Chinese Competition Casts Shadow over FTAA

 
China's accession to the World Trade Organization and the end of special textile (Multifiber Agreement) privileges for the Americas and other traditional producers mean big trouble for regional trade. The pressures heighten expectations for market opening through the FTAA, but will put many nations on a collision course with WTO rules.

Since gaining entrance to the WTO last year, China has become the principal competitor for Mexican exports to the US market. The competition is greatest in sectors that require extensive labor, especially textiles. During the first quarter of this year, Chinese textile exports to the US increased by 27% compared to the same period last year, while Mexico's decreased by 3.7%.

In addition to textiles, other areas of competition are telecommunications equipment, electronics, automobile parts, computers and office equipment, scientific and professional equipment, industrial machinery, metallic and non-metallic manufactured goods, and furniture, according to Mexico's National Association of Importers and Exporters of Mexico. The US is the top export market for both China and Mexico.

Chinese exports menace Mexico along with the rest of Latin America and the Caribbean, but more ominous still is China's status as a growing destination for direct foreign investment. Recently, Jeffrey Garten, dean of the Yale School of Management and a former investment banker, wrote in Business Week: "Among developing nations, China has been the largest recipient of foreign investment, averaging about $40 billion a year during the late 1990s. Membership in the World Trade Organization will result in even higher levels. US companies are shifting manufacturing from Malaysia, Thailand, Indonesia and even Mexico to China."

China has the lowest industrial wages in the world, averaging about 30 cents an hour. The minimum wage in Mexico is 50 cents an hour, and wages in the maquila sector are often double or triple the minimum. But costs are not the only factor that makes China attractive compared with Latin America. China's large and expanding domestic market is another major draw.

China casts a shadow over the FTAA negotiations. Nations like Brazil and Mexico are especially aware of this. In Mexico's case, any lessons learned from NAFTA will have to be applied to this new situation. As flows of funds from the US are diminished due to the slowing of the US economy, the local market will become more and more of a concern. NAFTA had little effect on the growth of a strong and attractive domestic market in Mexico. Brazil too must address this question in its own concerns over the FTAA. What will be the implications of China's increasing dominance of world markets for the FTAA and even bilateral trade agreements? How much of a protectionist backlash will China create in the region?