VERACRUZ (Mexico): Every evening as he sells mango-flavoured snowcones by the docks here, Miguel Sanchez bitterly remembers the last time he applied for a factory job.
“The bosses said business was slow, that all the factories were moving away to China,” Sanchez recalled.
“I have lots of friends who got fired. We don’t understand what’s happening.”
His bosses, Mexico’s manufacturers, understand all too well: China is routing them in a global battle for trade markets – namely the United States, where Mexico sends 90% of its exports.
The awakening Asian giant’s cheap labour is causing headaches for economies the world over.
But the pain is especially sharp here as China muscles in on the niche that Mexico considered its own: as a supplier of low-cost, labour-intensive goods to the United States.
Chinese exports to the US jumped 21.7% last year and overtook Mexico’s exports to its northern neighbour. Mexico’s US exports grew an anaemic 2.6%, and the disturbing trend continued unabated in January.
The competition is across the board, from leather jackets to cell phones.
Ten years ago, only about a quarter of Mexico’s exports competed with Chinese products. Today, that number is closer to 65%, according to a Mexican export association.
“China is the most important challenge for the Mexican economy right now. It’s impacting companies in a way we've never seen before,” Hector Reyes Retana, general manager for Mexico’s state-owned export bank Bancomext, told a conference of Mexican exporters here last week.
“As a country, we’ve been lethargic for years now. It’s time to wake up. This problem isn’t going away,” Reyes Retana said to thunderous applause.
Veracruz is a teasing symbol of the trade bonanza Mexico hoped to reap after the North American Free Trade Agreement (Nafta) took effect in 1994.
The toll road leading to Mexico’s biggest seaport is still packed with trailers carrying brand-new Volkswagens. Cranes load mangoes, pineapples and coffee onto barges bound for Houston and other US ports.
In the town’s colonial plaza, Mexicans in cowboy hats talk business in English on cell phones as mariachi bands blare in the background. New US chain hotels have appeared all over town.
For years after Nafta took effect, proximity to the United States was enough of a competitive advantage to enable places like Veracruz to boom.
During the late 1990s, Mexico’s maquiladora factories – which import raw materials and ship the assembled product across the US border – grew at annual rates as high as 20%.
But the dizzying advances in worldwide communications have rendered close proximity less important in recent years.
Meanwhile, Mexico failed last year to pass reforms that could have lowered sky-high energy costs or eventually produced better-educated workers.
“Success made Mexico lazy,” said Hector Rangel Domene, president of a national business group.
“We stood still while the world raced ahead.”
That left the door open for cheaper competitors, and in walked China. Mexico’s average wage at the maquiladoras is about US$1.80 per hour, including benefits – more than twice the level of similar jobs in China, economists say.
Since their peak in 2000, maquiladoras have shed over 200,000 workers, or about 20% of their labour force, and little recovery in jobs is expected this year.
“Mexico is never going to beat China in a head-on battle on cost,” said Alfredo Thorne, head economist for Latin America at J.P. Morgan, adding that China’s strength is not just at the low end of the market as it also produces a broad range of high-tech goods.
Thorne said there are still sectors where proximity helps, such as bulky items like autos or components for defence equipment and medical supplies.
He also said the United States is unlikely to send technology in sensitive sectors like software or military parts to China, and Mexico could pick up the slack.
US security fears may also help trade flows at Mexican seaports, especially on the Pacific coast. Shipments for cities like Los Angeles or Seattle could be routed through Mexico, where they would undergo US-run security checks and then move north in sealed truck or rail containers.
The problem, however, is that none of these ideas seem big enough to substantially bolster Mexico’s economy, which is just now staging a lukewarm recovery from a three-year slump.
“There’s no solution that will produce an instant miracle,” said Rangel Domene.
“It’s the other way around – if we don’t do anything, it would be disaster for the economy.”
That would be bad news for men like Miguel Sanchez, who is unlikely to get that factory job any time soon.
“I’m out of ideas,” Sanchez said, before laughing: “I guess I could always move to China.” – Reuters
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