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  • The China RoadWhy China Is Beating Mexico in the Competition for U.S. Markets
  • Ian Robinson (bio)

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 [End Page 51] 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 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...

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