U.S. High-Tech Producers Compete Well Internationally

U.S. producers of high Technology electronics compete very well internationally. For example, in 1991 trade in computers registered a U.S. surplus of $3.6 billion. The U.S. computer industry is the leader in the global marketplace.

High-technology equipment produced in low to moderate volumes, such as computer mainframes, are supported by large numbers of high-wage engineers, software specialists, and skilled technicians. The production of these products requires the smallest percentage of production workers. These product categories are high growth areas in the United States and employment in computers and data processing services has expanded -- and is rising faster than any other major industry. In fact, employment is expected to rise from 224,000 in 1978 to 1.2 million in the year 2000. Growth in software and computer services could create more jobs than are lost in electronics manufacturing by next century.

Computer firms prefer to be close to their primary markets in order to quickly respond to the ever-changing consumer tastes and demand. When categorized with peripherals, which registered a deficit of $6.9 billion in 1991, the computer industry as a whole did not appear to compete well. Direct labor for peripherals constitutes up to 50% of production costs.

The complex nature of semiconductors, for example, mandates that production be highly automated and performed by a technology-savvy work force. Because the labor content of such products is low, product cycles short, and delivery quick, it is quite cost-effective to produce in the United States. Less sophisticated, lower-end electronic products, however, have been under increasingly greater pressure from Asia for U.S. market share.

Lower Technology Producers Are Under Attack

The electronics industry as a whole, composed of electronics, computers and telecommunications equipment, has run a multilateral trade deficit since 1983. It reached $11 billion in 1991. Employment peaked in 1984, but declined by approximately 16 to 19% (307,000 jobs) to nearly 2 million by the end of 1991. The majority of goods, such as TVs and VCRs, are characterized by standardized mid-tech components, require labor-intensive production, and derive low profit margins. Consequently, competition from low-wage countries has hurt the industry.

The U.S. telecommunications industry has endured some rigorous structural changes over the last decade due to deregulation, reductions in defense spending, and intense foreign competition. The deficit in telecommunications equipment has been attributed to imports of customer premises equipment, such as telephones and fax machines -- for which labor costs constituted approximately 30% of production costs. Production of telecommunications switches, however, which require higher worker skills, are more competitive internationally and would likely remain in the United States for at least the intermediate term.

Industry growth rates in Japan and other East Asian countries have been higher than in the United States -- which has fallen behind in standardized, labor-intensive electronics. As a result, U.S. producers of these types of goods have been more likely to move low-end production offshore in order to stay competitive.

Electronics, Computers and Telecommunications Rules of Origin

Goods produced in North America entirely from originating materials will qualify for Nafta's benefits. However, the rules of origin for non-originating materials or non-North American subassemblies are complex. These rules include requirements for specified changes in tariff classification, minimum regional value-content requirements, and prohibitions against the use of certain non-originating parts or components. The general sum effect is twofold: to ensure that electronics goods with a high degree of non-North American content do not receive preferential treatment by Nafta, and to encourage North American production at the expense of foreign production.

For example, origin requirements could significantly affect U.S.-Mexican trade and investment in television production. Many TV sets assembled in Mexico for sale in the U.S. incorporate picture tubes made in Asia. Under Nafta, most or all foreign picture tubes will be denied preferential access to the United States. As a result, U.S.-made picture tubes will likely be substituted for foreign ones -- resulting in more, higher-wage U.S. jobs. The picture tube is the most expensive component incorporated in a TV and the production of these tubes commands the highest wages in the television sector. Due to the technology-intensive nature of its production, required level of skill and state-of-the-art facilities, this production is unlikely to move to Mexico.

Importantly, Nafta's rules of origin will protect against foreign competitors from using Mexico as an export platform into the U.S., while simultaneously encouraging more production and job growth throughout North America.

Nafta's Impact on the U.S. Electronics, Computers and Telecommunications Sectors

Based on 1991 trade, The pre-Nafta average trade-weighted duty on imports of Mexican electronics was 2.4%. A large portion of imports entered the United States under the tariff classification 9802.00.80 (application of duty only on the non-U.S. origin production costs, such as Mexican labor, overhead and Asian components) and the General System of Preferences allowing for duty-free entry. Thus, the removal of U.S. tariffs under Nafta, most of which were completely eliminated on January 1, 1994, will not adversely affect the United States.

Prior to Nafta, the average Mexican duty on U.S. electronics was 15.8%. Under Nafta, 40% of Mexican duties on U.S.-made electronic products were eliminated on January 1, 1994. Another 50% of duties will be phased out over five years and the remaining 10% over ten years. Consequently, U.S. producers of electronics will be more competitive in Mexico compared to Mexican, European and Asian producers.

The Agreement itself is unlikely to radically alter current trade and investment trends in the electronics industry between the United States and Mexico. Many U.S. lower-technology manufacturers of electronics are already producing in Mexico and in other low-wage countries. Since Mexico has already gained much of the U.S. labor-intensive production in this field, it isn't likely that many more firms will move there in at least the short to intermediate term.

Mexican manufacturing tends to be limited to routine assembly of components originating in the United States and the Far East. Mexican suppliers provide low-technology parts, including housings, printed circuit boards, metal and plastic mechanical parts, cable harnesses, and limited power supplies electric components. The lack of skilled technicians and more sophisticated infrastructure has prevented expansion.

In the longer term, however, Mexico's ability to produce higher-end products hinges on its investment in work force education and training. Additionally, development of other factors such as market size, interfirm linkages, supplier networks, and investment costs is also necessary for Mexico to develop a more modern electronics industry.

In the absence of Mexican government policies forcing companies to manufacture in Mexico in order to sell there, many computer firms will have little reason to produce there. Relocation of U.S. computer manufacturers to Mexico would needlessly isolate them.

High-technology goods have an increasingly declining direct labor content, which means that the relative importance of indirect labor -- engineers, technicians, managers and designers -- has increased. These are precisely the types of workers that Mexico has the least of and the U.S. has the most of. Nafta will allow the United States to exploit this competitive advantage so that high-end production will not only stay in the United States, but continue to flourish. By allocating the simpler labor-intensive operations to Mexico, U.S. electronics firms can make production more cost-effective, which allows them to create more of the higher paying jobs in the United States. The net result: a more competitive American electronics industry.

This article appeared in The Exporter, July 1994.

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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