The United States and Mexico have increasingly integrated their manufacturing industries and rationalized production. In turn, the North American Free Trade Agreement partners have based plant locations on the availability and cost of inputs (labor, raw materials, energy and capital), the quality of supply chains and proximity to markets. Increasingly, however, Chinese trade and investment have affected the U.S.-Mexican relationship and raised questions as to the impact on American manufacturing.

U.S. Production Continues To Increase

U.S. manufacturing output, measured by the value of total shipments, continues to rise each year with few exceptions, according to the U.S. Census Bureau. In fact, it has nearly doubled since 1987, reaching almost $4.8 trillion in 2006. Economists attribute this increase to new technologies and productivity gains.

Last year, U.S. merchandise imports from China totaled $288 billion. Although this resulted in a large U.S. trade deficit, the ratio of Chinese imports to U.S. manufacturing output only was 6 percent—suggesting Chinese imports have less impact on overall U.S. manufacturing activity than popular opinion would suggest.

Is the China Challenge Overrated?

By examining sectors where Mexico is a leading U.S. supplier, and China is not, North American competitive factors are revealed.

In manufacturing sectors were Mexico and by extension the United States are most competitive (automotive, measuring instruments, motors and medical goods), Mexico supplied 18 percent of U.S. imports in 2005 while China supplied 2 percent, according to Ralph Watkins, Senior International Trade Analyst, U.S. International Trade Commission. By contrast, in sectors where Mexico and the U.S. are least competitive with China in the U.S. marketplace (toys, dolls, games, sporting goods, bicycles, footwear, lamps and luggage), Mexico supplied 4 percent of U.S. imports while China supplied 70 percent.

After review, it appears that Mexico has advantages, relative to China, in products that:

• Have a high ratio of weight to value (motor vehicles, large screen televisions, major household appliances),
• Are quality rather than price intensive (medical goods and process control instruments),
• Require inputs for industries on a just-in-time basis, customized production or frequent design changes (auto parts), and
• Are intellectual property rich and require sound protection.

In sectors where Mexico is least competitive, there is little remaining U.S. production, and consequently little demand for Mexican cost-reducing assembly, says Watkins. China has an advantage in products that require long production runs and infrequent style changes, which therefore are not hindered by lengthy ocean delivery times.

Where is Mexico most challenged by China? Both countries are leading U.S. suppliers of computer hardware, telephone equipment and apparel. In these sectors, Mexican maquiladoras experienced a loss of employment mostly attributable to Chinese competition.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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