Mexico II: The China Syndrome
Mexican President Vicente Fox completed the first half of his six-year term on Monday amid increasing criticism that he has failed to live up to promises made during his election campaign: especially those related to economic growth and reform. In the last two years Mexico's economy has been struggling to pick up steam following a recession in 2001. In 2002 GDP expanded a modest 0.9 percent. Right now Mexican growth is lagging far behind the breathtaking spped of the U.S. recovery. The Mexican central bank forecasts gross domestic product growth of 1.5 percent for 2003, way behind the 8.2% rate recorded by the United States in the third-quarter GDP. This has to be worrying for Mexico since about 90 percent of its exports go to the United States. Obviously high on the candidates list for culprits comes China, what else. One thing which is interesting to note is that some countries in LA - Brazil, Argentina - seem to be seeing the China factor as a plus, whilst others - Mexico - are definitely having a hard time of it.
Despite Mexico's proximity to the United States, local exporters say they will not reap the benefits of a U.S.-China spat over import quotas for Chinese bras, knit fabrics and robes. The United States last month slapped import quotas on the Chinese products but Mexico, home to 13,000 apparel manufacturers, has lost past trade advantages and will struggle to fill the gap left by fewer Chinese textiles.
"The Americans are going to come looking because we are the nearest neighbors but in the end it will come down to price and our prices, these days, are high," said Saleh Penhos Erfeli, director of lingerie makers Mas Lenceria. Penhos, who used to export 24,000 robes a week to the United States but since 2000 has shipped nothing abroad, said an overvalued peso currency and higher labor costs have eaten into Mexico's apparel export advantages. "The problem with Mexico is that it is no longer a third-world nation but it is not yet a first world nation and we are not competing on price any more," said Penhos. Mexico's clothing industry lapped up business with the United States and Canada immediately after the North American Free Trade Agreement took effect in 1994. A huge peso devaluation in 1994-95 also gave apparel exporters a big price advantage.
But by 2000, Mexico's advantages had disappeared. Other nations -- from Africa to the Andes -- ushered in mirror trade pacts with the world's No. 1 economy, leveling the playing field. The final nail in the coffin came when China joined the World Trade Organization in 2001.
Mexican exporters said other textile countries with cheaper labor costs than Mexico and similar trade pacts with the United States would also seek bra and robe export orders left open by the Chinese quota cap that is not yet in place. "The market that is going to open up in the United States, the slice of the pie that will emerge, is going to be sought by Mexicans, Guatemalans, Hondurans, Koreans, Taiwanese and by Vietnamese," said Raul Garcia, director of the National Apparel Chamber. "It's not going to be an automatic opportunity for Mexico's clothing industry." Noel Slater, export manager for underwear maker Van Dior which employs 1,000 people, said he no longer makes bras for export because of price restraints. Slater focuses foreign sales on less labor-intensive lingerie such as panties and boxers.
"Because of lower costs the Chinese can be more labor-intensive and they end up with marvelous bras," Slater said. Mexican textile workers are paid about $50 to $75 per week, a third more than their Chinese counterparts and also more than workers in other emerging textile nations such as Honduras and Vietnam. Mexico's labor costs rose 50 percent between 1999 and 2002 as the peso held rock solid against the dollar and inflation outpaced U.S. price hikes. Garcia of the National Apparel Chamber likened China's government-aided and undervalued-yuan economy to handing out subsidies for industry. "We are never going to be able to compete with this type of economy," Garcia said.