Mexico and China in the US manufacturing market: An empirical analysis

Abstract

<p>This paper conducts a disaggregated comparative analysis of China’s and Mexico’s export dynamism in the US manufacturing market over the period 1994-2015 and, against this backdrop, it estimates a panel data econometric model showing the impact of key variables on Mexico’s export performance across manufacturing subsectors of different technology categories. Export performance is measured in terms of import market shares in the US and numerous econometric issues are addressed to produce a plausible model. In addition to capturing some heterogeneity among different manufacturing subsectors, this study shows that: (i) a depreciation of the real exchange rate calculated for each subsector worsens (rather than improves) Mexico’s export performance, which is likely due not only to the high import content of Mexican manufacturing exports, but also to the increasing weight of the private sector’s external liabilities; (ii) a fall in domestic unit labor costs has a positive impact on Mexico’s export performance, which highlights the importance of raising labor productivity faster than wages; and (iii) a reduction in US unit labor costs deteriorates Mexico’s export performance. In this context, the empirical evidence leads to clear-cut policy recommendations to raise export performance and thus economic growth.</p>