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
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).
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).
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
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).
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
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