As the Trans-Pacific Partnership (TPP) looms on the horizon, MNCs should pay close attention to its impact on the Mexican manufacturing industry. Since 1994, Mexico has become a platform for the production and exportation of manufactured goods to the rest of the world, yet Mexico continues to depend on Intermediate Goods from abroad to finalize its products. Electrical components and intermediate goods account for 70 % of Mexican imports, and become inputs for 90 % of Mexico’s exports.
While Mexico has signed free trade agreements with 45 countries, it has not secured access to high-quality cheap manufacturing resources; the TPP may be the solution. Through the TPP, signatories would reduce or eliminate tariffs for all goods and services over a 15-year period, including electrical machinery and intermediate goods. In the case of Mexico, MNCs would gain access to cheaper and better electrical components from the Asia Pacific region, which are currently blocked by tariffs and rules of origin.
Where do Mexico’s inputs come from?
Presently, Mexico imports more than 50 % of its intermediate goods from China and the United States, with the former providing low-value added cheaper components, and the latter supplying higher-priced advanced components. Yet TPP members such as Malaysia, Singapore, Vietnam and Japan offer a balanced alternative: high-quality components at a lower price than the competition.
Is Mexico getting the best products at the best price?
Malaysia, Japan, Singapore and Vietnam have specialized in the production of intermediate goods, and in doing so they have increased productivity and manufacturing wages. In contrast with China, who has focused on lower-value products and kept production costs low to remain competitive.
Furthermore, by minimizing production costs, China has sacrificed product quality. Since 1981, the U.S. Consumer Safety Commission (USCSC) has received over 2,800 recall requests for Chinese manufactured goods, compared to six recall requests for Singaporean products.
When compared to the United States, Malaysia and Vietnam’s manufacturing costs are more competitive than those of the United States. Labor costs for manufactured goods are ten times lower in Malaysia and Vietnam than in the United States, and less than half of Mexico’s hourly wage. Furthermore, corporate tax rates in Asia Pacific (excluding China) are on average half the rate of those in the United States. In spite of the availability of lower cost and more productive markets, Mexico continues to import intermediate goods from the U.S. and China.
Tariffs and rules of origin continue to block Mexico’s access to these better and cheaper intermediate goods from Asia Pacific. Mexico, Malaysia and Vietnam continue to impose high tariffs on each other, yet should the TPP be ratified, each country’s tariffs would gradually disappear. Additionally, the TPP’s rules of origin would give Mexican manufacturers preferential access to the high value-added manufacturing industries in Malaysia and Singapore, while at the same time, low production costs in Vietnam and Malaysia would reduce total production costs.
The example of Japan
In 1999, Mexico signed a Free Trade Agreement with Japan, eliminating tariffs for most goods and services. Mexico was particularly interested in obtaining access to Japan’s advanced auto and electrical components. Since then, intermediate goods being imported to Mexico from Japan have increased by 300%. Mexican officials hope the TPP will have a similar effect, with manufacturing inputs increasing from Malaysia, Singapore and Vietnam.
What do cheaper and better inputs mean for Mexico?
The TPP could provide new business opportunities for Mexico-based MNCs. A particular example is the electrical machinery industry, which requires high-quality components to develop finalized goods. Through the TPP, MNCs will be able to import electrical components from Malaysia and Singapore, and assemble finished goods in Mexico before distributing to other markets.
At a macroeconomic scale, trade liberalization would continue to cement Mexico’s position in the global value chain as a centralized hub for production to other markets. For the Mexican manufacturing industry, the TPP would provide MNCs with cheaper and better intermediate goods, which could boost Mexico’s competitive advantage over the next decades.
This post was written by FSG Custom Engagements Intern, Gabriel Toledo Guerrero
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