The rise of neoprotectionism on the other side of Mexico’s northern border, has found a basis on arguments centered on, and references to, the United States’ voluminous trade deficit with its North American Free Trade Agreement (NAFTA) partner to the south. The reality of the deficit notwithstanding, however, it is important to note that this deficit contemplates only the gross flow of goods, without taking into account the added value acquired in each territory. This myopic perspective on trade ignores the commercial exchanges that involve an amalgam of goods from a broad range of origins, fostered by an increasing fragmentation of production processes on a global scale. The point of view proposes a mistaken analysis of the actual undercurrent of international trade relations. This article sheds light on the issue, examining Mexico-Unites States trade from the double perspective of both value-added and global value chains (GVC).
A Myopic View of the Gross Flow of Goods: An apparent reality
From its inception and to this day, the study of trade has centered on a perspective which ignores the international fragmentation of production processes. The greater part of research has taken the analysis of countries as a point of departure, assuming that commercial exchanges respond to net inflow and outflow of domestically generated value. Thus, the measurement of trade has centered on the gross flow of goods, under the premise that this flow represents a given value generated within each country, with a final destination in the receiving country. However, this perspective constitutes an insufficient interpretative framework for a true understanding of the changes that have affected the value creation process of exported goods and services, over the course of recent decades. These changes have surfaced primarily due to the fragmentation of international production processes, shifting interest toward global value chains (GVC) which, in accordance with the laws that govern transnational capital, leave behind the very notion of “country”.
In accordance with the laws that govern transnational capital, global value chains leave behind the very notion of “country”
Mexico’s two main export industries –the automotive and the computers and electronics sectors– are fundamentally carriers of foreign value-added
The GVC and Value-Added Trade: The hidden face of commerce
The concept of GVC is of increasing relevance in the research on the configuration of trade in today’s world; it refers to the stages involved in the generation of value throughout the production process, each of which may be located in a different country, culminating in the manufacture of a finished product. GVCs represent a phenomenon that transcends the borders of regional blocks which, until recently, had been characterized as centripetal axes of economic affairs among member countries. The emergence and consolidation of GVCs have given way to important implications for participating countries. First and foremost, the countries located outside of the area of activity, run the risk of experimenting a decrease in their exterior sectors and, as a result, in their economic growth. Secondly, the commonly-held notion that, for a country to become an important exporter, it must also become an important importer of intermediate supplies plays down the objective of a surplus trade balance. From these two implications, derives a third, which is regulatory in nature, and has to do with the current trend in trade policies. Concretely, protectionist measures risk turning against the very same national interests they portend to protect, given that restrictions on imports (supplies) may shift and thus affect exports.
In methodological terms, the existence of the GVC makes it necessary to change the way trade is measured so as to avoid the bias that results from the double counting that is commonplace when measuring gross trade. Notwithstanding other methodological strategies, it is important to underline that the measurement of trade in value-added, is based on the decomposition of trade flows. In addition to avoiding the bias that results from double counting, the measurement of trade in value-added captures the intensity of and the way in which international production fragmentation affects trade in participating countries. Thus, it can be observed that Mexico’s trade surplus within the NAFTA decreases when shifting from gross trade measurements, to those of trade in value-added (see Chart 1). In other words, Mexico’s apparent (gross) trade surplus with its two main commercial partners to the north, in actual fact, overestimates the net balance in terms of the exchange of value-added. Several indicators1 have been proposed for the study of the participation of different countries in the GVCs. Backward participation linkages show which percentage of a country’s gross exports corresponds to the value generated in other countries. Forward participation linkages show which percentage of a country’s gross exports corresponds to domestic value-added included in the exports of other countries. The total participation index, which measures the joint importance of the production chain of a given country within the framework of the GVCs, is determined from the sum of these two indicators. Lastly, the position index, obtained by subtracting the forward participation index from the backward participation index, shows which type of linkage predominates in a given country’s GVC participation.
Mexico shows increasing difficulties in maintaining its participation quota in the value-added chain of final demand goods in the United States
The NAFTA from the Perspective of Value-Added
Upon examining the evolution of the geographic origin of value added goods that corresponds to the final demand of the United States, a progressive decrease in importance of domestic (United States) value-added, can be seen. On the other hand, China gains importance, while Mexico shows increasing difficulties in maintaining its participation quota in the value-added chain (see Chart 2). Upon analyzing Mexico’s final demand, two opposite trends can be observed: on the one hand, there is a decrease in the importance of its domestic value-added, as well a decrease in the value-added originating in the US. On the other hand, there is a growing importance in Chinese value-added, which feeds Mexican final demand, although it is still far lower than that of the US (see Chart3).
Mexico’s Participation in the GVCs: An asymmetrical insertion
Mexico has seen an increase of eight percentage points in its total participation in the GVCs since 1995. Although this increase is distributed in equal parts among both types of linkages, backward linkages predominate in Mexico’s insertion in the GVC (see Table). This fact explains why Mexico’s foreign trade functions as more of a carrier of value-added with an origin in other countries, than as a part of its own domestic value-added toward future stages within the framework of the international fragmentation of production. From a comparative perspective, it is important to note the contrast between the insertion profiles of Mexico and the United States. This difference is best expressed by the comparison between the position index of the two countries. Mexico shows a predominance of backward linkages, while the US shows the contrary (see Chart 4).
From the perspective of value-added, Mexico’s trade surplus with the United States is more apparent than real
Main Export Sectors in Mexico from the Perspective of GVCs: The trap of appearances
It is of particular interest to examine Mexico’s participation in the GVC related to the motor vehicle and computers-electronics industries, which jointly concentrate close to half of its manufacturing exports. Although the main destination of both industries is the United States, there are differences that bear particular importance. The motor vehicles sector reflects a value-added quota of Mexican origin in the United States’ final demand, which is considerably higher than that of the computers-electronics sector (12%, as opposed to 2%, respectively). Additionally, both sectors show contradicting trends in terms of their penetration in the US market: a growth of the automotive industry, and stagnation (when compared to figures from 2000, there is in fact a decrease) in the case of the computers-electronics industry (see Charts 5 and 6).
However, these two sectors show a similar profile in terms of their insertion in the GVC; both seem to show a high participation index, particularly the computers-electronics sector, with 66% of its exports linked to the international fragmentation of production (55% in the case of motor vehicles). Even more revealing is the strong predominance of the backward linkages of both sectors (see Charts 7 and 8). This reveals the fact that Mexico’s two main export industries are fundamentally carriers of foreign value-added, meaning that its weight is significantly lower in terms of the domestic value-added that tends to be attributed to its gross trade. This revelation helps to understand, from the perspective of value-added, why Mexico’s trade surplus with the United States is more apparent than real.
As a result of this analysis, it is clear that there is an urgent need to undertake research that delves deeper into Mexico’s trade relations, from the burgeoning perspective of value-added trade and its participation in the GVC. The origin of value-added flow offers a richer analytical body, which in turn allows for a better understanding of Mexico’s foreign trade. Mexico’s commercial insertion in the United States has experimented a significant series of difficulties over the course of the last decades, in terms of adding value, and this has been felt particularly in its main export sectors (automotive and computers-electronics). Two factors have had a bearing in this development: the increasing fragmentation of production processes, and the advance of emergent economies such as that of China. These factors are far from neutral, insofar as Mexico becomes incorporated in these processes, with a predominance of backward linkages, functioning as a carrier of value-added generated in other countries. The results show, in addition, a stark difference between the GVC insertion profile of the United States, and that of Mexico. Mexico shows a predominance of backward linkages, while the United States shows a predominance of forward linkages. In light of these findings, Mexico needs to move forward in the design of a long-term strategy to upgrade its production and technology within the framework of the international fragmentation of production.
Mexico needs a long-term strategy to upgrade its production and technology within the framework of the international fragmentation of production