The Comeback

• Author: Herman Kamil and Jeremy Zook
• Position: a Senior Economist and is a Research Assistant, both in the IMF's Western Hemisphere Department.

The U.S. market has long been critical to Mexico—not only to its manufacturing sector, but to its overall economic strength. When Mexico signed the North American Free Trade Agreement (NAFTA) nearly two decades ago, the greater access it provided to the U.S. market was a boon to the country’s manufacturing base, whose share of the country’s GDP grew by almost 4 percentage points in the five years following the signing of the treaty. In turn, Mexico’s share of the U.S. manufactured goods import market increased from slightly above 7 percent in 1994 to nearly 13 percent in 2001.Â

But Mexico’s fortunes changed dramatically after China joined the World Trade Organization (WTO) in 2001. WTO membership reduced many barriers to Chinese exports. China’s low-cost manufacturing base and ample production capacity enabled it to compete head-on and significantly undercut Mexico’s export share in the U.S. market, despite the trade preferences Mexico received under NAFTA. Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24 percent, while Mexico’s export growth decelerated sharply from about 20 percent a year to 3 percent on average each year over the same period. As a result, China’s share of U.S. manufacturing imports almost doubled by 2005, eroding the previous gains in market share by Mexico (see Chart 1).Â

China was able to crowd out Mexican exports in the U.S. market because Mexico lost its advantage in several labor-intensive manufacturing sectors in which it specialized—including apparel, office machinery, furniture, and photographic and optical equipment. Looking for cheaper labor, many of these manufacturers, including those in the famed maquiladora industries (which assemble mostly imported parts into finished products for export to the United States), relocated their operations from Mexico to China.Â

But almost as quickly as it stumbled, Mexico regained its footing and began to claw its way back. Over the past seven years, Mexican manufacturing exports rose from about 11 percent of the U.S. import market to an all-time high of 14.4 percent—at first elbowing out such competitors as Japan and Canada, but in recent years gaining market share at the expense of China. Between 2005 and 2010, both Mexico and China gained market share in the United States. Since 2010, however, Mexico’s gains in the U.S. import market coincided with a decline in China’s market participation.Â

The return of Mexico

Mexico’s rebound has been driven primarily by exports of electronics, telecommunications, and transportation equipment. Since 2005, Mexico’s share of U.S. imports of transportation and communications products increased steadily to 18 percent, accounting for 76 percent of total...