Mexico is growing increasingly concerned about its ability to compete with China in North America.

Erwan Quintin

English

Research Papers in Economics

years’ experience in sectors where skills
and supply networks require time to
develop.
To preserve its edge in those areas,
it would serve Mexico well to address
chronic weaknesses that, unlike the elu-
sive Chinese threat, are within its con-
trol. These old problems include the
high cost of electricity and the fiscal
uncertainty that plagues the export sec-
tor, particularly maquiladoras. Because
competition is restricted at all levels of
the supply chain, electricity demand out-
paces capacity. This issue has become a
priority for the Fox administration, but no
progress has been made yet. As for fiscal
uncertainty, the recently approved bud-
get makes permanent some of the privi-
leges of maquiladoras, which is a step in
the right direction. Structural reforms of
this sort will help Mexico’s export sector
pick up where it left off in fall 2000.
—Erwan Quintin
Quintin is a senior economist in the
Research Department of the Federal Reserve
Bank of Dallas.
to bring fiscal deficits down to less than
1 percent of gross domestic product.
Finally, Mexico continues to offer un-
beatable access to North American mar-
kets and a workforce more qualified
than China’s.
There is little doubt that in sectors
where transportation costs, skill require-
ments and added value are low, China’s
expanding capacity will erode Mexico’s
market shares in North America. In tex-
tiles, for instance, Mexico has benefited
from prohibitive tariffs the United States
has imposed on non-NAFTA imports, but
those tariffs are to come down under 
the aegis of the World Trade Organiza-
tion (WTO). No country stands to bene-
fit more from this opening than China,
the WTO’s latest member. 
Like industrialized nations a gener-
ation ago, Mexico may have to concen-
trate on sectors in which its competitive
advantage is strongest. In the automotive
and household appliance industries, to
name two, transportation costs remain 
a significant deterrent. China does not
appear ready to overcome Mexico’s 40
Beyond the Border
exico is growing increasingly
concerned about its ability to
compete with China in North
America. The stakes, admittedly, could
hardly be higher. The United States
accounts for nearly 90 percent of Mexico’s
exports.
On several occasions, the Fox ad-
ministration has accused China of luring
investors away from Mexico with prac-
tices that violate international trade
agreements. Along the U.S.–Mexico bor-
der, anecdotes abound of trade officials
offering investors financial incentives to
move their operations to China. Mexican
manufacturers also complain that their
labor costs are rising faster than those of
their Chinese counterparts. These con-
cerns were compounded two years ago,
when the six-year expansion of Mexico’s
exports came to a screeching halt. Since
then, half a million manufacturing jobs
have been lost.
In reality, the current weakness of
Mexico’s industrial sector has little to do
with China. In fact, Chinese exports to
the United States have not fared much
better than Mexico’s in most sectors.
Similarly, although foreign investment
has weakened, this is largely due to 
the tapering off of U.S. investments of 
all types in fall 2000. The United States
accounts for three-quarters of all foreign
investment in Mexico.
The truth is that Mexico remains an
attractive place to do business. In spite
of the peso’s supposed overvaluation
and the relative rigidity of the country’s
labor markets, there is no evidence that
labor costs have risen faster than labor
productivity (Chart 1). By that measure,
Mexican labor is not more expensive
today than it was eight years ago. Addi-
tionally, in the past 10 years endemic fis-
cal and monetary uncertainty has been
replaced by a remarkable commitment
to policy discipline, in jarring contrast to
other Latin American nations. Inflation is
near historical lows, and recent Mexican
administrations have spared no effort 
M
FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   MARCH/APRIL 2003 10
The Giant in Mexico’s Rearview Mirror
Labor Productivity and Costs in Mexican Manufacturing
Index, January 1994 = 100 (in 2002 pesos)
Chart 1
60
70
80
90
100
110
120
130
140
150
Labor productivity
Labor cost
2002 2001 2000 1999 1998 1997 1996 1995 1994
NOTES: Labor productivity is the real value of production divided by hours worked. Labor cost is the total real compensation divided by hours
worked.
SOURCE: Instituto Nacional de Estadística Geografía e Informática.

Beyond the border: the giant in Mexico's rearview mirror

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Beyond the border: the giant in Mexico's rearview mirror

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