Global Value Chains and Upgrading:China and Mexico Compared

Gary GereffiDuke Universityggere@soc.duke.edu

“Globalización, Conocimiento y Desarrollo desde la perspectiva mexicana”

Universidad Nacional Autónoma de México (UNAM), México, DF, México

15-17 de marzo, 2006

5 Themes

• Global value chains & industrial upgrading

• Industrial diversification in Mexico & China

• Comparing industrial upgrading trajectories in Mexico and China

• Why is Mexico losing U.S. market share to China?

• Can Mexico be competitive with China?

Global Value Chains

• Industrialization takes place in a global context (“national” industries outmoded)

• GVCs focus on the organization of entire industries: raw materials-production-retail

• GVCs can be fragmented or consolidated

• Who drives the chain? (power of lead firms – producer-driven vs. buyer-driven)

• Upgrading by countries within GVCs is possible, but not guaranteed

Forms of industrial upgrading

• Product upgrading (new, better products)

• Process upgrading (more efficient, cheaper)

• Functional upgrading (new roles in GVCs)– assembly – “full package” (OEM) – original design manufacturing (ODM) – original brand manufacturing (OBM)

• Inter-sectoral upgrading (new industries) – Primary products to manufacturing to services– Labor-intensive to capital- & knowledge-intensive

Comparing Industrial Upgrading

Trajectories: Mexico vs. China

Mexico’s Industrialization since 1985

• Export oriented (mainly to U.S. market)

• Highly diversified

• Shifting emphasis from primary product exports & intermediate goods to manufactures

• Within manufacturing, medium-tech and high-tech exports are displacing low-tech exports

Table 1: Mexico’s Top 10 Exports to the U.S. Market, 1985-2004

Rank SITC Product Value (US$

millions)

% SITC Product Value (US$

millions)

% SITC Product Value (US$

millions)

%

1 33 Petroleum 7,981 48.0 77 Electrical machinery & appliances

11,507 16.7 78 Road vehicles 26,147 16.8

2 71 Power generating machinery

1,018 6.1 78 Road vehicles 10,683 15.5 33 Petroleum 19,697 12.6

3 77 Electrical machinery & appliances

956 5.7 76 Telecommunications & sound recording apparatus

7,691 11.1 77 Electrical machinery & appliances

19,130 12.3

4 76 Telecommunications & sound recording apparatus

665 4.0 33 Petroleum 6,633 9.6 76 Telecommunications & sound recording apparatus

17,553 11.3

5 05 Vegetables & fruit 628 3.8 71 Power generating machinery

3,406 4.9 75 Office machines & automatic data processing equipment

7,729 5.0

6 07 Coffee, Tea, Cocoa, Spices

457 2.7 84 Apparel 2,869 4.2 84 Apparel 6,945 4.5

7 78 Road Vehicles 426 2.6 89 Miscellaneous manufactured articles

2,713 3.9 71 Power generating machinery

6,310 4.0

8 03 Fish, crustaceans, molluscs

378 2.3 05 Vegetables & fruit 2,491 3.6 74 General industrial machinery & parts

5,866 3.8

9 68 Non-ferrous Metals 335 2.0 75 Office machines & automatic data processing equipment

2,146 3.1 87 Professional, scientific & controling instruments

5,083 3.3

10 89 Miscellaneous manufactured articles

332 2.0 74 General industrial machinery & parts

1,707 2.5 82 Furniture and parts thereof

4,317 2.8

Top 10 Products (2-digit level) 13,176 79.2 51,846 75.1 118,777 76.2

Total Exports to U.S. Market 16,631 100.0 69,043 100 155,846 100

Note: SITC refers to Standard International Trade Classification categories.

2004*

Source: World Trade Analyzer, based on United Nations trade data. *2004: USITC U.S. General Imports - http://dataweb.usitc.gov

19951985

Source: World Trade Analyzer.

Graph 1: Composition of Mexico’s Exports to the U.S. Market, 1985-2003

MexicoExports to USA Market

150.8146.3142.7149.0122.6104.695.983.269.054.444.438.920.120.417.814.613.910.116.6

0

10

20

30

40

50

60

70

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

% E

xpo

rt M

ark

et

Primary Products

Resource Based Manufactures

Low Tech Manufactures

Medium Tech Manufactures

High Tech Manufactures

TotalExportsUS $B

China’s Industrialization since 1995

• Sustained & diversified export dynamism

• Decline of low-tech manufactured exports

• Increase in medium-tech and high technology manufactured exports

• China’s science & education policy emphasizes high-tech parks & ICTs

• Business services weak outside of big firms

Source: World Trade Analyzer.

Graph 2: Composition of China’s Exports to the U.S. Market, 1985-2003

10664.347.635.626.118.46.84.73.12.4

0

10

20

30

40

50

60

70

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

% E

xpo

rt M

arke

t

Primary Products

Resource Based Manufactures

Low Tech Manufactures

Medium Tech Manufactures

High Tech Manufactures

TotalExportsUS $B

Mexico vs. China

• 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

Table 2. Top 50 US Imports in which Mexico and/or China hold 20% or more of the US market, 2004

Table 3. Mexico's and China's Competing Exports to the United States, 2000-2005

Main Competitors in the US Market for Automatic Data Processing Machines and Units (SITC 752)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2000 2001 2002 2003 2004

Year

Sh

are

of

US

Mar

ket

China

Malaysia

Mexico

Singapore

Taiwan

Main Competitors in the US Market for Telecommunications Equipments and Parts (SITC 764)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2000 2001 2002 2003 2004

Year

Sh

are

of

US

Mar

ket

China

South Korea

Mexico

Malaysia

Canada

Main Competitors in the US Markets for Furniture and Parts (SITC 821)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2000 2001 2002 2003 2004

Year

Sh

are

of

US

Mar

ket

China

Canada

Mexico

Italy

Taiwan

Main Competitors in the US Market for Articles of Apparel and Clothing (SITC 84)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004

Year

Sh

are

of

US

Mar

ket

China

Mexico

Hong Kong

Honduras

Viet Nam

Why is China gaining U.S. market share over Mexico?

• 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

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.

How can Mexico compete with China?

• Take advantage of proximity to U.S. market (e.g., quicker time to market; large & heavy goods; made-to-order customized products)

• Eliminate comparative disadvantages (bureaucracy; low productivity; poor utilities & transport infrastructure; education)

• Move into high-value activities within GVCs (e.g., R&D, design, engineering, business services)

• Use domestic market as an asset

Conclusions

• There is a globalization paradox– The dramatic expansion of production capabilities

reflected in global outsourcing creates heightened anxieties in both developed and developing countries regarding sustainable development

• The global economy is concentrated at the top and fragmented at the bottom– Thus, the real opportunities to move up in value

chains are concentrated in a small number of developing economies

• Development strategies need to be more balanced and decentralized – “Free trade” is not a development strategy– Industrial policies are being implemented at subnational

level– Regional markets supplement national ones, and can

reduce the pressures from global competition

• Labor and environmental standards matter– As much of the world’s apparel production becomes

concentrated in China, pressures to follow “ethical sourcing” procedures will intensify

– China will need to upgrade its labor standards and working conditions, or it will be embroiled in continuous battles with NGOs and social activists

Thank you

for your attention!