Maquiladoras: We're not dead yet!

Does Mexico's boom mean China's not the bogeyman?

Published May 22, 2006 5:00PM (EDT)

Mexico is booming again -- boosted by high oil prices, strong increases in manufacturing output, and robust economic growth in its No. 1 trading partner, the United States.

The Mexican surge has given pro-globalization advocates a rhetorical opening, which they haven't been shy to seize. A few years ago, as maquiladora factories closed by the scores and hundreds of thousands of workers were laid off, critics of globalization used Mexico as an example of race-to-the-bottom futility. Mexico may have temporarily benefited from NAFTA in the late '90s, they wrote, but then came China, undercutting even Mexico's cheap labor. As William Greider pointed out in his Nation article "A New Giant Sucking Sound" and Institute for International Economics analyst Daniel Rosen wrote in "How China Is Eating Mexico's Lunch," Mexico's "comparative advantage" -- its low-cost labor and proximity to the United States -- could not prevail over China's even lower-cost labor and hustling entrepreneurs.

The deeper message: Mexico's woes demonstrated how the whole system is out of whack. Multinational corporations would just keep seeking the cheaper supply chains, eviscerating both developed and developing nations as they went. And it was a compelling message. As any trip to Wal-Mart or Target would demonstrate, "Made in China" tags seemed to far outnumber "Made in Mexico."

But a few quarters of economic growth always wave a magic wand over conventional wisdom. Now, Mexico's on the rise, and this week, Newsweek's Joseph Contreras tells us that the time for Sinophobia is over:

"Manufacturing output is soaring again, and exports rose 26 percent in the first quarter this year, lifting Mexico's trade surplus to its highest level in nearly a decade. Alfredo Thorne, senior Latin America economist for JPMorgan Chase, says in a recent report that the diagnosis behind the China scare was 'hasty and superficial': Mexico's slump was due mainly to internal factors. Yet fear of China also helped spur recovery by triggering an aggressive response from Mexican companies. They shifted from cheap exports like $199 TVs into more-valuable export products like fiber-optic transmission equipment, and took steps to remedy the slowdown in productivity and run-up in labor costs that were the primary causes of the manufacturing recession. Those moves in turn helped lure back foreign investors, whose capital drives the maquiladoras. The lesson: no question China is a competitive threat, but it is not the bogeyman behind every piece of bad economic news."

Guess what, Mexico's location does give it comparative advantage -- as agile as China's manufacturers are, the Pacific Ocean is still a major obstacle to overnight delivery, and with transportation costs surging along with oil prices, over time that equation will only deliver better results for Mexico.

But before we cede this skirmish to the free traders, two caveats:

First, there is the simple fact of U.S. economic growth. Mexico plummeted when the U.S. went into recession, but now it is surging again, in tandem with the U.S. Contreras acknowledges this, but it can't be emphasized enough: As the U.S. goes, so goes Mexico, regardless of what China is up to. The same thing could be said with some safety about the global economy. If the U.S. goes sour, even mighty China will get indigestion.

The second problem is the question of who pays the price for Mexico's new competitiveness. Again, let's turn to Contreras:

"The resurgence of Mexican manufacturing companies is all the more remarkable, Thorne says, because they received little help from the top. President Vicente Fox took office in 2000 vowing to make Mexico more competitive by reforming its tax code and changing labor laws to make it easier for employers to dismiss unproductive workers. The opposition parties have stymied those reforms. But in the past two years, Mexican corporations have managed to slow the increase in real hourly wages from 12 percent in 2001 to a mere 0.3 percent last year. Foreign investors responded by raising the amounts they poured into the Mexican manufacturing sector from $6.2 billion a year in 2002-2003 to $8.5 billion a year in 2004-2005."

So, even though Fox refused to help the private sector by making it easier to fire workers, Mexican corporations, all by themselves, managed to ensure that workers gained almost no benefit whatsoever from a growing economy. Does that sound familiar?

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

MORE FROM Andrew Leonard

Related Topics ------------------------------------------

China Globalization How The World Works Latin America Mexico