Expect to see more goods "Hecho en México"

Globalization is entering a new phase as most of the hype surrounding emerging markets like the BRIC (Brazil, Russia, India, and China) countries dies down. Recent evidence points to the end of rapid growth in the BRICs, as real gross domestic product (GDP) growth for each of those countries has slowed considerably. China is the only one of the four that seems to be holding on; its 2012 growth came in at 7.7 percent, and its growth for 2013 is likely to end up slightly below the 8-percent mark. The others are struggling, however. Russia's economic well-being is closely tied to the ups and downs of world oil markets, and India faces a much slower economic growth rate despite strong population growth. Meanwhile, Brazil's real GDP growth for 2012 stood at 0.9 percent and is likely to reach only 2.4 percent in 2013.

While all this is going on, an interesting development is unfolding in Latin America. Mexico's increased competitiveness is helping that country regain its share of U.S. imports at China's expense. As many American shoppers are noticing, more products with the label Hecho en México ("Made in Mexico") are appearing on retail shelves, and they're seeing a little less of "Made in China."

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[Figure 1] Share of U.S. manufacturing imports Enlarge this image

The "giant sucking sound"
In a 1992 debate, an independent presidential candidate, Ross Perot, made the famous remark that the proposed North American Free Trade Agreement (NAFTA) would cause Americans to lose jobs to Mexico—a situation he described as "a giant sucking sound going south." NAFTA, which came into effect in early 1994, opened up the borders for trade between its signatories: Canada, Mexico, and United States. The ultimate goal of NAFTA was to reduce, and eventually eliminate, most U.S.-Mexico trade barriers.

However, during the 1990s, when Americans like Perot feared that production would shift to Mexico, much of it actually went to China. One of the factors that helped China increase its export manufacturing was its admission into the World Trade Organization (WTO). In fact, a closer look at the nominal (before adjusting for exchange-rate changes and price differences) share of U.S. imports from various countries makes a compelling case that China's WTO entry and its relatively inexpensive, unskilled labor played a very strong role in the rapid growth of Chinese imports into the United States. In 1996, for example, Mexican exports accounted for 9.2 percent of the U.S. import market, while China's share was a tad below 8 percent. Mexican and Chinese import shares increased to 12.1 percent and 11 percent, respectively, by 2001, while Canadian and Japanese shares of U.S. imports dropped. (See Figure 1.)

Since China's entry into the WTO in late 2001 and continuing to the present, there has been a symbiotic relationship between China and the United States. Harvard University professor Niall Ferguson calls this relationship "Chimerica" (China+America) in his book The Ascent of Money: A Financial History of the World. In essence, he writes, the Chinese are saving and Americans are spending; the Chinese are exporting and Americans are importing; the Chinese are building up reserve funds by means of currency manipulation and Americans are piling on debt.

China was able to quickly outpace Mexico in exports to the United States, while U.S. competitiveness declined due to high wages and costs in labor-intensive industries such as clothing, certain types of machinery, and many types of low-value-added consumer goods. Many multinational corporations found it more cost-effective to relocate manufacturing and assembly plants from the United States and Mexico to China. Between 2001 and 2005 Mexico's share of U.S. imports fell from 12.1 percent to 10.4 percent, while China's share rose from 11 percent to 19.2 percent. The "giant sucking sound" was not coming from the South but from the Far East.

However, in 2005 Mexico began to regain its competitiveness in many sector-level areas of production, such as automotive, electronic equipment, and higher-end consumer goods. By 2009 China's share of U.S. imports started to level off at around 25.5 percent, while Mexico's increased by almost 3 percentage points to reach 13.1 percent by the second half of 2013.

A comeback for Mexico's export sector
Four main factors have contributed to the recent revival of Mexico's export sector:

• Location. Mexico's proximity to the United States is the most obvious factor contributing to its comparative advantage versus China. In addition, the U.S. economy has done relatively better than most eurozone economies in weathering the global financial crisis. The proximity to the United States is a big plus for highly time-sensitive goods, as well as large durable goods such as autos. But from Mexico's point of view, that proximity also has potential drawbacks. About 100 years ago, when Mexican President José de la Cruz Porfirio Díaz Mori allegedly said, "Poor Mexico, so far from God and so close to the United States," he was referring to territorial issues and U.S. interference in Mexico's internal affairs. Proximity to the United States has also brought negative social consequences, as much of the drug-related violence in Mexico is related to end use in the United States.
• Narrowing wage gap between China and Mexico. China's manufacturing wage inflation has been increasing at a considerably faster pace than in many other emerging markets. In addition, the appreciation of China's currency also restrains export growth. Meanwhile, Mexico's manufacturing wage growth, adjusted for nominal wage increases and peso fluctuations, has been relatively modest. Moreover, the peso has actually depreciated in recent years.
• Trans-Pacific shipping rates. The high cost of ocean shipping, including fuel and equipment rental costs, are another consideration that explains why many multinational corporations are locating plants just across the border. In addition, the north-south transportation infrastructure has improved significantly over the past two decades, making surface transportation from Mexico to the United States faster and more cost-effective.
• NAFTA and free-trade policy. Mexico's rule of law is sometimes questionable given the level of drug-related violence there. But most Mexican governments have had a liberal free-trade policy, and the country has been very diligent in adhering to international standards for intellectual property rights, especially since the NAFTA treaty went into effect.

Many multinational corporations are eyeing the relative strength of the Mexican economy in regard to demographics as a reason to increase production to serve that nation's domestic market. The rise of the Mexican middle class, increased levels of educational attainment, and lower fertility rates are all strengthening the consumer base. Both U.S. and international supply chain managers should take Mexico and its economy into consideration when making strategic decisions. Although China and India will still play a key role in world growth over the next decade, Mexican exports to the United States will continue to rise, and Mexico will grab a greater share of imports from other major U.S. trading partners.