Mexico: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
28 Nov 2012
eISBN:
9781475543551
Language:
English
Keywords:
ISCR; CR; Mexico; migration flow; financing; migration; bank financing; market share gain; share of U.S.; export share; manufacturing sector; dollar gain; Exports; Manufacturing; Imports; Labor costs; Global
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Mexico is an open economy with strong real and financial links to the rest of the world with risks of spillovers from global turbulence. Recent gains in market share in the U.S. manufacturing market are owed to improved relative unit labor costs and reemergence of a location advantage. Mexico’s current fiscal framework requires measures to offset the emerging challenges of a decline in oil revenues and the projected increase in health- and pensions-related spending. The sustained increase of bank credit after the global crisis has been reversed. The effects of migration depend on labor reform.

Abstract

Mexico is an open economy with strong real and financial links to the rest of the world with risks of spillovers from global turbulence. Recent gains in market share in the U.S. manufacturing market are owed to improved relative unit labor costs and reemergence of a location advantage. Mexico’s current fiscal framework requires measures to offset the emerging challenges of a decline in oil revenues and the projected increase in health- and pensions-related spending. The sustained increase of bank credit after the global crisis has been reversed. The effects of migration depend on labor reform.

II. What Explains Mexico’s Recovery of U.S. Market Share?1

Mexico’s market share in the U.S. manufacturing market has staged a strong recovery since 2005. By mid-2012, Mexico’s share of U.S. manufactured imports reached near 15 percent, surpassing its post-NAFTA peak. In contrast with earlier trends, Mexico’s gains in the 2010–2012 period coincided with a fall of China’s market share. Recent gains in market share may have been driven in part by improved relative unit labor costs in dollars. Other factors could include the reemergence of a location advantage due to higher oil prices and a change in inventory management among U.S. firms, and a reassessment of benefits of relocating to Mexico (including the protection of proprietary technologies). As a result, global manufacturers are increasingly relocating to Mexico (near-shoring of production), particularly in the automotive, aerospace and electronics and appliances sectors.

A. Background and Recent Developments

1. Mexico’s manufacturing sector, a key engine of growth, is highly integrated with the U.S. manufacturing supply chain. Approximately 80 percent of total Mexican exports go to the U.S. (representing almost 22 percent of GDP), most of which come from the manufacturing sector. Following its entry into NAFTA, Mexico’s participation in the U.S. manufacturing market grew from less than 10 percent of U.S. manufacturing imports in 1996 to close to 15 percent in mid-2012 (Figure 1), with industries increasingly vertically-integrated with those of the U.S., particularly in the automobile sector.

Figure 1.
Figure 1.

Share of US Manufacturing Imports by Origin

(In Percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

2. China’s entry to the World Trade Organization (WTO) in 2001 transitorily undercut Mexico’s export share in the U.S. market. China’s low-cost manufacturing base and ample production capacity had a major impact on Mexico’s exports to the U.S. in the wake of its entry to the WTO. Between 2001 and 2005, Chinese manufacturing exports to the U.S. expanded at an average annual rate of 24 percent, while Mexico’s export growth decelerated sharply to 4 percent on average over the same period.2 As a result, China’s share of U.S. manufacturing imports almost doubled by 2005, eroding the previous gains of market share by Mexico (Figure 1). China’s crowding out of Mexican exports in the U.S. market was the result of a loss of comparative advantage in several labor-intensive manufacturing sectors in which it had previously specialized, including apparel, office machinery, furniture and photographic and optical equipment sectors (Chiquiar, Fragoso and Ramos-Francia, 2008).3

3. Since 2005 Mexico has regained ground in the U.S. import market, particularly after the recent global crisis.4 Mexican manufacturing exports clawed back their share of the U.S. import market over the last seven years, rising 3 percentage points to a historically-high 14.4 percent by mid-2012. Between 2005 and 2010, Mexico’s increased presence in the U.S. import market paralleled a market share gain by China, while Japan’s and Canada’s continued to decline. Since 2010, however, Mexico’s gains in the U.S. import market coincided with a decline in China’s market participation (Figure 1).5

4. The recovery in Mexico’s market share has been driven by exports of electronics, telecommunications, and transport equipment. Since 2005, Mexico’s share of U.S. imports of transport and communications products increased steadily to 18 percent, accounting for 76 percent of total Mexican manufacturing exports in the first half of 2012. The recovery in market share of other manufacturing goods, however, took place only after 2009 (Figure 2). Analyzing trade flows at a more disaggregated level (2-digit Standard International Trade Classification) shows that Mexico’s market share gains were generalized, in 20 of the 26 manufacturing import categories, jointly accounting for 80 percent of total Mexican exports (Table 1).6

Figure 2.
Figure 2.

Mexico’s Market Share of US Imports within each Manufacturing Category

(In Percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Table 1.

Sectors with the Biggest Gain in US import Market Share: 2005-2012

article image

5. In turn, the automotive sector has been the most important contributor to the increase in aggregate market share, explaining half of the increase between 2005 and 2012. Mexico’s market share in U.S. imports of autos, auto-parts and accessories (excluding trucks) increased almost 9 percentage points over this period (Table 1), particularly since 2009 (Figure 3). By 2012, Mexico has become the second-biggest foreign supplier of autos and auto-parts to the U.S., behind Canada, exporting over one fifth of the total U.S. imports. The automotive sector accounts for one quarter of all Mexican manufacturing exports to the U.S. The large increase in production capacity and exports has been underpinned by a continued flow of foreign direct investment into the sector.7

Figure 3.
Figure 3.

Auto and other Manufactured Goods Exports

(in millions of dollars; Index June 2008=100)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

B. Evolution of U.S. Market Share: Mexico and China

6. Mexico’s gains in U.S. market share have increasingly occurred in sectors where China reduced its share. Figure 4a and 4b show the changes in Mexico’s market share in U.S. imports (horizontal axis) against those of China (vertical axis) in each of the 2-digit sectors, for the periods 2005–2007 and 2010–2012.8 In each panel, the North-West quadrant (red) indicates those sectors in which China’s market share increased while Mexico’s fell, while the South-East quadrant (green) plots those sectors, if any, in which Mexico’s share increased and China’s fell. The size of the bubbles is proportional to each sector’s contribution to the overall change in market share in each period. During 2005–2007 all the observations lie in the Northern quadrants, indicating that there was no sector in which Mexico increased and China simultaneously decreased market share. Moreover, during this period Mexico was losing participation in several sectors in which China was gaining participation. In contrast, in 2010–2012 there are several sectors (marked green) in which Mexico’s share increased while China’s fell. In addition, the number and relative importance of sectors in which China’s share went up and Mexico’s down (i.e., the number and size of red bubbles) declined in the most recent period.9

Figure 4a.
Figure 4a.

2005-2007 Period

(In Percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Sources: IMF staff estimates based on U.S. International Trade Commission data
Figure 4b.
Figure 4b.

2010-2012 Period

(In Percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Sources: IMF staff estimates based on U.S. International Trade Commission data

7. During 2010–2012, 40 percent of the dollar gains in sectors where Mexico increased its market share came from sectors where China’s share fell. Using an extension of the constant market shares methodology developed in Chami Batista (2008), we calculate the fraction of Mexico’s increase in market share that can be associated with China’s reduction, controlling for changes in the shares of the other competitors.10 During 2010–2012, 40 percent of Mexico’s dollar gains in those sectors where it increased market share could be attributed to China’s reduction (Figure 5).11 Table 2 presents those sectors showing the largest fraction of market share gains accruing from China.12 In contrast, during 2005–2007, half of Mexico’s increase in market share was explained by reductions by Canada and Japan, but none coming from China.

Figure 5.
Figure 5.

Gains in Mexico’s market share attributed to each competitor

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Sources: IMF staff estimates based on data from USITC
Table 2.

Sectors in which the largest fraction of market share gain accrued from China (2010-2012)

article image
Source: IMF staff estimates based on data from USITC

8. During 2010–2012, Mexico’s changes in market share relative to China’s were larger in sectors with higher labor-to-capital intensity. Using revealed factor intensity indices at the 5-digit SITC product level constructed by Shirotori et al (2010), a linear regression was estimated of the relative change in market share of Mexico vis-à-vis China for a given product on its degree of labor-to-capital intensity and human capital intensity.13 For 2010–2012, results show that sectors with higher labor-to-capital intensity saw a bigger relative increase in market share for Mexico compared to China (Table 3). This appears consistent with the notion that Mexico’s recent gains in market share vis-à-vis China may have been driven in part by improved relative labor costs. In contrast, over the period 2005–2007, there is no systematic relationship between relative market share changes and factor intensity. The estimated value of the constant in the model indicates that, during 2010–2012, Mexico’s increase in market share was on average higher than China’s across goods.

Table 3.

Change in Mexico market share vis a vis China and factor intensity

(OLS estimates at the 5-digit SITC level)

article image

C. What Explains Mexico’s Increased Competitiveness?

9. Several factors could have contributed to explain Mexico’s increased competitiveness:

(i) Relative labor costs in dollar terms.

Wages in the manufacturing sector in China have increased at an average annual rate of 14 percent in nominal yuan terms from 2003 to 2011, and close to 20 percent annually in dollar terms (Figure 6), given the appreciation of the yuan (Figure 7). In contrast, average wages in the Mexican manufacturing sector have remained fairly constant in dollar terms, underpinned by moderate wage growth and a depreciation of the peso (Figure 7).14 In 2003, average dollar wages in Mexico were six times higher than those in China, whereas in 2011 wages were only 40 percent higher. These developments have reduced the competitive advantage that China had as a low-cost supplier of manufacturing goods to the U.S. in the early part of 2000s.15

Figure 6.
Figure 6.

Real Dollar Annual Wages: Mexico and China

(In USD)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Sources: Barclays and CEIC China Database
Figure 7.
Figure 7.

Nominal Exchange Rate

(Domestic currency per USD; index, 2002=100)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Source: WEO

(ii) Productivity gains in Mexico

Strong productivity increases underpinned by strong investment in the manufacturing sector in Mexico have helped lower unit labor costs and increase the competitiveness of manufacturing production (Figure 8).

Figure 8.
Figure 8.

Mexico: Unit Labor Costs and Productivity in Manufacturing

(Index, 2008=100)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Sources: INEGI

(iii) Oil prices and transportation costs

The benefits of proximity to the U.S., Mexico’s key location advantage, have increased with the rise in oil prices and changes in U.S. companies’ inventory management. The price of oil increased from US$25 per barrel in early 2000s to over US$100 in October 2012, increasing substantially transoceanic freight costs. This has given Mexico a competitive edge, particularly when it comes to heavy and bulky items. Proximity, as a proxy for speed-to-market, has also gained importance as U.S. companies increasingly adopted outsourcing of inputs and just-in-time manufacturing. According to the 2011 U.S. Manufacturing-Outsourcing Cost Index, goods produced in Mexico had the lowest landed costs (i.e., the price at a California shipping port) for U.S. importers in 2010 compared to other key low-cost countries (Figure 9).16 This has coincided with the trend to “near-shoring” (as opposed to “off-shoring”) exploiting the advantage of a proximate manufacturing hub to the U.S.

Figure 9.
Figure 9.

US Manufacturing-Outsourcing Cost Index

(Landed costs in US relative to US domestic manufacturing cost, in percent)

Citation: IMF Staff Country Reports 2012, 317; 10.5089/9781475543551.002.A002

Source: AlixPartners

(iv) Protection of proprietary technologies

The strong commitment to the protection of proprietary technologies has also helped Mexico in the relocation of FDI. Mexico has a strong reputation for protection of international intellectual property, patent and trademark rights and is a party to several international treaties, including the World Intellectual Property Organization. This has helped minimize the risk of piracy, counterfeiting and other intellectual property infringements, which is especially important in high-technology sectors as well as sectors with technologies that could be used in military applications. In January 2012 Mexico joined the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.17 Joining the Waasenaar Arrangement opened up new possibilities for American and European firms to invest in Mexico in the high-tech sectors, including semiconductors, software, aerospace, lasers, sensors and chemical production.

(v) Openness and commitment to free trade

Mexico’s manufacturing base has been buttressed by the economy’s openness. Mexico has one of the largest trade agreements networks, with free trade or preferential agreements with 44 countries.18 It has also shown a strong commitment to free trade, avoiding the use of trade restrictions and providing assurance to companies operating in Mexico of unrestricted access to markets and intermediate inputs. Moreover, Mexico is signatory to international standards and quality agreements facilitating the insertion of local manufacturing companies into the global supply-chains.19

10. Several of the factors that have contributed to explain Mexico’s increased competitiveness and recouping of market share in the U.S. are likely to be structural. The locational advantage, improved unit labor costs from enhanced manufacturing productivity and increased labor participation, and trade openness have likely underpinned Mexico’s improved competitiveness in the U.S. market in recent years. Structural reform efforts to boost productivity and investment would help sustain the dynamism of manufacturing exports and boost potential GDP growth. These efforts would include, inter alia, measures to further foster competition and labor flexibility, improve education and reinforce domestic security.

Appendix 1. Data AND Methodology Used

A.1. Data

The empirical analysis is based on data on the customs dollar value of U.S. manufacturing imports (categories 6, 7, and 8 of the Standard International Trade Classification) by country of origin disaggregated at the 5-digit level. Data is at annual frequency from 1996 through June 2012. The source is the United States International Trade Commission (USITC).

A.2. Competition Between Mexico and China in the U.S. Manufacturing Import Market

Below we describe an extension of the Constant Market Share (CMS) analysis derived by Chami Batista (2008), attributing the gains or losses in import market shares by a given country to each of its competing exporters. The ultimate goal is to determine what fraction of Mexico’s dollar value gains in market share in manufacture products came at the expense of China (vis a vis other countries that were also changing their share in the U.S. market over this period).

Assume that there are n exporters to the U.S. market K, so that:

kHt=XHtMKt(1)

are the macro shares of each exporting country H=1,….,n.

The change in the micro market share of product i between time t and time t+1 of exporter H can be defined as:

ΔkH,i≡kH,it+1-kH,it+1≡(XH,it+1MK,it+1-XH,itMM,it)(2)

Dropping the subscript i for ease of notation, ΔkH,J may be defined as the part of the change in the micro share of exporter H that can be ascribed to the change in the micro share of exporter J, such that:

ΔkH≡ΣJ≠HnΔkH,j=ΣJ≠Hn(XJtMKt-XJt+1MKt+1)(3)

bearing in mind that:

ΣJn(XJt+1MKt+1-XJtMKt)≡0(4)

That is, when exporters compete for a specific market, the changes in a given country’s share of the market necessarily come at the expense of all the others’ shares together.

Starting from (4), it can be shown that the change in market share of exporter H for product i that can be attributed to exporter J is equal to:

ΔkH,J,i≡ΔkH,i(XJ,itMK,it)-ΔkJ,i(XH,itMK,it)(5)

or

ΔkH,J,i≡ΔkH,ikJ,i-ΔkJ,ikH,i(6)

which is equal to the difference between the changes in market shares for a product i between H and J, where each term is weighted by the market share at initial time t of the other competitor. Note that the only case where the increase country H’s import share to the U.S. will be unambiguously equal to the decrease in market share by country J is when country’s J share of the market for product i was 100 percent in period t (and consequently the share of country H was 0 in the initial period).

Chami Batista (2008) shows that the formulation in (6) satisfies four desirable properties. First, country H cannot lose or gain from itself. Second, a gain for exporter H from exporter J is equal to the loss of exporter J to exporter H. Third, the sum of the changes in market shares of one exporting country that are attributed to each of its competitors is equal to the overall change in market shares of the country. Fourth, the change in market share of one exporting country that is attributed to one of its competitors is directly related to the difference between the rates of growth of the value of exports of the two countries. It can be shown that (9) can be re-expressed as:

ΔkH,J,i≡(xH,i-xJ,i)1+m^kH,ikJ,i(7)

where xH,i and xH,i is the gross rate of growth in the value of exports of products i by country H and J, respectively, and m^ is the gross rate of growth in the value of imports of product i by country K.

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1

Prepared by Herman Kamil and Jeremy Zook. Enrique Flores and Esteban Vesperoni also contributed to the project.

2

The relocation of manufacturing activities (including from the Maquila industry) from North America to China, and Asia more generally, also explained the low export growth.

3

Several studies have used sectoral flow data to assess the impact from Chinese exports on Mexican and other Latin American producers (Freund and Ozden, 2006; Hanson and Robertson, 2007; Lederman et al., 2008; Devlin et al., 2006; Lall et al., 2005). More recently, Iacovone, Rauch and Winders (forthcoming) provide evidence on the impact of Chinese competition on Mexican manufacturing firms between 1996 and 2004.

4

Based on revealed comparative advantage measures, Chiquiar and Ramos-Francia (2008) provide evidence that the Mexican manufacturing sector reacted to the increase in China’s competition by shifting resources towards sectors where it remained competitive. This allowed the effect of China’s entry to the WTO to be only temporary.

5

In contrast, during the period 2001-2004, Mexico lost market share in U.S. imports in 13 of the 26 sectors.

6

Among the sectors that lost market share, the most important is electrical machinery, apparatus and appliances, which accounted for 14 percent of Mexican exports in 2012, and lost 1.1 percentage points in market share over this period. The biggest decline occurred in the U.S. import market share of apparel and clothing products, which fell 8 percentage points from its peak of 14 percent at the beginning of the last decade.

7

Mexico was the third-largest investment destination for the automotive sector in the world, receiving US$5.6bn during 2007–10, above Japan and the BRICs, according to PROMEXICO. While the industry has been largely dominated by U.S. manufacturers in the past, more recently, companies from other countries, particularly Asia, have opened or expanded operations in Mexico. See Martin (2012) for a detailed analysis of FDI flows into Mexico’s manufacturing sector in recent years.

8

We exclude the period 2008–2009 to avoid temporary effects associated to the global crisis.

9

Among the sectors in which Mexico lost and China gained market share during 2010–2012, the most relevant for Mexico was “Telecommunications and sound-recording and reproducing apparatus and equipment”, which lost 1.1 percentage points over the period. This sector accounted for 13 percent of Mexican exports in 2012.

10

The gain in market share of one exporting country that is attributed to one of its competitors is proportional to the difference between the rates of growth of the value of exports of the two countries over the period. See the Appendix for a description of the method. Calculations were performed at the 2-digit level of aggregation.

11

Part of this reduction in China’s market share may be due to a shift in China’s exports towards a different set of goods.

12

See also Oviedo (2012) for an analysis of the sectors in which Mexico gained competitiveness during the period 2010–2012.

13

The authors construct the indices by calculating, for each good, a weighted average of the factor abundance of the countries that export this good, where the weights are variants of Balassa’s (1965) revealed comparative advantage index.

14

Subdued wage growth is in part associated with an increase in labor participation and in the growth rate of the working age population, from a reduction in migration to the U.S. since the mid-2000s (sees Selected Issues Paper “Migration and Labor Markets”).

15

Reliable data on unit labor costs in the Chinese manufacturing sector is not available, preventing an assessment of the evolution of wages in China accounting for changes in productivity.

16

Several cost drivers are factored into the analysis, including wages and productivity, exchange rates, and freight fees, overhead, raw materials, duties, and in-transit inventory (AlixPartners, 2011).

17

Under the Waasenaar Arrangement, the 41 signatory nations cooperate and adhere to export controls for conventional arms and dual-use goods and technologies.

18

On June 2012, Mexico was formally invited to join the ongoing negotiations for the Trans-Pacific Partnership (TPP), a proposed free trade agreement involving the United States and eight other countries.

19

For instance, Mexico is a signatory of the Bilateral Aviation Safety Agreement (BASA), which brings it into the global aerospace supply-chain by allowing aircraft parts to be shipped overseas for assembly without first undergoing an international inspection. This has bolstered Mexico’s manufacturing capabilities in the aerospace sector: more than 260 aerospace companies now operate in Mexico (mostly in the Tijuana-Mexicali cluster), exporting some $4.3 billion in aircraft and parts in 2011.

Same Series

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Cover IMF Staff Country Reports
Mexico: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2012: Issue 317
Publisher:
International Monetary Fund
ISBN:
9781475543551
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781475543551.002
  • View in gallery

    Share of US Manufacturing Imports by Origin

    (In Percent)

  • View in gallery

    Mexico’s Market Share of US Imports within each Manufacturing Category

    (In Percent)

  • View in gallery

    Auto and other Manufactured Goods Exports

    (in millions of dollars; Index June 2008=100)

  • View in gallery

    2005-2007 Period

    (In Percent)

  • View in gallery

    2010-2012 Period

    (In Percent)

  • View in gallery

    Gains in Mexico’s market share attributed to each competitor

  • View in gallery

    Real Dollar Annual Wages: Mexico and China

    (In USD)

  • View in gallery

    Nominal Exchange Rate

    (Domestic currency per USD; index, 2002=100)

  • View in gallery

    Mexico: Unit Labor Costs and Productivity in Manufacturing

    (Index, 2008=100)

  • View in gallery

    US Manufacturing-Outsourcing Cost Index

    (Landed costs in US relative to US domestic manufacturing cost, in percent)

Share of US Manufacturing Imports by Origin

(In Percent)

Mexico’s Market Share of US Imports within each Manufacturing Category

(In Percent)

Auto and other Manufactured Goods Exports

(in millions of dollars; Index June 2008=100)

2005-2007 Period

(In Percent)

2010-2012 Period

(In Percent)

Gains in Mexico’s market share attributed to each competitor

Real Dollar Annual Wages: Mexico and China

(In USD)

Nominal Exchange Rate

(Domestic currency per USD; index, 2002=100)

Mexico: Unit Labor Costs and Productivity in Manufacturing

(Index, 2008=100)

US Manufacturing-Outsourcing Cost Index

(Landed costs in US relative to US domestic manufacturing cost, in percent)