MexECON Blog

Mexico v. China: Who Is Winning?

This analysis examines whether Mexico's ability to export to the United States has been hurt by surging Chinese exports over the last decade.  For Mexico, the question is important.  Official Mexican data show over 80% of the country's exports went to the United States in 2009.  That same year, exports accounted for almost 28% of Mexico's gross domestic product (GDP), meaning some 22% of Mexican economic activity is directly dependent on sales to the United States.  If China is gaining U.S. market share at the expense of Mexico, there would be negative implications for Mexico's industrial production, employment, capital flows, fiscal position, and social stability.

The results of the analysis are mixed.  On the one hand, China has completely outclassed Mexico over the last decade in terms of growing its exports to the United States and grabbing U.S. market share.  In 2003, Chinese exports to the United States surpassed Mexican's for the first time, and China has since become the top source of foreign goods and services sold into the U.S. market.  On the other hand, Mexico has been able to modestly increase both its exports to the United States and its U.S. market share, even in the face of the Chinese onslaught.  On this score, Mexico has far outperformed some of the most competitive countries in the world, including Canada, Japan, and Germany.  The analysis shows that Mexico's ability to hold its own probably came in part from simply having the right export structure.  Mexico's success also appears to have come from a weakening peso and continued low labor costs.

China Surging, Mexico Holding Its Own

The analysis is based on the U.S. Census Bureau's detailed foreign trade data from 1999 through 2009.  The analysis focuses on the final revised tally of imports from each U.S. trading partner each year, calculated on customs basis and expressed in nominal U.S. dollars.  Many countries with technology-heavy exports performed badly when global technology investment imploded in the early 2000s, but comparing the full ten-year period to the five-year period from 2004 to 2009 suggests the same general trends applied to both time frames.  Some minor distortions might also arise from using 2009 as the end date for the analysis.  After all, 2009 was marked by a sharp decline in U.S. demand in the midst of the global recession.  However, a comparison with year-to-date figures for 2010, when U.S. demand has been rebounding, suggests any distortion from the choice of end date is minor.

The data show U.S. imports grew at a compound annual growth rate (CAGR) of 4.3% in the ten years ended in 2009.  Some countries were able to increase their sales to the United States at a pace much faster than average during the period.  For example, U.S. imports from Nigeria grew at a CAGR of 15.9%, while imports from Vietnam grew at a CAGR of 35.1%.  Most of these countries, however, were small and started out with a very low level of U.S. sales.  Among the largest U.S. trading partners, the strongest performer by far was China, with a ten-year CAGR of 13.7%.  U.S. imports from Mexico grew at a slightly above-average CAGR of 4.9%.  The top U.S. trading partners showing the worst performance were Germany, with a CAGR of 2.6%, Canada, with a CAGR of 1.3%, and Japan, with a CAGR of -3.1%.

The period from 2004 to 2009 shows a similar pattern.  In that period, U.S. imports grew at a CAGR of 1.2%.  Among the top U.S. trading partners, China was the main outperformer, with a five-year CAGR of 8.5%, while Mexico had a CAGR of 2.5%.  In contrast, U.S. imports from Germany showed a CAGR of -1.5% and imports from Canada showed a CAGR of -2.5%.  U.S. imports from Japan fell even faster, with a CAGR of -5.9% (see Table 1).

                                 Table 1.
Mexico v. China - Table 1

Because of these differing performances, the shares of U.S. imports from the various countries have shifted dramatically.  Most significantly, China's market share more than doubled, from 8.0% in 1999 to 19.0% in 2009.  No other country has come close to boosting its U.S. market share to the extent that China has.  Nonetheless, among the top U.S. trading partners, Mexico had the second-best performance, with its above-average growth in exports to the United States helping boost its market share from 10.7% in 1999 to 11.3% in 2009.  Many people probably think higher market share for emerging markets such as China and Mexico would come at the expense of other emerging markets, but that has not been the case.  Among the top U.S. trading partners, Germany's market share fell from 5.4% in 1999 to 4.6% in 2009, while Canada's market share fell from 19.4% to 14.5%.  Japan had a truly disastrous performance, with its market share being cut in half, from 12.8% to just 6.1% (see Figure 1 and Table 2).

                                                       Figure 1.
Mexico v. China - Fig 1

                                                          Table 2.
Mexico v. China - Table 2

Just Lucky?

One reason Mexico has been able to hold its own against the Chinese onslaught might simply be blind luck.  That is, Mexico might have had more capacity to produce and export those products with the strongest increase in U.S. demand.  There is even some evidence of that.  Although the Census Bureau's country-by-product data is readily available only from 2000, the data shows that almost two-thirds of the increase in U.S. imports since that year can be attributed to oil and gas, chemicals, and other petroleum and coal products (probably reflecting rising volumes in the face of declining U.S. production, as well as rising prices for these commodities).  This greater U.S. reliance on foreign hydrocarbons helps explain the increase in U.S. import market share for big oil producers, such as Nigeria, Venezuela, Saudi Arabia, Russia, and Mexico.

Nevertheless, industrial structure does not explain all of Mexico's success.  If industrial structure were the whole story, the top U.S. trading partners would show a similar growth rate in exports to the United States for any given type of commodity.  The reality is much more nuanced.  As shown in Table 3, oil and gas alone accounted for almost one-third of the increase in U.S. imports from 2000 to 2009, with oil and gas imports rising at a CAGR of 8.0% in the period.  The only large U.S. trading partners to take advantage of the U.S. growth in oil and gas demand were Mexico and Canada, almost certainly because only they had large energy sectors with the capacity to boost exports.  For a counterpoint, however, one only has to look at an industry that is large in all of the top five U.S. trading partners, i.e., autos.  Table 3 shows the commodity with the steepest decline in U.S. import demand from 2000 to 2009 was transportation equipment (primarily autos).  As more production shifted to the United States and demand softened at the end of the period, U.S. imports of transport equipment fell at a CAGR of 1.8%.  U.S. imports of Chinese transport equipment surged, but from a very small base.  U.S. imports of Mexican transport equipment were virtually unchanged.  In contrast, imports from Canada, Germany, and Japan all fell substantially.  In sum, Mexico's ability to maintain its share of overall U.S. imports came in part from its position as a major petroleum exporter, but its success also came from competing better against its rivals in both growing and declining export categories.

                                                                            Table 3.
Mexico v. China - Table 3A

The Role of Currency Values

Consistent with the recent worries about a global "currency war," it turns out that currency values also help explain why Mexico has been able to hold its own against the Chinese export boom.  Among the top five U.S. trading partners, only Mexico had a currency that depreciated against the dollar over the last decade.  The peso has depreciated by 26.7% against the dollar from the end of 1999 to the end of 2009, making Mexican products relatively cheaper in the U.S. market.  In contrast, the Japanese yen rose by 14.0%, the Canadian dollar rose by 39.7%, and the European Union's euro rose by 44.2%.  The Chinese yuan rose by 21.3% over the period, but this was not enough to prevent Chinese exports to the United States from booming.  It appears that the rise in the yuan was not enough to offset China's low labor costs and other competitive advantages (see Figure 2).

                                                          Figure 2.
Mexico v. China - Fig 2

The Role of Labor Costs

Another likely contributor to the difference in U.S. market-share performance is labor costs.  According to adjusted data from the International Labor Organization (ILO), currency-adjusted wages per hour in manufacturing have risen much faster in Germany and Canada than in the United States over the last decade.  Increased productivity, particularly in Germany, has probably offset some of these costs, but the fact remains that Germany and Canada have become more expensive places to produce for export to the United States.  In Japan, currency-adjusted wages have risen only modestly, but they remain far above the rates in China and Mexico.  Because of this differential, many Japanese manufacturers have shifted production from Japan to China, which helps explain the dramatic drop in Japanese exports to the United States.  While Mexican manufacturing wages may be higher than China's, they are still relatively competitive, and this appears to have helped shift some production from other parts of the world to Mexico (see Figure 3).

                                                        Figure 3.
Mexico v. China - Fig 3


In sum, Mexico has failed to boost its exports to the United States as rapidly as China during the last decade, but the country has managed to hold, and even slightly increase, its U.S. market share.  One reason for Mexico's success versus the likes of Canada, Germany, and Japan is that it is a large petroleum exporter.  However, this is not the whole story.  The general weakening of the peso over the last decade has also helped make Mexican goods more competitive in the U.S. market, and Mexico continues to benefit from relatively low labor costs.  In addition, other factors not discussed here may be playing a role, such as high global energy costs that encourage global manufacturers to "near-source" into Mexico and stable macroeconomic policies that have further encouraged investment into the country.  Threats to Mexico's success include such problems as drug violence that can disrupt business and investment plans, as well as declining oil output because of insufficient investment in its energy sector.   Nevertheless, Mexico deserves credit for its success to date in the area of trade.

Patrick Fearon, CFA
Vice President, Fund Management

0 comment(s) for “Mexico v. China: Who Is Winning?”

    Leave a Comment