Exploiting the extensive margin of trade to spur growth
Mexico has the potential to realise more dynamic, growth-enhancing gains from trade. One possible avenue of trade creation can be pursued through further exploiting dynamic comparative advantages. While Mexico’s export growth over the past two decades has been largely based on an intensive margin (i.e. exporting existing products to its usual trading partners), further trade creation can be generated through an extensive trade margin (i.e. creating new trade flows). Many emerging countries, including India and China, have based their trade growth on the extensive margin, transitioning to higher value-added exports. Mexico is well placed to pursue this trajectory, given the wide array of productive capabilities that it has developed in manufacturing, which can be redeployed in the discovery of new sources of value-added.
Remarkably, most of the products that Mexico currently exports were developed in the 1970s. Balza et al. (2008) find that 80% of product lines exported by Mexico in 2000-04 were already exported in 1970-74, when Mexico underwent radical structural transformation. By the early 1980s, even before NAFTA, Mexico had one of the most diversified export baskets of Latin America, with a degree of diversification and sophistication in products that made it an outlier considering its level of income. The country gained comparative advantages in a wide array of products, ranging from chemicals and raw materials to labour- and capitalintensive products.
Over time, and in particular since the mid-1990s, Mexico narrowed its export basket across a range of products where it had previously revealed a comparative advantage. The country strengthened its specialisation in machinery products, particularly machinery related to vehicles and electronic products, and significantly increased the range of products where it had comparative advantages (Figure 8.4). It also maintained or slightly expanded its comparative advantage in capital-intensive products. Meanwhile, it ceased exporting products in areas with lower technological requirements, such as raw materials, tropical agriculture and labour-intensive products.
This evolution largely resonates with the experience of the Asian emerging economies, with a first stage characterised by diversification followed by specialisation in high-technology products (OECD, 2012b). Mexico enjoys a relatively favourable pattern of comparative advantage, providing opportunities for future growth if a series of structural reforms are adopted. Approximately 72% of Mexico’s manufacturing exports are classified as medium- and high- technology products, a share similar to that of Korea (OECD, 2009, 2012b). Mexico should therefore exploit the installed technological capabilities that already exist in its export profile to increase its productivity and “migrate” towards exports of high-productivity goods.
Figure 8.4. Mexico’s comparative advantages, according to Leamer product
Source: author’s calculation, based on OEcd (2012), The Product Space and the Middle-income Trap: Comparing Asian and Latin American Experiences, OECD Development Centre, Working Paper No. 311, April.
To realise this potential, however, Mexico needs to increase domestic value-added share in manufacturing activities. Whereas the value-added of the manufacturing sector in Mexico was higher than that of Korea in the early 1970s, it has since decreased - from a level of 21% to 17.6% by 2009. This decline results from the growing influence of maquilas and other final-assembly activities, which tend to generate less value-creating activity upstream and downstream in the production process. Conversely, Korean value added in the manufacturing sector has steadily increased over this time, from 18.5% in 1970 to a level of 28% by 2009 (OECD, 2012b).