Mexico took a definitive step in putting itself on a path towards becoming a significant economic player on the North American and global stage by signing the NAFTA in 1994.
Within five years of signing the international trade agreement, the country’s GDP grew by nearly 4%, and its share of the US manufactured goods import market increased from 7% in 1994 to 13% in 2001. Mexican economic competitiveness, however, suffered a setback when China joined the World Trade Organization (WTO) in 2001, reducing many barriers to Chinese exports. In just four years, Chinese manufacturing exports to the US expanded at an average annual rate of 24%, while Mexico’s export growth dropped from 20% per year to 3% on average. The new reality was that China’s share of US manufacturing imports nearly doubled by 2005, and the gains Mexico had achieved since 1994 were severely eroded.
Today a new day dawning on the Mexican economy. Recent reforms have capitalized on a shift in the global economic situation. While China isn’t abdicating its position entirely, Mexican economic competitiveness has nonetheless made a noteworthy comeback, particularly in manufacturing. Since 2007, manufacturing exports from Mexico have risen from 11% of the US import market to an all-time high of 14.4%. The primary driver behind this rebound has been the export markets of electronics, telecommunications, and transportation equipment. In fact, Mexico became the world’s leading exporter of flat-screen TVs in 2009. Between 2005 and 2012, Mexico’s market share in US automotive sector imports increased almost 9%.
The reasons for increased Mexican economic competitiveness are myriad. While manufacturing wages in China rose nearly 20% annually in dollar terms between 2003 and 2011, average manufacturing wages in Mexico remained nearly constant in dollar terms. Furthermore, Mexican workers now typically produce more per hour than their Chinese counterparts, leading analysts at the Boston Consulting Group to predict Mexican factory wages will be almost 30% lower than China’s by 2015, when productivity differences are factored in.
Also a factor in Mexico’s economic comeback is the country’s proximity to the largest consumer economy in the world. As fuel prices quadrupled over the past decade, many companies found the shipping and transportation costs of transoceanic production to be prohibitive. This has particularly benefited Mexico when it comes to time-sensitive, and heavy and bulky products. Speed-to-market has grown in importance, since many US companies buy, rather than make, their materials, and have adopted just-in-time manufacturing procedures to reduce the cost of inventory. This need for precise and timely deliveries means Mexico is the location of choice for many companies.
Many other factors come to bear in the recent rise in Mexican economic competitiveness. The convenience of operating in the same few times zones is a significant draw to US corporate executives. Mexico’s well-known commitment to protecting proprietary technologies and intellectual property has also helped it attract significant foreign direct investment (FDI). The country’s trade agreements with over 40 countries ensure that manufacturing in Mexico makes strategic sense for international players, and has enhanced Mexican economic competitiveness globally. These factors, coupled with recent structural reforms, will continue to make Mexico a truly competitive market.