Ronald W.Cox 369INDUSTRIAL RESTRUCTURING AND REGIONAL TRADE
The trend of relocating partial production of a product to the less-developed world
for reexport to the home market has been occurring to various degrees since the
early to mid-1960s. This approach was feasible only for companies with access to
appropriate capital, marketing, administration, or technology that made relocation
less costly than producing the entire product within the domestic market.
Multinationals able to take advantage of this approach found partial production
abroad to be preferable to other options for maintaining their competitive position
within the domestic market....
[F]irms often chose to relocate their labor-intensive operations to low-cost areas
abroad as a strategy to maintain their competitive position against foreign firms
that had penetrated the U.S. market. As other analysts have noted, this process
was facilitated in the case of U.S. firms by tariff codes 806.30 and 807, which
permit the “duty-free entry of U.S. components sent abroad for processing or
assembly.” In addition, U.S. foreign direct investors lobbied heavily for regional
trade agreements with Canada, Mexico, and the Caribbean Basin, which allowed
them to further integrate their production strategies for the U.S. market. As we
will see, the regional agreements also have given (or promise to give) U.S. firms
preferential treatment versus their most important international rivals. U.S. foreign
direct investors facing declining profitability and increased competition in the
U.S. market saw the regional trade agreements as an important political extension
of their ongoing efforts to restructure their global operations against increasing
foreign competition.
As part of this process, multinational corporations in electronics and automobiles
have increasingly viewed Mexico as an ideal location to cut costs and bolster
their competitive positions. Since the late 1960s, U.S.-based firms in these industries
have used locations in Mexico for production of component parts for export to
the U.S. market.
Since the mid-1980s, export production from Mexico has been increasingly
important for U.S. firms due to two primary factors. First, U.S.-based firms
in electronics and automobiles faced domestic obstacles to lowering the costs
of production in the U.S. market. These included relatively high wages and
capital costs, which made it difficult to compete with foreign rivals. For
electronics industries, the Caribbean Basin and Mexico allowed for the division
of production between capital-intensive production in the U.S. and labor-
intensive production in cheap labor regions, continuing a trend well established
in Asia. For U.S. auto companies, Mexico provided an increasingly important
platform for the assembly of component parts and vehicles destined for the
U.S. market.
Secondly, these U.S.-based firms faced an internationalization of the U.S.
economy that involved increases in foreign direct investment in the U.S. market
by Japanese and European competitors. The reaction to such competition was the
increased sourcing of component parts to Mexico and (in the case of electronics
firms) to the Caribbean Basin, a strategy designed to lower costs of production
and maintain profitability in the face of growing competition for the U.S. market.