Trump's recent pronouncements about auto imports and NAFTA may knock out nation's biggest competition

When it comes to the United States market, Chinese and Mexican manufacturers have long been rivals. Both groups export fairly similar types of goods. Both have advantages in lower labor costs. And they are now the No 1 and No 2 exporters to the US.

In most sectors, whether it is toys or laptops, Chinese manufacturers have become dominant.

However, in a few key sectors, most notably cars and autoparts, Mexican manufacturers have been more successful, and most frequently because of the North American Free Trade Agreement. That is why US President Donald Trump's statements about wanting to renegotiate or dismantle NAFTA and US-Mexico trade are so important. This could be very bad for Mexican manufacturers but possibly quite good for China. Either way, it looks like it will change the existing dynamic.

My argument for this is three points:

Point 1: In the US market, Chinese manufacturers have consistently beaten Mexican manufacturers.

The types of exports coming from China and Mexico are fairly similar. In 2015, electronic equipment was 26 percent of China's exports (about $600 billion) and 21 percent of Mexico's (about $81 billion). Machines, engines and pumps were 16 percent of China's ($364 billion) and 16 percent of Mexico's ($59 billion). The other major categories such as furniture, lighting, signs; plastics; and medical and technical equipment are also similar between the two countries. The biggest differences you see between Chinese and Mexican exports are in oil and vehicles. And what is most noticeable is that China's exports in almost all of these sectors now dwarf Mexico's.

This was not the case 15 years ago. In 2000, Mexico was already six years into the enactment of NAFTA but China had yet to join the World Trade Organization. According to the US Census Bureau, Mexico's exports to the US totaled $136 billion in 2000. At the same time, China's exports to the US were $100 billion.

Yet by 2010, China's exports to the US had soared to $365 billion, far surpassing Mexico at $230 billion. Also during 2000 to 2006, Mexico's export growth rate fell to 6 percent, from its previous 15 percent during 1995-2000 and prior to China joining the WTO. In 2016, China's exports to the US reached $423 billion, compared with $271 billion from Mexico.

One can certainly argue that Mexico was actually increasing in overall exports to the US during this period. China was just doing better. However, the quote that comes to mind is by Warren Buffett's partner Charlie Munger, who said: "At Berkshire Hathaway, we do not like to compete against Chinese manufacturers."

Mexican manufacturers probably now say the same thing.

Point 2: A big exception to this trend is in cars and autoparts, where Mexican manufacturers have done consistently better.

The biggest exception to this China and Mexico export story is in vehicles and autoparts. In 2016, Mexican global exports in this sector reached $90 billion, making it the country's single largest export at 23.7 percent. And the US was the primary destination for a rapidly growing autoparts-automotive industry. In contrast, China's global exports in this space represented only 2.7 percent of their exports, and totalled $62.7 billion.

The reasons for this are, unsurprisingly, NAFTA and Mexico's close proximity to the US. It is simply much cheaper to transport cars and other heavy items from Mexico to the US and most final car assembly is done close to market. However, autoparts have less of a geographic factor and there is fairly complicated movement of parts, components and various stages of assembly across Mexico, America and Canada. NAFTA is the other factor, which has removed most trade and investment barriers between the US, Canada and Mexico. Virtually all of the major automakers have now centralized some or all of their production for North America to Mexico.

Today, the importance of the automobile-auto parts industry to Mexico cannot be overstated. It is the country's single biggest export and source of dollars (now surpassing money sent home by migrants to the US).

Mexican car production has reached record numbers with more than 3 million cars produced each year. Automobile-autoparts are also one of the biggest drivers for foreign investment into the country. Since 2010, nine of the major automakers have announced more than $24 billion in investments in Mexico, with most targeting the US as their primary end-market.

Point 3: US President Trump may now be changing NAFTA and the rules of US-Mexican trade. This could be very good for Chinese manufacturers.

US President Trump's recent announcements of an intended renegotiation or cancellation of NAFTA have sent shockwaves through Mexico. More than 70-80 percent of all Mexican exports are going to the US and Canada (i.e., the NAFTA members). And what's worse, Trump has specifically focused on Mexican produced automobiles and auto parts, one of the most rapidly growing areas of Mexican manufacturing. Trump has specifically called for a 35 percent tax on cars imported from Mexico.

Trump has also already criticized Ford, General Motors and Toyota for moving facilities to Mexico and has stated they will have to pay this 35 percent tax to bring their cars into the US. Ford had the unfortunate luck of announcing an end to all of their US production of small cars in the middle of the election, which got a response from candidate Trump. Ford have now canceled their planned $1.6 billion plant in Mexico. Without question, the potential for upcoming changes to NAFTA and car imports is already having a chilling effect on investment into Mexico.

However, for Chinese manufacturers this could be a positive development. For them, this looks like their biggest competitor for exports to the US may be about to lose its biggest advantage, a largely tariff-free border. Plus, Mexican exports to the US are heavily weighted to automobile-auto parts, the area Trump is focusing most on. For China, broad changes to NAFTA could result in a leveling of the playing field in certain sectors in terms of tariffs.

It is also worth noting that Chinese manufacturers have already been catching up with Mexican manufacturers in automobile-auto parts, just as they have in most other industries. In 2014, China passed Canada and became the second-largest exporter of automotive parts into the US after Mexico. Even before the recent comments, Mexican manufacturers were worried that China might be granted a lower tariff.

Ultimately, there are a lot factors in each sub-sector when it comes to trade, whether its tariffs, shipping costs, changing currencies or others. So it's difficult to generalize too much when it comes to Mexico and Chinese manufacturers.

However, we can conclude that Trump's recent pronouncements about auto imports and NAFTA are much worse for Mexico than China. And they raise a very intriguing question: Without NAFTA, can Mexican manufacturers successfully compete with China?

The author is the professor of investment, Guanghua School of Management. The views do not necessarily reflect those of China Daily.