Production sharing occurs when various aspects of an article's manufacture are performed in more than one country. U.S. companies regard this as an important tool allowing them to improve the relative price competitiveness of their products, help them keep higher wage jobs in the United States, and provide an important market for U.S. exports of components. The growth in U.S. production sharing imports (primarily under HS 9802.00.80) in 1994 resulted mainly from larger shipments of motor vehicles and parts, televisions, and other electronic products from Mexico; apparel from the Caribbean Basin and Mexico; and semiconductors from Southeast Asia.

Mexico is the largest U.S. production sharing partner—and growing. After the implementation of NAFTA, U.S. imports from Mexico, entered under provision 9802.00.80, continued to rise in 1994 and 1995. The 50 percent devaluation of the Mexican peso which began in December 1994, and the resulting 25 - 30 percent decline in Mexican wages, were the principal cause of an 8 percent growth in production sharing imports from Mexico in 1995 to an estimated $25 billion. Reportedly, as of October 1995, this had helped produce 89,900 new maquiladora jobs and added 400 new plants to the then existing 2,134 assembly facilities.

Production Sharing Is Good for U.S. Suppliers and Workers

Production sharing benefits U.S. suppliers of components and workers to a large extent. For example, the use of U.S. components in motor vehicle parts imported from Mexico contrasts sharply with their use in vehicles imported from Germany and Japan. While U.S.-made parts accounted for 39 percent of the value of finished vehicles imported from Mexico under provision 9802.00.80, they made up only 1 percent of the value of vehicles imported from Japan and 2 percent of those from Germany.

Since 1989, U.S. apparel imports have grown by 62 percent to almost $40 billion in 1995, and now supply roughly half of U.S. demand. Developing countries in Asia supply the vast majority of U.S. apparel imports. NAFTA and the peso devaluation have made sewing operations in Mexico more globally competitive. In the first quarter of 1996, the top five exporters of textiles and apparel to the United States were Mexico, Canada, China, Taiwan, and Hong Kong. For the first time, Mexico and Canada took over the number one and two spot, respectively.

During the first quarter of 1995, U.S. textile and apparel imports from China, measured in square meter equivalents (sme), continued their downward trend, falling 38 percent. During the same period, U.S. imports from South Korea, Hong Kong and Taiwan declined by 9.8 percent.

"NAFTA is working and the shift of apparel imports from the Far East to Mexico and the Caribbean Basin nations is concrete evidence. Our industry and the U.S. economy benefit because... more than 80 percent of apparel from Mexico is made from fabrics produced in the United States and largely from U.S. yarns, while apparel from the Far East is primarily from Asian fabrics and yarn," said James M. Fitzgibbons, President of the American Textile Manufacturers Institute.

Overall, U.S. production sharing-imports from Mexico accounted for nearly half of all U.S. imports from Mexico. And on average, 50 percent of their value are components of U.S.-origin.

In 1995, U.S. exports to Mexico climbed in textiles and apparel. Duty-free treatment under NAFTA of apparel sewn in Mexico from U.S.-cut fabric led to a significant rise in U.S. exports of textiles/apparel pieces to the maquiladora industry. This expansion, however, was nearly offset by lower U.S. exports of finished apparel resulting from the reduction in Mexican consumer purchasing power following the peso devaluation.

The result last year was a 7 percent ($162 million) net increase in U.S. exports of all textile and apparel products to Mexico, reaching $2.4 billion. Compared to 1993, the year before NAFTA was implemented, 1995 U.S. exports to Mexico in yarns, fabrics, apparel and other related manufactured goods were substantially higher — by 32 percent, 25 percent, 81 percent, and 12 percent respectively.

The first quarter of 1996, compared to the same period last year, also showed positive increases. U.S. exports to Mexico of textile and apparel products increased 27.2 percent reaching $440 million, and exports of textile mill products (a subcategory) rose by 13.7 percent to $240 million.

Canada and Mexico have become the top U.S. destinations for textile and apparel exports. These markets, which currently sustain over 800,000 export related jobs in the United States, are growing rapidly.

NAFTA Continues to Work

NAFTA has provided a sound framework and foundation that has helped preserve and promote the growth of U.S.-Mexican trade and business ventures throughout the economic crisis of last year. It remains a strong anchor to ensure those commitments to ongoing tariff cuts and elimination of trade restrictions among NAFTA nations. This partnership continues to fulfill its objective of improving the growth and competitiveness for the entire North American marketplace.

This article appeared in The Exporter, October 1996.

John Manzella
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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