities for U.S. producers. A large number of independent software vendors with small local operations maintain about 85% of the sector. With a 22% share of the European software and services market, Germany is the largest and fastest growing European market for software.

In 1993, the United States ranked fourth among Germany's leading chemical suppliers, after France, the Netherlands and Belgium/Luxembourg. German imports of photochemical and pharmaceutical products from the United States have been strong. According to the U.S. Department of Commerce, the 1993 industry market size of $80.5 billion is expected to grow to $87.2 billion this year.

The German market for high quality, advanced medical equipment is exciting. U.S. producers of innovative technologies such as laser optics, new diagnostic devices, as well as new artificial implants and components should find opportunities in Germany. Innovative devices used in micro-surgery, biomedicine and radiology are also in demand.

Other major German markets where U.S. producers stand to benefit include aircraft, motor vehicles and parts, telecommunications equipment, electronic components, and audio/visual equipment.

Mexico's Sizable Silver Lining

Published on Wednesday, April 12, 1995

Mexico’s first trade surplus in four years might, at initial glance, seem to confirm one of the arguments against the North American Free Trade Agreement. One of NAFTA’s key benefits was supposed to be guaranteed access to Mexico’s growing consumer market. The peso devaluation, however, has made our exports to Mexico more expensive, reducing Mexican purchasing power. Should we concede Ross Perot’s “I told you so”?

Far from it. A closer analysis of the trade figures shows that appearances can indeed be deceiving. While the dramatic drop in the peso is making life difficult for Mexico in the short term -- and suppressing demand for U.S. exports -- the devaluation’s long-term impact will provide a substantial boost for both the Mexican and U.S. economies.

That’s because a lower peso will spur a significant increase in “production sharing” among North American countries. This will mean more jobs and growth in the U.S. and Mexico -- at the expense of our Asian and European trade competitors.

Production sharing, or “co-production,” is an important component of the NAFTA partnership, and will be further enhanced by the new currency situation. We are already seeing evidence of this. The latest trade figures point to several revealing trends.

The first is that Mexico is making a dramatic turnaround in its trade deficit. In February 1995, Mexico ran a world trade surplus of $452 million, its first monthly surplus in four years. Mexican global exports for the first two months of 1995 increased 31.3%, while imports declined 1.6%. This means Mexico is making good progress towards a key goal of its economic recovery plan -- reducing the huge current account deficit that helped spark the peso crisis in the first place.

But while this is good news for the long-term -- because boosting Mexican exports helps stabilize its shaky economy and a healthy Mexico is good for the United States -- the trade data contain additional information that helps offset the downside of a substantial decline in U.S. exports to Mexico.

A closer look shows that much of Mexico’s drop in imports is coming from a reduction in consumer goods imports, which declined 20.3% for January and February. Significantly, though, intermediate good imports to Mexico continued to grow, by 5.7%, over the same period last year. This is due in large part to Mexico’s increasing participation in production sharing.

A growing global business strategy, production sharing splits up the manufacturing process to take advantage of local efficiencies. A portion of the manufacturing and assembly process is done in one country, a portion in another, to make the most competitively priced goods from various inputs of production. From 1991 to 1994, Mexican production sharing exports to the United States increased more than 60%, and accounted for almost half of all Mexico’s exports to its trade partner to the north. Currently, U.S./ Mexican co-production accounts for one-third of total U.S. global production sharing.

While the peso devaluation is causing a sizable short-term slowdown in Mexico’s economy, it is also lowering Mexico’s cost of manufacturing -- and that should spur further growth in U.S./Mexico co-production alliances. Facilities previously located outside of North America now have greater incentive to relocate to Mexico. Zenith Electronics, for example, will discontinue sourcing picture tubes for projection television sets in the Far East and begin manufacturing them in Mexico.

Why is this good for the U.S.? Because Mexican co-production imports contain roughly 50% of U.S.-produced content -- a much higher portion than goods from other parts of the world, such as Asia and Europe. Production sharing imports from Asia typically consist of only 25% U.S.-made content. Furthermore, relatively few Mexican imports compete directly with U.S. goods and services. Instead, they compete more with U.S. imports from non-NAFTA nations.

Because of this, a good portion of the expected increase in imports from Mexico will replace U.S. imports from other parts of the world. Unlike non-NAFTA imports, the higher U.S. content of goods co-produced and imported from Mexico translates into thousands more jobs for Americans as well as Mexicans. That’s why U.S./Mexico trade is best measured, not just by which country has a trade surplus or deficit, but by the growing number of partnerships and co-production.

The U.S. International Trade Commission (ITC), which has been studying the issue closely, reports production sharing has helped retain many U.S. jobs that otherwise would have been lost to intense foreign competition. An ITC analyst also confirms that relocation of production sharing from East Asia to Mexico is indeed likely to accelerate as a result of the peso’s devaluation.

As more co-production shifts from Asia to Mexico, the ITC suggests, the more the U.S. will benefit. Because of NAFTA’s rules of origin and other factors, U.S. and non-NAFTA companies who co-produce in Mexico will be at a competitive disadvantage unless they source more of their previously non-NAFTA components and other production content from the United States.

Recent tariff increases by Mexico on a number of products imported from non-NAFTA nations should further fortify North America’s co-production base. Mexican apparel production has been hit hard for several years from inexpensive Asian imports flooding the market. Thousands of small and medium-sized companies have been bankrupted, despite anti-dumping duties levied on Asian imports. The devaluation provided some relief. However, since much apparel production in Mexico is based on imported materials -- now about 40% more expensive -- additional action was needed.

The new Mexican tariffs -- to the level allowed by the WTO -- make Asian imports more expensive, and Mexicans will seek lower-cost products to replace them. U.S.-Mexican co-produced goods, which are cheaper, competitive and locally-produced, can fill the vacuum. U.S. trade with Mexico already reflects increased preference for U.S.-Mexican co-produced goods over Asian imports.

With NAFTA, the U.S., Canada and Mexico sought to improve their overall competitiveness, productivity and economic growth vis a vis the rest of the world. The devaluation and new trade deficit with Mexico shouldn’t be too hastily bemoaned. Yes, it is giving Mexico’s beleaguered economy a boost, at the cost of a short-term drop in U.S. exports.

But the trade deficit is also evidence of a longer-term and beneficial shift of our production base to a greater reliance on North American content and production-sharing partnerships. This will help reduce U.S. trade deficits with our Asian and European neighbors, and provide more business and job opportunities for the U.S., Canada and Mexico. That’s good news for all North Americans.