Nafta’s uninvited guest: China and the disintegration of North American trade

13 Feb

by Enrique Dussel Peters and Kevin P. Gallagher * [Documenti] 

www.freeenterprise.comThe analyses set out in this paper suggest that Nafta [North American Free Trade Agreement] has gone through two distinct phases. In the first phase (1994-2000), the region integrated profoundly as a result of trade, investments, rules of origin and specific segments of industrial chains, such as the autoparts-automobiles and yarn-textile-garments chains. In this first phase, Nafta evolved in line with some of the predictions and estimates outlined in the literature review in the second section of this paper: on the whole the region experienced growth in terms of gdp, trade, investment, employment and wages, among other variables, and intra-industry trade also increased substantially.

While some of the gaps between the United States and Mexico were closing slowly, this was true for only a small part of  Mexico’s highly polarized socioeconomic and territorial structure. Even in segments of Mexican industry that were highly integrated in Nafta, the integration process did not lead to a wider process that promoted backward and forward linkages in Mexico.

In the second phase (since 2000), Nafta has been deteriorating in terms of  trade, investment and intra-industry trade, among other variables, and both Mexico and the United States have been losing ground to third countries such as China.

The first part of our analysis finds that from the point at which China entered the WTO in 2001 and up to 2010, China outcompeted Mexico in the United States market and began to compete with the United States in the Mexican market. We found 53 sectors in Mexico where the United States is losing market share and China is gaining, which should allow Mexico to make efficiency gains and become more competitive in United States markets. However, in those 53 sectors (representing 49% of all of Mexico’s exports to the United States) Mexico is losing market share in the United States. We then use two case studies to examine these trends in the Mexican economy in more detail.

The second part of the document highlights changes in competitiveness during these different stages of Nafta. The trade analysis clearly shows how Mexico increased its share of total United States imports, ranking second only to Canada in 2001-2004, only to be subsequently displaced by China. And while the United States has historically been Mexico’s main trading partner, its share of total Mexican imports fell from more than 75% in the first five years after Nafta came into effect to less than 50% since 2009.

As shown by different calculations, in both cases China is the main factor behind this disintegration. China’s share of Mexico’s top 20 exports to the United States and the United States exports to Mexico has increased substantially since 2000. The United States’ share of Mexico’s total exports fell from 72% to 41.54% in the period 2000-2009, while China’s share jumped from 1.09% to 17.83%. In all, 96% of United States exports to Mexico, and 81% of Mexican exports to the United States are under “threat” as defined in this paper.

Finally, the “triple threat” is examined: sectors in the Mexican market in which the United States is losing market share to China and those in the United States market in which Mexico is losing market share to China.

The two case studies illustrate the clearly defined stages that Nafta has gone through since 1994. The yarn-textile-garment chain reflects the profound integration at the firm level and in terms of industrial organization between Mexico and the United States. From a Mexican perspective, the sector has been symbolic for integration with the United States: it is a very dynamic export-oriented, labour-intensive sector that is highly dependent on imports from the United States and that produced a trade surplus (that has surprisingly turned into a trade deficit since 2005) based on massive imports of parts and components and exports of finished and assembled garments. However, the sector shed more than 50% of its jobs during the period 2000-2010 and is in a deep crisis region-wide: Nafta incentives have lost their impact, and both Mexico and the United States

lost hundreds of thousands of jobs over the decade.

The erosion of Nafta rules of origin, the signing of other free trade agreements since Nafta took effect, and competition with Asia and China took their toll within the Nafta region: China’s share of total United States imports expanded from 12% to 42.1% in 2000-2010, while Mexico’s fell from 13.22% to 6.51%. The crisis and loss of competitiveness of key inputs for the yarn-textile-garment chain, particularly in synthetic fibres, has profoundly affected Mexico’s output and exports to the United States, although Mexico does still maintain a substantial share in exports of natural fibres, including cotton and fabric such as denim.

The autoparts-automobile chain differs from the yarn-textile-garment chain in that, to date, competition from China has been quite limited. Even though China became the leading producer of automobiles in 2010 (almost a quarter of vehicles worldwide and more than twice the figure for the United States), it consumes 100% of its output, in addition to imports. However, as a result of massive investments by the Chinese public sector, new Chinese brands are entering the market, with increasingly sophisticated technologies, and now account for almost 40% of total vehicle production. China will very soon start competing with vehicles produced in Latin America, Mexico and the United States, thus, the sector could be very important in terms of policy responses in the

Nafta region regarding relations between the treaty members and, specifically, Mexico-United States bilateral relations.

Policies in the United States during 2008-2009 reflected its strategic significance. Mexico is at present one of the major suppliers and players in this sector in the United States, while China still

lags behind in this respect. Mexico is still the leading supplier of autoparts for Nafta and the United States, particularly in segments such as bodies and parts, chassis and drivetrain parts, electrical components and engines and parts, while China is already the main exporter of automotive tyres and tubes and is expected to increase its share in all other segments of the chain.

Several policy recommendations result from this analysis. On the one hand, there are substantial

arguments for deepening a regional and Nafta policy framework. Since 2000, China has profoundly changed the socioeconomic and territorial integration framework provided by Nafta, with enormous effects on production, trade, employment and wages, among other variables. The aggregated analysis in this paper and the two case studies show that Mexico and the United States are

deeply integrated in many value added chains. The question is when policymakers will start proposing a short-, medium- and long-term development agenda with explicit reference to Asia and China.

…..

(This is a part of the last section)

 from Cepal Review,  n° 110, August 2013, pp. 83-108                                                                                                                                                                                                        13 / 2 / 2014

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