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Wednesday, February 26, 2003

Mexico: Watch Out For the China Factor

An extremely interesting post on Mexico from Morgan Stanleys Gregg Newman (the man who got it right on Argentina, when most of the other commentators - including Paul Krugman - were either navel-gazing to avoid imagining the inevitable or trying not to make things worse for Cavallo. See for example. Looking For Tipping Points 6 July, 2001, Tipping Has Begun December 3, 2001, Accelerating the Tipping Points December 17, 2001). (See yesterdays China post for some of the significance of the Mexico/China comparison). On China the short term winners will be the suppliers, and the losers will be the competitors. On Mexico, note the consumer strength, this you would expect from the changing demographics, and note the point that its all in the balance, depending on the upward momentum of the US economy.

Given China’s rapid emergence as the low-cost manufacturer of choice, it may seem risky to ignore recent developments. Just this past week, China gained further ground in Mexico’s principle export market, the US. Based on US trade data released in late February, China displaced Japan as the third-largest exporter to the US and is gaining ground on Mexico as well. Indeed, we expect there to be much ado later this year when China’s exports to the US exceed those of Mexico. We are expecting China to take over the number-two spot from Mexico in the third quarter just before Mexico’s new congress convenes.

The pace of China’s export growth is significant: exports to the US in 2002 reached $125 billion, nearly double the $62 billion of 1997. Mexico’s exports to the US, after growing at a clip of nearly 18% during the late 1990s, have slowed in the past three years. Exports to the US in 2002 ($135 billion) were largely unchanged from those in 2000. Meanwhile, total Mexican exports in 2002 ($161 billion) were actually off slightly from 2000 ($166 billion).

Our advice not to worry about China is not meant to belittle the serious challenge that it represents to Mexico in the coming years. Indeed, in discussions with a whole host of manufacturers, we have seen examples of production having been lost in Mexico to China. There is little doubt that Mexico’s export performance in 2002 was in part hampered by China’s gains. The long-term threat of China has arrived. But where we would advise caution is in underestimating the cyclical component which has also worked against Mexico. The bulk of Mexico’s export performance and economic weakness appears to be directly tied to the weakness in US activity. Indeed, during the past three years, Mexico’s export sector appears to be more synchronized than ever with the US business cycle. Steve Roach is fond of reminding us that globalization has led to a more US-centric world economy; nowhere is that clearer than in the direct links between the US and Mexican real economies. When the US recovery returns, we expect to see the kind of pickup in Mexican exports and manufacturing output that we witnessed in early 2002. We believe China’s threat to Mexico’s growth prospects is real, but we believe this secular trend is likely to be overwhelmed with the cyclical upturn in US activity. And with Mexican consumers in better shape coming out of a downturn than at any point during the past 30 years – the first downturn in which purchasing power was not devastated – the export-led recovery should find domestic legs
Source: Morgan Stanley Global Economic Forum

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