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Eastern threat.

As China's WTO entry looms, Mexico's garment industry--already hurting from cheap, Chinese imports--fears the worst

The walls of Eduardo Garcia-Migoya's office, overlooking his sprawling yarn factory, are plastered with pictures of his great game kills on various safari expeditions, in regions as far away and exotic as Africa.

The industrialist, whose family has been in the yarn business for two generations, is a self-described hunter-by-hobby.

But professionally, these days he feels more like the prey.

In the last year, Garcia-Migoya's firm, Cosmotex de Mexico, has had to cut production by 30%, slash prices by 40% and scale back its work force.

The problem isn't the slowing of the economy in the United States, where Mexican garment and textile manufacturers send the bulk of their exports. Rather it's the flood of dirt-cheap imports, many of them from China, that business leaders say could cripple an industry that employs over 1 million people.

For example, Garcia-Migoya says he spends about 27 pesos to produce a kilogram of cotton yarn. Meanwhile, his Chinese competitors come in at 19 pesos per kilo, even after paying to ship their goods halfway around the world.

"China is a threat," he says. "And it is going to be a bigger problem in the future."


The dark cloud unfolding, Mexican manufacturers say, is China's bid to join the World Trade Organization (WTO), the Geneva-based body that seeks to reduce tariffs and trade barriers.

Mexico is now the only WTO member left to bless China's entry into the 136-nation club that requires unanimous member approval for any new nation to join.

Industry leaders here admit that China's eventual WTO ascension is inevitable, but insist that Beijing must first comply with global fair-trade practices.

"We don't object, so long as we are all playing on the same field," says Erasto de Ita Abed, president of the Chamber of Textile Commerce in Puebla, an industrial city of about 5 million near Mexico City that's home to 600 textile and garment plants.

Thanks to government subsidies, cheap labor costs and a host of allegedly shady ploys, many Chinese made garments hit the market here at less than it costs Mexican manufacturers to produce the fabrics that make them.

One major discrepancy is labor costs. Mexican factory workers earn on average between US$300 and US$400 a month while their Chinese counterparts take home less than half of that: about US$140 on average.

"There is no way people could survive on that kind of money here," de Ita Abed says.

Government subsidies, something Beijing has been reluctant to give up, add to final cost differences. Here, manufacturers spend roughly 14 pesos to produce a kilogram of cotton, according to delta Abed. China cotton, thanks in part to government subsidies, comes to the Mexican market at around nine pesos per kilo.

Raul Garcia Tapia, the general director of Mexico's National Chamber of Commerce for the Garment Industry, says the problem is fundamental: "Mexico simply cannot compete" with China's centrally planned economy.

"This (China) is a country that practices dumping," he adds. "And if it joins the WTO, we will have lots of companies in many industries that simply won't survive."

Mexico worries that once China becomes a full-fledged WTO member, it can rightfully call for the reconsideration of tariffs with other member states at any time.

Under pressure from industry leaders, Mexico's trade negotiators have met on and off for more than a year with their Beijing counterparts, pushing for the right to extend compensatory tariffs, imposed in 1994, for another 15 years.

The tariffs of about 400% currently apply to some 1,400 Chinese products, most of them in the garment and textile industry, as well as other labor intensive sectors, including footwear and toys.

China has said it is willing to concede to an extension of no more than five years.

Mexico requests have prompted complaints from Beijing that Mexico wants more concessions from China than were granted to either the United States or the European Union (EU).

Negotiations have been tense. The most recent Geneva talks stalled in January, reportedly over the tariff issue. But both sides have indicated that they expect to reach a deal this year, and there are signs that a fresh round of bargaining may begin shortly.

Officials at Mexico's Economy Secretariat declined to comment. But on Feb. 12, Economy Secretary Luis Ernesto Derbez said at a news conference that his team had "called the Chinese, and we said we'd like to talk."

The Chamber of Commerce's Garcia Tapia, who has been briefed by the trade negotiators, says the two sides may simply put an end to the ordeal by signing a deal whereby Mexico drops its opposition to China's entry, but doesn't agree to any obligations or reciprocal relations.

Under this type of agreement, he says, "there would be no preferential treatment."


It's somewhat ironic that Mexico is the last holdout against China's WTO admission. Only seven years ago, when Nafta was adopted, it was U.S. manufacturers and labor unions who cried foul, fearing that cheap Mexican labor would cause widespread factory layoffs and destroy once-powerful U.S. industries, among them textile and garment-making.

Now, Mexican industry leaders admit privately that they fear they may also suffer that fate.

What they find even more galling is that free-wheeling Nafta policies meant to help their businesses grow have also helped unscrupulous manufacturers get their cheaper products into Mexico tariff-free, and then often over the U.S. border illegally.

Under Mexico's maquiladora and Temporary Import for Export (PITEX) programs, industrial enterprises that assemble goods imported from other Nafta nations may import those goods duty-free on a temporary basis and then subsequently export the finished product.

Here is where Mexico's textile manufacturers suffer from a more home-grown problem: corruption.

As many as half the garments sold in Mexico are believed to be technical contraband, goods imported on false papers to bypass compensatory tariffs.

Some products sold in local markets and labeled "Made in the USA" have prices that are too low to have been made in the region, says de Ita Abed.

"These are certainly not Nafta products," regardless of what the labels say, he adds.

De Ita Abed and other commerce chamber officials, who have been briefed by the government, say many of the garments arrive complete in Mexico, but come in on papers that claim there is still assemblage work to be done in maquiladoras here.

"You hear about companies that are importing fabric to sew up 30 million garments a month, but when their 'factories' are checked out, they have only a Mexico City office space of 40 square meters."

Industry leaders and government trade officials say privately that they believe the majority of technical contraband is Chinese-made. Korean importers are also suspected of being major offenders. But this is difficult to prove, and even harder to combat.

Moreover, as yarn-maker Garcia-Migoya puts it: "Contraband is not a WTO problem. It's a Mexican problem."

And that means compensatory tariffs don't add up to much, no matter how high they are or how long they last under any final WTO deal.


But there are signs that the new business-friendly government of President Vincente Fox is eager to clean house. His new customs chief has already sacked nearly all upperlevel management, citing widespread corruption.

And in late March, a joint commission of the Interior and Economy Secretariats, along with the Customs Department, launched a nationwide campaign specifically geared toward fighting technical contraband.

Rocio Ruiz, general director of the Economy Secretariat's External Affairs Department, says officials have already identified some 2,000 factories operating illegally under the maquiladora and PITEX umbrella. A total of 1,900 of those have already had their licenses revoked while tax evasion cases are being compiled against them.

Textile manufacturers say they have confidence the Fox government will succeed where previous, and notoriously corrupt, Mexican governments have failed.

"This is a government that understands -- a government you can talk to," says de Ita Abed. By the end of May, he predicts, "we won't be seeing nearly as much contraband."

Others aren't so optimistic the problem will go away quickly. Under PITEX and maquiladora regulations, there is no system in place to watch over how many meters of fabric come into Mexico, and how many go back out as garments. Putting such a system in place would be exorbitantly costly and time consuming.

Another problem is the U.S. border, the world's busiest, where customs officials on the U.S. side are much more concerned with snatching illicit narcotics and illegal aliens than checking the origins oft-shirt and sock shipments.

Manufacturers say EU customs officials are far stricter, scrutinizing each shipment to make sure the factory that allegedly made them really exists and has paid the proper duties. Their U.S. counterparts, Mexican trade officials say, simply don't have the time.

At stake, manufacturers here say, is Mexico's position as the leading exporter of textiles to the United States. It edged out China for the top spot in 1999, and still holds a relatively thin lead. Last year, Mexico exported.. US$10.2 billion worth of garments across the border, compared with China's US$8 billion, according to the Foreign Trade Division of the U.S. Census Bureau.

Some trade experts argue that Mexico will always stay on top of this contest, by virtue of its physical proximity to the world's biggest market.

Mexican manufacturers, however, say the figures are already skewed by contraband. The fear is that as Nafta trade increases the flow of goods over the U.S.-Mexico border, customs officials on both sides of the Rio Grande will have less, not more, time to inspect the goods coming across.

Seeing their markets threatened at home and abroad, Mexico's embattled textile-makers point to the country's already yawning trade deficit with China, and wonder why Mexico should even negotiate over China's WTO entry -let alone make any concession.

"Why do we need a deal from a country that doesn't buy anything from us?" asks Garcia-Migoya, as he surveys work in his struggling yarn factory. "What we need is an equal balance."

Gretchen Peters is a Mexico City-based freelance writer.
COPYRIGHT 2001 American Chamber of Commerce of Mexico A.C.
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Author:Peters, Gretchen
Publication:Business Mexico
Geographic Code:9CHIN
Date:May 1, 2001
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