In 1998, China and Mexico had the same share of U.S. apparel imports: 13 percent each. By 2008, Mexico’s share had fallen to 6 percent, while China’s had increased to 34 percent. This was a stunning contrast with the previous decade (1989-1998) when Mexico’s share of U.S. imports quadrupled from 3 percent, while China’s share rose by just one percentage point.1 Why did Mexico do so well against Chinese competition in the first decade and so badly in the second?

Critics of neoliberal globalization, myself included, have argued that suppressing worker rights is a powerful—though ultimately self-destructive—source of international competitive advantage for both firms and nations.2 We have used the term “race to the bottom” as a shorthand for this argument. There is no question, I think, that the vast difference in compensation rates between the countries of the global North and countries such as Mexico and China in the global South—combined with diminishing labor productivity differences— has played an important role in gutting apparel and electronics industries in the global North.

But is Mexico now losing those same industries to China because its workers are paid “too much”—that is, considerably more than China’s, though only about one tenth of U.S. wages? If so, then the race to the bottom (RTB) argument applies to competition among countries in the global South as well as to North-South competition. Many firms, government officials, and media pundits in Mexico make this argument. So does the World Bank when it asserts that Mexico’s labor law must be reformed to eliminate severance pay and other provisions that make Mexican labor too expensive and “inflexible.”3 Some on the left also believe in a China-driven South-South RTB.4 

This version of the RTB argument doesn’t stand up to the evidence. One problem has already been noted: Mexico-based firms were beating China-based firms in the 1989-1998 period, despite the fact that the China-Mexico wage difference was greater in that decade than in the subsequent one. So much lower wages were not enough to enable firms based in China to compete successfully in the first decade, and the reduction of that wage gap in the second did not stop those firms from competing much more successfully. This was true even in the apparel sector, where labor costs are a much higher share of production costs than in industries such as electronics or auto assembly.

Another kind of analysis leads to the same conclusion. In 1997, according to economist Robert Pollin and colleagues, the cost of producing a typical men’s shirt in Mexico was about $4.45 in U.S. dollars. Of this, wages and salaries accounted for about fifty cents.5 At this time, China’s hourly wage was about one fifth of Mexico’s, which means that the labor cost

A Mexican-made shirt went from 10 percent more expensive than its Chinese counterpart in 2000 to 38 percent cheaper in 2010.

of the same shirt made in China was just ten cents.6 So the cost of making the same shirt in China, all other things being equal, was $4.05.

Other things were not equal, however. Between 1995 and 2000, the peso lost 48 percent of its value against the U.S. dollar, while the value of China’s currency (the yuan) remained stable; between 2000 and 2010, the peso lost another 33 percent of its value against the U.S. dollar, while the yuan increased by about 18 percent. This means that a Mexican-made shirt that cost $4.45 in 2000, cost only $2.98 in 2010, if the costs of inputs had remained constant in peso terms, a savings of $1.47 (i.e., almost four times the savings from China’s lower wages). If the costs of Chinese apparel inputs had also remained constant in yuan terms, the U.S. dollar cost of the Chinese shirt would have increased to $4.78 because of the exchange rate change. Taking labor cost differences and exchange rate movements together, the Mexican shirt went from 10 percent more expensive than its Chinese counterpart in 2000 to 38 percent cheaper in 2010.

In reality, labor and other production costs, measured in their domestic currencies, increased in both countries over these years. By one estimate, the rate of wage increases in the two countries in the last three years of this period (2005-2008) was about the same, resulting in a five-percentage-point reduction in the cost advantage of manufacturing production in both China and Mexico, relative to the U.S.A. But in Mexico’s case, this change was more than offset by the twelve-percentage-point improvement in Mexico’s cost advantage caused by the fall of the peso against the dollar; by contrast, the rise of the yuan against the dollar reduced China’s cost advantage by another nine percentage points.7

According to an AlixPartners study,8 by 2008 these shifts made Mexico a lower-cost producer than China for all six of the types of manufactured goods that they considered. Nevertheless, China greatly improved its export competitiveness—measured by its share of U.S. imports—against Mexico between 1998 and 2008, both in the apparel sector and in the more capital-intensive electronics sector. (Chinese export competitiveness also improved dramatically in Mexico in these years, despite the fact that the peso’s fall against the yuan was even greater than its fall against the U.S. dollar. By 2009, for every dollar of Mexican exports to China, China exported $15 of goods to Mexico!)9

These Chinese export gains had to be due to factors other than lower Chinese wages and in spite of adverse exchange rate movements and rising transportation costs, relative to Mexico. What were those factors? China benefited in these years from less restricted access to the U.S. market, due to its admission to the World Trade Organization in November 2001 and (for apparel) the termination of the Multi-Fiber Arrangement’s system of country quotas in January 2005. But these changes did not give China anything that Mexico did not already have, and Mexico still has advantages under NAFTA that China lacks.

There must be something else. A 2004 World Bank survey of big U.S. and European apparel buyers operating in multiple Asian economies found that most believed that Chinese factories have “the best skilled workers and productivity, quality, speed, production capacity, product development, technology, storage facilities, and transportation.”10 Analysts responding to the 20-30 percent wage increases that have occurred this year in China’s highly industrialized Guangdong province echo this point. Financial Times reporters Tom Mitchell and Kathrin Hille

By 2009, for every dollar of Mexican exports to China, China exported $15 of goods to Mexico.

state that the manufacturers they interviewed “argued that better wages would reap other rewards, including higher worker retention rates and increased efficiency. Combined with first-rate infrastructure and dense ‘clusters’ of components suppliers, which tended to group round big assemblers such as Foxconn, China would remain a formidable manufacturing power.”11 Pansy Yau, deputy chief economist at the Hong Kong Trade Development Council, agreed: “Well established industrial clusters, a highly efficient and skilled labour force, and infrastructure systems are able to offset the disadvantage of rising [labour] costs.”12

China has pursued a low road on worker rights and wages, but a high road on public investment. 

High levels of workforce and infrastructure development are characteristics normally associated with the high levels of public investment found in rich countries pursuing “high road” competitive strategies. Thus, China has pursued a “mixed” competitive strategy: a low road on worker rights and wages, but a high road on the range of factors noted by the World Bank. Mexico’s government has likewise repressed labor and kept wages low, but without making infrastructure investments on the same scale. The high-road components of China’s mixed strategy gave it a decisive edge over Mexico in the competition for U.S. apparel and electronics markets.

It might be argued that another key factor was the undervalued yuan. Most analysts agree that the Chinese currency is significantly undervalued against the dollar. Estimates of the scale of that undervaluation range from about 10 percent to 50 percent, depending on methods used and assumptions made.13 If China revalued the yuan upward by 20 percent, that might be enough to offset fully the advantages deriving from the high-road component of its competitive strategy. It is difficult to estimate such effects with precision, but such a move would give Mexico even more room to raise wages, provided that it also adopts China’s policies on investing in worker skills, infrastructure, and the like.

The analysis, so far, has several important implications. First, Mexican labor repression was not sufficient to win the competition against China for U.S. markets; nor was it necessary, even in the apparel sector. If the Mexican government had adopted policies that matched China’s improvements in the areas noted by the World Bank survey and the Financial Times, wages in the sector could have increased significantly without undermining Mexico’s competitiveness, because of the competitive advantage deriving from its devaluations. Second, what is true for the highly labor-intensive apparel industry holds even more forcefully for more capital-intensive industries, such as electronics and auto, where worker compensation is a smaller share of production costs.

Mexico’s government has repressed labor and kept wages low, but without making infrastructure investments on the same scale [as China]. 

So Chinese competition is hurting Mexican exports to the United States and elsewhere. But the main source of that competitiveness is not low Chinese wages, and Mexico cannot recover its competitiveness by pushing domestic wages lower or making them more “flexible.”

It follows that Mexican governments and manufacturing sector employers are not forced by RTB dynamics emanating from China to continue suppressing worker rights and wage increases. If they persist in such policies, rather than investing in the sorts of human and infrastructure development that have made Chinese competition so formidable, they must bear the responsibility for this choice.

None of this prevents employers or governments from invoking China as a threat to induce workers and their unions to settle for less. Such threats can be effective in securing concessions when the probability of the threatened outcome is difficult for workers to gauge. If they are effective even some of the time, they could drive down wages and/or induce workers to give up some of their rights. But the principal cause of such a dynamic is the employer that makes these threats. China serves as the bogeyman, not the real cause of the problem.

The South-South RTB argument provides political cover for private and public actors who repress worker rights in such countries. We must put the blame for labor repression in Mexico and elsewhere where it belongs: on those who support these policies, and the larger neoliberal paradigm, when they could do otherwise.

The neoliberal model has failed in Mexico. It has not generated rapid growth and large-scale, trickle-down improvements in income as its supporters predicted; it has not even generated sustainable competitiveness and profitability.14 China and the other success stories of East Asia have advanced by pursuing a very different model, characterized by a much more extensive state role in economic development.15 Not all variants of this model are democratic or consistent with worker rights, but the success of South Korea demonstrates that such a “developmental state” is compatible with a powerful, independent labor movement that substantially increases workers’ share of national income, while also contributing to a higher-quality democracy than is yet found in Mexico.16

But is the Mexican state capable of developing and implementing that kind of industrial policy? And if it is, does the Mexican state really have the autonomy—vis-à-vis global markets, the United States, and the International Monetary Fund—to pursue such a course? If we assume, for the sake of argument, that the Mexican state could implement such policies, investing in worker skills and infrastructure takes time. China needed a decade to get to the point where it could compete successfully with Mexico in the U.S. apparel sector. It took a second decade to begin driving Mexico out of the U.S. electronics market.17 To get Chinese autos to world competitive levels has taken even longer, though it appears that significant exports of this kind are not far off.18

Does Mexico have the time it needs to realize the kinds of human and infrastructure investment required to save its electronics and auto sectors, and (perhaps) regain some of its rapidly shrinking apparel sector? Maybe, if China allows the yuan to appreciate to more appropriate levels. This seems quite possible over the next year. Chinese wages are now rising faster than Mexico’s, which will also help, though (as argued earlier) the importance of wage differences and trends to overall competitiveness should not be exaggerated.

But Mexico’s policymakers must resolve to take full advantage of the window of opportunity such shifts would create to begin making the investments necessary for either a mixed or a high-road competitive strategy. If they fail to do this—and the current trade regime remains in place—it’s only a matter of time until most of Mexico’s manufacturing exports are crowded out of the U.S. market by China and/or other countries following its strategic lead.19

Which path Mexico pursues will largely depend on choices made in Mexico and the United States, rather than in China. Mexico depends upon the U.S.A. for about 85 percent of its exports and imports, not to mention jobs for some 10 percent of its people who send back remittances roughly equal in value to the sum of all Mexican manufacturing exports.

The Obama administration could make a big difference in enabling Mexico to adopt a successful high-road strategy, although—at present—it shows no signs of abandoning the neoliberal model of continental economic integration. The administration’s support—for stronger worker rights and higher worker compensation in all three NAFTA countries, and backing for Mexican infrastructure development on the model of the European Union’s social funds—would enable the Mexican government to move in this direction. If the United States government shows no such commitment, we must hope that ongoing struggles to improve the quality of Mexican democracy yield a government that is willing to put the matter to the test. Many Mexican activists are making great sacrifices to this end, but progress is slow and uneven. Unfortunately, on the international economic front, time is not on their side.

 

Notes:

1. Trade data are from the U.S. Department of Commerce’s Trade Stats Express, available at http://www.export.gov/tradedata/index.asp.
2. Ian Robinson, North American Trade as if Democracy Mattered: What’s Wrong with NAFTA and What Are the Alternatives? (Washington, D.C. and Ottawa, Ontario: International Labor Rights Fund and Canadian Centre for Policy Alternatives, 1993).
3. Regulatory Transformation in Mexico: 1988-2000 (Washington, D.C.: World Bank Group, 2008).
4. Robert J.S. Ross and Anita Chan, “From North-South to South-South: The True Face of Global Competition,” Foreign Affairs (September/October 2002): 8-13.
5. Robert Pollin, Justine Burns, and James Heintz, “Global Apparel Production and Sweatshop Labor: Can Raising Retail Prices Finance Living Wages?,” Cambridge Journal of Economics 28, no. 2 (2004): 153-171.
6. Erin Lett and Judith Banister, “China’s Manufacturing Employment and Compensation Costs: 2002-2006,” Monthly Labor Review (April 2009): 30-38.
7. AlixPartners, 2009 Manufacturing Outsourcing Cost Index—Overview and Highlights (May 2009), 13-14.
8. See ibid.
9. Thanks to Enrique Dussel Peters, in personal correspondence, for these Mexican statistics. Dussel Peters’s analysis of Chinese export competitiveness, and its implications for Mexico, is found in China and Latin America: Economic Relations in the Twenty-First Century, eds. Rhys Jenkins and Enrique Dussel Peters (Bonn: German Development Institute & Centro de Estudios China-México, UNAM, 2009).
10. Amy Kazmin, “Garment Buyers Prefer Cambodia,” Financial Times, December 4, 2004, 5.
11. Tom Mitchell and Kathrin Hille, “Salary Deals Raise Questions over China’s Workforce,” Financial Times, June 4, 2010.
12. See ibid.
13. Vikas Bajaj, “Coming Visit May Signal Easing by China on Currency,” New York Times, April 1, 2010.
14. Eduardo Zepeda, Timothy Wise, and Kevin Gallagher, Rethinking Trade Policy for Development: Lessons from Mexico Under NAFTA (New York: Carnegie Endowment for International Peace, 2009), available at http://www.carnegieendowment.org/ publications/?fa=view&id=24271.
15. Ha-Joon Chang, Globalization, Economic Development and the Role of the State (New York: Zed Books, 2002).
16. Robert Pollin, Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (New York: Verso, 2003), 161.
17. Enrique Dussel Peters, “La Manufactura Mexicana: Opciones de recuperación?” (2008), available at http://www. dusselpeters.com/dussel-tema-nuevos. html.
18. Keith Bradsher, “China’s Factories Aim to Fill the World’s Garages,” New York Times, November 2, 2003.
19. Huberto Juárez Nuñez, in an unpublished essay co-authored with Amellali Salgado Cortés entitled “The Aerospace Industry in Mexico: Outsourcing and Regional Development in a Global Context” (Puebla, Mexico: CEDES, Autonomous University of Puebla, 2010), notes that the Mexican government has invested more in human and communications infrastructure in the auto sector, and is now doing the same in the aerospace industry. This should assist Mexican competitiveness in these sectors. However, in contrast to China, Mexico has not insisted on technology transfer, joint ownership, or sourcing from Mexican parts companies with a view to building “backwards linkages.” These omissions—largely ruled out by NAFTA’s Chapter 11—limit Mexico’s capacity to transform international competitiveness into national economic development.

New Labor Forum 19(3): 49-50, Fall 2010
Copyright © Joseph S. Murphy Institute, CUNY
ISSN: 1095-7960/10 print, DOI: 10.4179/NLF.193.0000008