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Protectionism, NAFTA and U.S. – Mexico GVCs

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Professor Gary Gereffi's presentation at the South-Southeast Commission and FIDESUR covers:

- Trump’s Protectionism: the Current Context
- The Evolution of GVCs: 3 Eras
- GVC Competition for US Market: China vs. Mexico
- NAFTA’s Impact on the Mexican and U.S. Economies

Published in: Economy & Finance
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Protectionism, NAFTA and U.S. – Mexico GVCs

  1. 1. Protectionism, NAFTA and U.S. – Mexico GVCs 1 Gary Gereffi Director, Duke CGGC Duke University South-Southeast Commission and FIDESUR Merida, Mexico April 24, 2017
  2. 2. AGENDA 1. Trump’s Protectionism: the Current Context 2. The Evolution of GVCs: 3 Eras 3. GVC Competition for US Market: China vs. Mexico 4. NAFTA’s Impact on the Mexican and U.S. Economies
  3. 3. © 2013 Duke CGGC TRUMP’S PROTECTIONISM & U.S. ECONOMY Trump’s protectionism: “buy American, hire American”  NAFTA free trade deal – “a complete and total disaster”  World Trade Organization – “another one of our disasters”  Trump’s executive order (signed April 18, 2017) – a “historic step” to help protect American manufacturers and American workers* Research and policy-relevant questions:  Which country poses the biggest threat to the U.S. economy: Mexico or China?  If NAFTA were dismantled, would U.S. manufacturers & workers be better off?  Will protectionism improve U.S. innovation and income growth? 3 *Source: http://www.cnn.com/2017/04/17/politics/trump-wisconsin-buy-american/index.html
  4. 4. © 2013 Duke CGGC FDI Promotion in the South-Southeast Region of Mexico The South-Southeast Region of Mexico is already targeting many GVCs relevant to U.S.-Mexico trade –Textiles-apparel, automotive, electronics, medical devices, offshore services, high-value agriculture FDI challenges –Which sectors are most appropriate? –What stage of the value chain? –What nationality of FDI? –What end markets?
  5. 5. THE EVOLUTION OF GVCs: 3 ERAS 5
  6. 6. © 2013 Duke CGGC GVCs: 1st ERA 1970-1990 – Economic globalization 1.0 (global outsourcing)  Cross-border production sharing by mfrs. (US-Mexico “maquila” trade)  Rise of buyer-driven chains (GPNs led by retailers, brands & supermarkets) • Sears, Kmart, JC Penney (early 1970s); Liz Claiborne, Nike, Reebok (late 1970s); Walmart, Target (1980s); Tesco, Carrefour (mid-1980s)  Emergence of Washington Consensus (neoliberal reform package promoted by IMF, World Bank & US Treasury: stabilization, 6
  7. 7. © 2013 Duke CGGC GVCs: 2nd ERA 1990-2008 – Economic globalization 2.0 (BRICs and beyond)  Three events circa 1990 resulted in the “great doubling” of world labor market from 1.5 billion to 3 billion workers (Richard Freeman) • Fall of Berlin Wall (1989) – dismantling of USSR and end of Cold War • Opening of China (early 1990s) – Deng Xiaoping • Economic liberalization in India (1991)  Regional economic integration and trade agreements: EU (1993), NAFTA (1994), CAFTA (2000)  Rise of China -- pre-eminent global exporter of manufactures (2000s) 7
  8. 8. © 2013 Duke CGGC GVCs: 3rd ERA Global economic recession (2008-09) & rise of economic nationalism (2015-present)  Dramatic slowdown in imports by US and EU, and closure of many export factories in developing economies around the world (esp. East Asia and Latin America).  End of Washington Consensus and EOI development strategy it promoted.  Large emerging economies (BRICs + Mexico, Southeast Asia, etc.) turn inward  Weakening of regional economic blocs (EU, NAFTA) and mega trade pacts (Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership)  Legitimacy crisis for UN system of trade and development 8
  9. 9. GVC BATTLE FOR THE U.S. MARKET: CHINA VS. MEXICO 9
  10. 10.  Head-to-head competition in U.S. market  China is world’s leading exporter of many manufactures, esp. consumer goods  China and Mexico are typically among the top three exporters to the U.S. market in many product categories  China is moving ahead of Mexico with dominant market shares in the United States, especially in 2000-2005 period Mexico vs. China 10
  11. 11. Mexico's and China's Competing Exports to US Market, 2000- 2014 11 SITC Category Product Value (billions) Share of US market Value (billions) Share of US market Value (billions) Share of US market Mexico 6.4 11.5 5.6 9.6 13.5 16.6 -1.9 7.0 China 6.3 11.3 28.6 49.3 53.3 65.7 38.0 16.4 US Total 55.9 57.9 81.1 Mexico 9.1 20.6 10.8 13.6 12.1 10.2 -7.0 -3.4 China 4.6 10.3 29.6 37.3 68.7 58.0 26.9 20.8 US Total 44.3 79.5 118.4 Mexico 3.1 18.3 5.0 21.8 7.2 21.4 3.5 -0.4 China 2.0 11.9 6.1 26.6 11.2 33.2 14.7 6.6 US Total 17.1 23.1 33.7 Mexico 4.6 16.3 10.2 22.2 19.1 30.4 5.8 8.2 China 0.4 1.5 3.6 7.8 8.3 13.2 6.2 5.4 US Total 28.4 46.2 62.9 Mexico 3.2 16.9 4.6 13.6 7.6 18.3 -3.3 4.7 China 4.5 23.6 16.2 47.7 19.2 46.3 24.1 -1.4 US Total 18.9 33.9 41.5 Mexico 8.7 13.6 4.7 5.8 4.0 4.4 -7.8 -1.4 China 8.5 13.2 27.1 33.4 34.2 37.9 20.2 4.5 US Total 64.3 81.2 90.2 Source: US Department of Commerce (http://dataweb.usitc.gov), Downloaded Aug 26, 2015 84 Apparel and Cothing 778 Electrical Machinery 784 Auto Parts 2007 821 Furniture 752 Automatic Data Processing Machines 764 Telecom Equipment 2014 Change in Market Share 2007-2014 Change in Market Share 2000-2007 2000
  12. 12. 12 Source: USITC http://dataweb.usitc.gov downloaded Aug 26, 2015
  13. 13. 13 Source: USITC http://dataweb.usitc.gov downloaded Aug 26, 2015
  14. 14. 14 Source: USITC http://dataweb.usitc.gov downloaded Aug 26, 2015
  15. 15. 15 Source: USITC http://dataweb.usitc.gov downloaded Aug 26, 2015
  16. 16.  China is a lower-cost producer overall (labor costs lower, but not transport & tariffs)  China has huge scale economies  China has a coherent and multidimensional upgrading strategy – diversify and add high value activities  China is using direct foreign investment to promote “fast learning” in new industries  China uses access to its domestic market to attract TNCs and promote knowledge spillovers Why is China gaining U.S. market share over Mexico? 16
  17. 17. China’s Supply Chain Cities in Apparel Source: David Barboza, “In roaring China, sweaters are west of socks city,” New York Times, Dec. 24, 2004. 17
  18. 18. 18  What kinds of work are Chinese, Indian, and American engineers actually doing? • Answer: Not just product adaptation, but cutting-edge research & commercialization  China: More than 1,200 MNC R&D Centers • GE’s China Technology Center: Advanced research in energy storage, environmental management • Microsoft Research Asia: Cutting-edge graphics & multimedia research
  19. 19. NAFTA’S IMPACT ON THE MEXICAN AND U.S. ECONOMIES 19
  20. 20. NAFTA: More than Free Trade NAFTA: the world’s largest free trade agreement  Overall trade between 3 NAFTA partners: >$1.1 trillion in 2016 • Canada & Mexico account for 34% of US exports in 2016 (Canada, #1; Mexico, #2) • Canada & Mexico supplied 26% of US imports in 2016 (Canada, #2; Mexico, #3) NAFTA: cross-border FDI  integrated & complementary supply chains  Most trade between the US and its NAFTA partners in key US manufacturing industries (autos, electronics, appliances, machinery) involves “production sharing” in vertical supply chain relationships: US tends to keep higher value-added components  US imports from NAFTA partners have a high percentage of US-made inputs • 40% of US imports from Mexico are of US origin
  21. 21. Trump’s Proposals vis-à-vis NAFTA and Mexico Recent trade-related proposals from President Trump • Withdraw from NAFTA or renegotiate various provisions • Impose a 20% border tax on all imports from Mexico • Enact a 35% tariff on light vehicles imported from Mexico Automotive and autoparts sector – largest NAFTA industry • NAFTA countries produced 17.8 million light vehicles in 2016 • 16% of US exports to Canada and Mexico is auto-related • Canada is #1 export market for US autoparts ($22b); Mexico is #2 ($20b) • Within NAFTA, 80-90% of automotive trade is intra-industry Estimated impact: U.S. 35% tariff on light vehicles imported from Mexico* • In 2015, Mexican vehicle exports contain an average of 40.3% US content • US sales decline: 450,000 units; US job loss – 31,000 workers *Source: Center for Automotive Research, “NAFTA Briefing: Trade benefits to the automotive industry and potential consequences of withdrawal from the agreement,” January 2017.
  22. 22. Without NAFTA, China Is the Alternative “China hasn’t developed a world-class automotive sector, and the fact that U.S., Canada and Mexico have worked so closely together is partly a reason for that” (Gordon Hansen, UCSD)* US imports from China vs. Mexico – major contrast • Imports from China: final goods with low US content (mainly buyer-driven chains) • Imports from Mexico: intermediate & final goods with high US content (producer-driven chains) US goods imports (and trade deficit) in 2016: • China: imports – $463 billion; trade deficit – -$347 billion • Mexico: imports – $294 billion; trade deficit – -$63 billion • Canada: imports – $278 billion; trade deficit – -$11 billion * http://www.wbur.org/hereandnow/2016/04/27/economist-gordon-hanson-nafta
  23. 23. Beyond Protectionism In a global value chain world, all imports are not the same • Their impact depends on type of GVC and relationship between trade partners In the current global economy, value chains are becoming increasingly regionalized and integrated supply chains are a regional asset • NAFTA, the European Union and East Asia – different regional models A major driver of the protectionist sentiment that propelled Trump’s election is that America’s blue collar workers feel left behind by globalization • Technological change (automation, new skills) is more important than trade • Trade agreements and immigration will be flash points for policy change US hegemony has been replaced by a multipolar world
  24. 24. Gary Gereffi ggere@soc.duke.edu Center on Globalization, Governance & Competitiveness (CGGC) Grey Building, Suite 0010, Lower Level | 2020 W. Main St. | Durham, NC 27705

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