Mexico and the World
Vol. 2, No 3 (Summer 1997)
http://www.profmex.org/mexicoandtheworld/volume2/3summer97/china_nafta.html

China's Possible Response to Mexico'’s NAFTA Challenge 

 INTRODUCTION

 Although there remains considerable debate among economists about the sources of economic growth, there is a great deal that can be said about growth in China. In particular, few would disagree that China's growth has been export led: over the 1980-1992 period, China's trade has grown at rates of more than twice the world average. Liberalization and decentralization of foreign trade and investment policies and the devaluation of the currency have been important factors underlying this growth in Chinese exports. Therefore, anything that may impede the growth of Chinese exports and hence Chinese growth would be of interest to Chinese policy makers. This paper was prepared with the possible impact in mind. However, the policy recommendations set out below, suggest that it is possible for China to respond to growing Mexican competitiveness within NAFTA. Mexican policy makers and private sector actors should not underestimate the continuing challenge China poses for Mexican trade and investment in North America.

It is perceived by many policy makers that Mexico's trade structure with Canada and the United States is quite similar to that of China's trade with these same countries. As a consequence of this perception, it is believed that the North American Free Trade Agreement (NAFTA) that includes Mexico will cause trade to be diverted away from China and toward Mexico. Since the North American market, and the United States in particular, is the largest market for Chinese and East-Asian exports, the creation of a NAFTA that includes Mexico is of great concern to East-Asian policy makers. 

In assessing the impact of the NAFTA on China's trade with Canada and the United States, some researchers have measured the similarity (overlap) of Chinese and Mexican exports to Canada and the United States (Magun and Sirimanne (1995)). However, such an approach is incomplete because it implicitly assumes that trade and industrial structures are exogenous. That is to say, this approach implicitly assumes that the NAFTA will not impact on the trade and investment patterns of Mexico, that Mexico will increase exports in its current export industries, thus displacing Chinese exports in these same industries. Such a backward looking or static analysis fails to incorporate the endogeneity of trade and industrial structures. More importantly, it fails to take into account the expected impact that NAFTA will have on Mexico's manufacturing sector.

In order to better measure the impact on China's exports to North America, we must take the dynamic trade pattern effects into account. The inclusion of Mexico into the NAFTA will impact on the industries in which Mexico is internationally competitive, causing a change in trade and industrial structures. Becoming part of a large and dynamic market will affect the competitiveness of Mexican industries, including some which are not currently export industries. These industries may as a result of the NAFTA become competitive in supplying the North American market, thus displacing other exports to North America. In order to undertake such a forward looking dynamic analysis, we employ a "Porter-like" framework.

The Competitive Advantage of Nations (Porter (1990)) is an empirical study of 10 nations which isolates four national characteristics which underlie a nation's ability to consistently improve, innovate, and upgrade in particular fields. These are: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure and rivalry. Porter also identifies a role for both the government and chance. These factors form a system that together determine a nation's ability to become internationally competitive in particular industries. It is beyond the scope of this paper to discuss in detail China and Mexico's relative positions in each of these categories. However, we discuss the impact that the inclusion of Mexico into the NAFTA will have on Mexican competitiveness.  

Furthermore, we also discuss the necessary conditions that must be satisfied by China if it is to continue to grow. This growth has two dimensions: first, China must act to maintain its existing export markets. The inclusion of Mexico in a NAFTA will likely affect Chinese exports to Canada and the United States. Second, if export-led economic growth is to provide high and rising standards of living for Chinese citizens, Chinese growth must be in high value added production processes. China must avoid becoming "trapped" in low-value added labour intensive manufacturing. The policy implications for both of these dimensions are clear and will be discussed thoroughly in this paper. 

The purpose of this paper is three-fold. First, we describe the pattern of Chinese exports to the world economy. Within a Porter-like framework, we are able to make statements about the industries that are emerging within China's competitive advantage. We draw a distinction between the traditional notion of comparative advantage and the more sophisticated notion of competitive advantage. Although comparative advantage is an important determinant of international trade, it is the notion of competitive advantage that is relevant in today's global markets. 

Second, we compare and contrast Chinese and Mexican exports to Canada and the United States. In particular, we assess the likely impact the NAFTA will have on Chinese exports to North America. This involves a two-step approach: a static analysis which is based on current trade patterns, and a dynamic one based on the changes in the structure of trade that will likely occur as a result of the implementation of the NAFTA. To the extent that the NAFTA affects the competitiveness of Mexican industries which do not currently overlap Chinese export industries, the dynamic analysis will give quite different predictions than a static analysis. Furthermore, policy statements based on a static analysis can be quite misleading.  

The export similarity indexes of Magun and Sirimanne (1995) show that the overlap in value of Mexican and Chinese exports to Canada and the United States has been growing in the past 10 to 15 years, and was 32 percent in 1991. This means that in a static analysis at least 32 percent of Chinese exports could be subject to direct trade diversion effects. This analysis does not take into account the expected impact of the NAFTA on Mexican competitiveness since NAFTA came into effect only in 1993. For example, apparel forms a large part of Chinese exports to North America, but only a small part of Mexican exports to Canada and the United States. However, the provisions of NAFTA will relieve Mexico of burdensome quotas in the North American market and impose ultra-strict rules of origin upon the industry. These factors will result in Mexico becoming much more competitive vis à vis China in supplying apparel to the North American market. This is an example of trade diversion that would not be picked up in a static analysis. Therefore, NAFTA's potential impact on Chinese exports to North America may in fact be considerably different than the static analysis would predict. 

Third and finally, we draw policy implications for the Chinese economy. These policy implications include liberalization of both trade and investment environments. In order for China to maintain access to existing export markets, progress must be made in terms of liberalizing access to the Chinese market itself. This would improve China's negotiating position with trading partners. For example, liberalization of Chinese imports would very likely lead to reciprocal acts on the part of Canada and the United States, as well as expedite China's admission into the World Trade Organization. This would maintain China's competitive position vis à vis Mexico in terms of supplying the North American Market.

Also, in order for a nation to achieve a high and rising standard of living, it must achieve high and rising levels of productivity in high-value added industries. Exports based on low wages and low profits are not the exports that will lead to the highest and fastest growing standards of living in the long run. China must establish policies which will encourage a move into higher value-added industries. This would require foreign investment, as embedded in these flows of foreign investment is the transfer of technology that is needed to assist in the development of a more sophisticated Chinese manufacturing sector. 

Porter argues that in order to compete internationally in high-value added industries, production must be based on advanced (created) factors of production, not inherited factors such as low-skilled labour. Given that a move from the initial factor driven stage of development to the more advanced investment driven stage is typically financed by foreign investment, it is quite important that the Chinese government improve the investment environment in China. This includes measures that will provide protection for intellectual property. The liberalization of the investment environment is accentuated by the extension of National Treatment within the NAFTA to member countries' foreign direct investment (FDI). This gives Mexico an additional advantage given the complementarity between trade and investment, and the important role played by foreign firms in the growth of Chinese exports. China must improve its investment climate to encourage FDI, and the NAFTA reinforces this need.  

REGIONAL TRADE AGREEMENTS, TRADE DIVERSION, AND TRADE CREATION 

A free trade agreement is an economic integration arrangement in which (many) barriers to trade among member countries are removed. The NAFTA eliminates most trade restrictions between Canada, the United States, and Mexico in manufacturing, extends National Treatment to foreign investment and imposes a strict intellectual property regime. Such a regional trade agreement is consistent with the principles of an open multilateral trading system provided that trade barriers affecting non-members are not increased. However, this is not to say that the creation of such an arrangement will benefit-non-member countries. International trade theory predicts that the creation of regional trade arrangements give rise to both trade creation and trade diversion effects. 

Trade creation occurs when members of an economic integration group focus their efforts on the goods for which they have a comparative advantage, and start trading extensively with each other. Trade creation is good in the sense that it results in efficient low cost producers in member countries' gaining market share from high-cost member producers, as well as generating increased extra-regional exports. These results occur because the efficient regional producers are able to offer lower-priced and higher quality output than their competitors both inside and outside the regional arrangement.

Trade diversion occurs when members of an economic integration group decrease their trade with non-member countries in favour of trade with each other. One common reason is that the removal of trade barriers among member countries makes it less expensive to buy from companies within the group, and the existence of trade barriers with non-member countries makes it more difficult for them to compete. Therefore, trade diversion can lead to the loss of production and exports from more efficient non-member countries to less efficient member countries that are protected.  

Non-NAFTA countries can therefore potentially be made worse off as a result of the NAFTA. It is feared that trade diversion in such an important market such as North America would slow export-led growth prevalent in many East-Asian economies, including China. The extent of Chinese trade that will be diverted will depend upon: the similarity of Mexican and Chinese exports to the markets of the United States and Canada now and in the future; the extent to which trade structures change as a result of the NAFTA; and the existence of non-tariff barriers that limit access for Chinese products or make them more expensive relative to Mexican products. Furthermore, if trade and investment are complements, then to the extent that the NAFTA brings about trade diversion, it will also bring about investment diversion.  

To make these points clear, consider the following two extreme scenarios. First, assume that Mexico and China export completely different goods to Canada and the United States. Furthermore, assume that trade structures are exogenous. In this extreme case, NAFTA does not cause Mexico and China to change industries in which they export (the industries in which they are internationally competitive). NAFTA would in this case cause Mexican exports to both Canada and the United States to increase, but these exports would not displace Chinese exports to North America. To the extent that the NAFTA improves growth rates within the NAFTA countries, Chinese exports to North America would in fact increase. In this scenario, therefore, China would be made better off as a result of a NAFTA. 

Second, assume that China and Mexico export the same goods to Canada and the United States. Then, the NAFTA could make Mexican exports much more competitive relative to Chinese exports, and a as a result Chinese exports could be displaced. Although the reduction in tariffs will immediately make Mexican exports more attractive relative to Chinese exports, Mexican industries may in the long run become more efficient as a result of becoming a member of the NAFTA.

If we allow trade and industrial structures to be endogenous, that is, we move to a dynamic analysis, then the inclusion of Mexico into the NAFTA may cause the pattern of Mexican exports to Canada and the United States to change. The impact of the creation of a NAFTA on Chinese exports to Canada and the United States becomes ambiguous. This ambiguity holds whether we assume that China and Mexico export the same goods to Canada and the United States, or not. These scenarios are displayed in Table 1.

 Of course, the model that best characterizes trade among these countries is somewhere in the middle. China and Mexico do export some goods within the same industries to Canada and the United States. We would therefore expect some trade diversion in a static analysis. However, the picture becomes less clear once we move to a dynamic analysis. We can expect that Mexican exports in current overlapping export industries will increase, thus causing trade diversion. It is less clear what will happen to current non-overlapping exports of these countries. 

PORTER'S DIAMOND THEORY

The traditional factor proportions model predicts that countries will have a comparative advantage in, and export those goods which make the most intensive use of the productive factor they have in abundance. Some argue (Porter, 1990) that this model, however, is insufficient to explain the patterns of trade that we observe in today's global markets. Raw materials, components, machinery and even many services are now available to firms through international markets, thus making the success of a firm depend less on factor endowments in the firm's home nation, and more dependent upon the efficiency and effectiveness with which firms deploy the resources available to them.  

The traditional approach to explaining trade patterns has also been supplemented by considerations given to macroeconomic conditions and government policy. However, firms and nations have succeeded or failed in spite of macroeconomic environments that vary widely. Furthermore, the record shows that government industrial policies fail as often as they succeed, even in countries like Japan and Korea.

 Porter's approach attempts to explain the following empirical observation: no nation is competitive in every industry; nations succeed not in isolated industries, but rather in entire clusters of interconnected industries; and the pattern of competitive clusters differs markedly from country to country. Porter finds that nations and firms that become internationally competitive in a given industry depend upon that nation's or firm's ability to innovate and upgrade into sophisticated techniques and processes. Therefore, in order to explain competitiveness, one needs to understand the ability to innovate. In his study of 10 nations, Porter identifies the following factors that are essential in the determination of the ability to innovate.

Factor Conditions 

Factor conditions refer to the availability and supply of the basic inputs necessary to compete in an industry, such as labour, arable land, natural resources, infrastructure and capital. These necessary factors can be classified as either basic or advanced. Basic factors are those factors which are inherited, such as natural resources, and unskilled labour. Advanced factors are those that are developed through sustained and sophisticated investment, such as human and physical capital. Unlike the basic inherited factors, the advanced factors are created. Porter argues that the advanced created factors are the most important to modern industrial competition.

 An abundance of basic inherited factors may, in Porter's world, work to undermine rather than enhance a nation's competitive advantage because their existence undermines the incentive to upgrade to more sophisticated and improved products and processes. In other words, the existence of an abundance of the basic inherited factors may cause a country to become trapped in industries that utilize these inherited factors. Since such industries are typically characterized as low value added, utilizing unskilled labour, they have low potential for converting the country into an industrialized economy that creates wealth for its citizens.

 Demand Conditions 

Companies that gain competitive advantage internationally in sophisticated industries often have a large market in their home country in these same industries. Also, these companies have domestic customers who are among the world's most sophisticated. These customers pressure their domestic companies to meet high standards, encourage them to improve, innovate and upgrade. In other words, sophisticated demand conditions provide an advantage to local companies by forcing companies to respond to tough challenges. If demand conditions are sufficiently sophisticated, and to the extent that companies react to these demand conditions, then these companies become competitive internationally. 

Related and Supporting Industries 

Related and supporting industries are industries that are linked by common technologies, distribution channels, skills or customers. Competitive, home-based suppliers of specialized inputs and machinery create advantages in downstream industries in several ways. They provide cost effective inputs in an efficient, early, rapid and often preferential way. Proximity plays an important role in fostering close working relationships. The exchange of know-how, and mutual pressures to progress, and the rapid flow of information and technical inter-change increases the rate of innovation and upgrading. Companies with home based suppliers also have the opportunity to influence the supplier's technical efforts, shape specifications to fit particular needs, serve as test sites for research and development, and maintain senior management contact.

Firm Strategy, Structure, and Rivalry 

In Porter's study, he finds that the dynamism and pressure created by a vibrant local industry was perhaps the single most important stimulus to innovation and upgrading in an industry—a result that held independent of country size. Domestic rivalry provides an essential motivation for firms to make the investments and take the risks necessary to generate competitive advantage. Domestic rivalry is more important than competition with foreign firms because proximity speeds information and improves incentives to compete. Domestic competition negates basic factor advantages and forces firms to develop higher order (more sophisticated) and ultimately more sustainable advantages. 

The Role of Government 

The role of government is best understood by examining how it influences the four factors above. The proper role of the government, to Porter, is to improve the quality of inputs firms can draw upon, to define a competitive environment, and to establish rules and regulations that promote upgrading and innovation. The government can therefore play an important role in shaping the pressures, incentives, and capabilities of a nation's firms. Porter's government is not the role player that some see in Japan, Korea and Singapore. 

The Diamond as a System 

These factors together form what Porter calls a diamond. This diamond contains the determinants of competitiveness that influence the capacity of a nation's industries to innovate and upgrade, and hence to become competitive internationally. They constitute a dynamic system that is more important than its parts. Over time, these determinants are mutually reinforcing. The diamond is also an important determinant of a nation's ability to attract mobile factors of production—the final form of mutual reinforcement. Mobile factors tend to be drawn to the location where they can achieve the greatest productivity because this is where they achieve the highest return. 

Stages of National Competitive Advantage

 There are four stages of national competitive development in Porter's analysis: factor driven, investment driven, innovation driven, and wealth driven. All nations begin at the factor driven stage of competitive development. In this stage, internationally successful industries draw their advantage almost solely from basic factors such as natural resources or low cost labour (i.e., the inherited basic factors). In the next investment driven stage of competitive development, a nation and its firms actively invest in upgrading into modern and efficient plants and methods, normally based on foreign technology. In the innovation driven stage of competitive development, all four determinants in the diamond are in place and work together to foster continuous innovation and upgrading in a wide range of industries. It is in this stage that an economy reaches it highest level of productivity. To Porter, the final, wealth driven stage is a stage of decline. It is in this stage where the emphasis switches from wealth creation to wealth redistribution.

 The primary distinction between the stages of development depends on the nature of the competitive advantage and the sophistication of the strategies, methods, and techniques employed. It is here that we need to draw the distinction between competitive advantage and comparative advantage. In a constant returns to scale production environment that utilizes only inherited basic factors, it is clearly comparative advantage that determines the patterns of international trade. In this environment, the traditional factor-proportions theory of international trade would predict trade patterns.

However, when production is characterized by increasing returns to scale, utilizing developed advanced factors of production such as skilled labour or sophisticated capital equipment, and in the presence of barriers to trade such as transportation costs, tariff and non-tariff barriers, language, culture and distance, then the concept of competitive advantage is relevant. It is no longer simply the factor endowments that determine trade, but how firms and nations utilize the factors available to them in positioning themselves to get access to inputs necessary to produce goods and services for export to foreign markets.

 It is clearly the case that Canada and the United States are in the innovation or wealth driven stages of development. The diamond is complete, reinforced by mobile factors of production, and there is a large amount of income re-distribution. Although there is tremendous effort to maintain and enhance growth rates and wealth creation, this is always done with consideration given to the impact on income distribution.

China and Mexico are in the factor/investment driven stages of development. Both countries are developing industrial sectors. In both countries, the source of competitive advantage is in large part determined by the abundance of low-wage labour and it is in this sense that these countries are in the factor-driven stage of development. However, the development of an industrial sector indicates an investment driven stage of development. Foreign investors are playing a large part in this process as both countries have received large inflows of foreign investment. Foreign investment in these countries is likely motivated by the abundance low-wage labour and at the same time access to a particular market: the North American market in the case of Mexico and the potentially enormous domestic Chinese market in the case of China, as well as for exports.

 However, there remain large reserves of untapped labour in both countries. Consider Table 2 below. The labour force participation rate in Mexico is much smaller than that of Canada, the United States or China. However, Table 2 shows that 60 percent of the Chinese labour force is in agriculture, whereas only 27 percent of Mexico's is. We can therefore expect that Mexican labour force participation rates will likely increase, increasing the supply of unskilled labour, and hence the production of low-end manufactured goods in Mexico. To the extent increased production is in the same industries as China, the more Chinese trade we expect will be diverted. The exact amount is an empirical question.

Table 2. Labour Forces, Mexico, USA, Canada

Source: World Development Report, 1994.

As Mexico is integrated into NAFTA, Mexican exports to Canada and the United States will increase. Therefore, Mexican production capacity will increase. This will result in both increasingly efficient production facilities, and an increased demand for labour. As labour force participation rates increase, existing Mexican export industries may absorb these workers, or these workers may enter new industries that overlap with China's export industries. Although it is unclear what will happen, by looking at the growth rates of Mexican exports, we can determine which industries are expanding and which are contracting, and hence make an inference at to what may happen to Mexican exports. 

But it is certainly the case that Mexico's entry into the NAFTA will give Mexico added momentum in completing its Diamond. Given that Mexico will become part of such a large, sophisticated, and advanced market group, it will have access to the factors necessary to become internationally competitive. Of course, advantages in the entire diamond are not necessary for competitive advantage in low skilled or inherently resource-dependent industries. Therefore, the diamond theory would not predict that China will be substantially displaced. It will always have a competitive advantage in a number of industries.

 Developing countries are often characterized by the coexistence of some capital intensive industrial sectors with large labour intensive, low value added manufacturing sectors. This industrial structure is needed to employ the relatively large supplies of labour in these developing countries. Given that there is such a large untapped pool of unskilled labour in Mexico, it is likely that Mexico may begin exporting in some current non-overlapping export industries, thus reinforcing the trade diversion effect in our static analysis. This would imply an additional source of trade diversion.

 Since Canada and the United States are in different stages of development than are Mexico and China, it is unlikely they will have competitive advantages in the same industries. Canada and the United States are internationally competitive in much more sophisticated, higher value added industries. As barriers to trade fall, low-value added industries in Canada and the United States that exist only because of protection will disappear, being replaced by Mexican or non-NAFTA exports. 

Although it is beyond the scope of this paper to discuss in detail the industries in which China and Mexico are internationally competitive, we can discuss the dynamic trade patterns of China and Mexico, and make inferences on what this means for the future of China-North American trade. We can also relate the inclusion of Mexico into the NAFTA to its ability to compete internationally with China. This would require a study of the impact the NAFTA will have on the competitiveness of Mexican industries. For this, we turn to Rugman and Gestrin (1993).

FIRM, COUNTRY AND REGION SPECIFIC FACTORS

 Rugman and Gestrin (1993) analyze the impact that NAFTA will have on the competitiveness of North American industries. Such an analysis is essential in estimating the impact that NAFTA will have on Chinese exports to North America. The authors lay out a conceptual framework in which firm specific advantages (FSAs) interact with country specific advantages (CSAs) or region specific advantages (RSAs) to determine which industries will become internationally competitive.

 Panel (A) of Figure 1 shows the outcome of the interaction of these advantages. A strong country specific advantage or a strong firm specific advantage is defined as an advantage sufficient to ensure competitiveness with respect to foreign rivals. International competitiveness is assured when both country and firm specific advantages exist simultaneously. In contrast, when both country and firm specific advantages are lacking, then competing internationally with foreign rivals becomes almost impossible. When one advantage exists and the other does not, then the existing factor may or may not compensate for the non-existence of the other. Nevertheless, the interaction of these advantages determines the international competitiveness of industries. It is straightforward to extend this analysis from country specific advantages to region specific advantages. These two advantages are conceptually the same thing.

Figure 1:

 The authors point out that investment liberalization agreements such as the NAFTA can affect firm, country, and region specific advantages. Panels (B) and (C) of Figure 1 summarize the impact the NAFTA will likely have on the international competitiveness of industries within North America, at the country specific level and the region specific level. It is important to note that although several industries are strengthened as a result of the NAFTA at the country specific level, no industries are weakened at the region specific level. Industries which were protected before the NAFTA lose their protection and face increased competition from member countries' producers.

But member country industries remain protected from competition from non-member countries' producers. This is the essence of a regional trade agreement. It is to increase intra-regional efficiency to the exclusion of non-members.

 We want to consider the impact of the NAFTA on the competitiveness of Mexican industries. At the country specific level, we see there are no industries in which Mexico has strong firm specific advantages. At the country specific level, therefore, all industries are characterized as having weak firm specific advantages. Energy, telecom services, and natural resources are industries within Mexico which have been strengthened by the NAFTA (i.e., protection remains). Most Mexican manufacturing industries are listed as having both weak country specific advantages and weak firm specific advantage, and also, these industries have been hurt by the NAFTA (i.e., protection removed).

 The most striking feature of these results is the characterization of the manufacturing sector as being hurt by the NAFTA. Mexican manufacturing suffers from extremely weak firm specific advantages. Under the terms of the NAFTA, most tariffs on manufacturing will be phased out over the 10 year implementation phase (and most will disappear in the first 5 years). While the adjustment to increased international competition has focused on the sunset industries in Canada and the United States, the Mexican economy is pursuing a wholesale restructuring of its economy in anticipation of the NAFTA at a pace that has rarely been matched in the history of economic reform.

 The National Treatment provisions in the NAFTA will result in large increase in FDI into Mexico from NAFTA members. As Rugman and Gestrin point out, the Mexican manufacturing sector will be transformed into a modern and efficient industry. It will move from an industry whose competitive advantage was based solely on inherited basic factors to one whose competitiveness is based on sophisticated advanced factors of production.

 Let us consider the Mexican automobile industry. In 1994 alone, planned FDI projects amounted to $2.5 billion, $1 billion from Chrysler, Ford, and General Motors, and $1.2 billion from Volkswagen and Nissan. BMW and Honda planned $246 million in FDI. These transnationals have introduced state of the art technologies and advanced organizational practices in their Mexican affiliates. In other words, the Mexican automobile industry has been transformed from a protected, fragmented and low productivity industry into a fast growing internationally competitive industry. The liberalization policies of the Mexican government resulted in transnational corporations integrating their Mexican operations into their global production networks. This is in line with Mexico's comparative advantage (United Nations, 1995).

 The implications of this analysis for China are obvious. Although both countries rely heavily on unskilled labour for their source of comparative advantage, Mexico is fast becoming integrated into international production networks. Therefore, among the class of low value added industries which use unskilled labour, the transformation of Mexico's manufacturing industry is moving Mexico out of the lowest value added processes and into the more sophisticated processes, such as motorized vehicles, industrial machinery, and petrochemicals. These are industries which are not major exports of China. This will only serve to push China further into the trap described by Porter. Also, provisions in the NAFTA, such as those for apparel, will likely make Mexico more competitive in these industries. Apparel is the major Chinese export to North America. Apparel is also one of the fastest growing Mexican exports to Canada and the United States. These results are reflected in the trade data to which we now turn.

CHINA'S TRADE IN THE WORLD ECONOMY

 Over the 1980-1992 period, Chinese exports have grown at an average annual rate of 12.5 percent. This is more than double the average annual growth rate for total world exports of only 5.4 percent (Figure 2). Over the period, Chinese exports have more than quadrupled, whereas world exports have doubled. Mirroring the growth in Chinese exports was similar growth in Chinese imports (Figure 3). Chinese exports and imports were each roughly US $20 billion in 1980. In 1992, exports had grown to approximately US $90 billion and imports to US $85 billion.  

Composition of Chinese Exports

 Table 3 gives the distribution of Chinese exports by 29 commodity categories over the 1980-1992 period. In the 1980-1986 period, the top 5 Chinese exports accounted for over 70 percent of all Chinese exports. This percentage has since fallen to 50 percent. In 1992, the top 9 exports accounted for 70 percent of all Chinese exports. Therefore, Chinese exports are becoming less concentrated. Over the 1980-1992 period, four exports have consistently entered the list of the top five Chinese exports, and three others entered the top five list over the period but not every year. Consider the following summary table. Clearly, Chinese exports are concentrated in low end, labour intensive light manufactures.

Although China does export some more sophisticated manufactures, these form a small but increasing component of total Chinese exports. We can see this by considering the industries that are the fastest growing. Table 5 gives the export growth rates by industry. The ten fastest growing exports over the 1980-1992 period were: office machines (42.2 percent), television receivers (41.2 percent), telecommunications and sound recording apparatus (37 percent), photographic apparatus and lenses (34.5 percent), radio and broadcast receivers (32.9 percent), books and other printed matter (32.1 percent), children's toys and games (31.2 percent), transportation equipment (28 percent), electrical machinery (26.3 percent), and footwear (25.3 percent).

The top ten fastest growing exports for the 1988-1992 period were books and printed matter (51.4 percent), photographic apparatus and lenses (49.6 percent), electrical machinery (46.1 percent), telecommunications and sound apparatus (45.3 percent), office machines (41.2 percent), footwear (40.2 percent), professional scientific and controlling instruments (38.1 percent), power generating machinery (34.8 percent), non-metallic mineral manufactures (27.2 percent), and children's toy (24.2 percent). Therefore, seven out of the ten fastest growing industries over the entire period were still growing rapidly over the-1988-1992 sub-period. The industries that fell out of the top ten list were radio broadcast receivers, television receivers, and transport equipment. The industries that replaced these three industries in the top ten list were professional and scientific controlling instruments, power generating machinery, and non-metallic mineral manufactures.

We can also make inferences about the impact these growth rates will have on Chinese export structures. From Tables 3 and 5, we see that only office machines, children's toys and games, and apparel are among the fastest growing industries and are also in the top five Chinese exports. Machinery, chemicals (fats), agricultural products, and fabrics are among the lowest in terms of growth rates. Therefore, it appears that China is increasing its exports of low end manufactures such as children's toys and apparel, and some higher end manufactures such as office machines, but relatively decreasing exports in agricultural products, fats, fabrics, and transport equipment.

In order to get a finer description of Chinese exports, we consider Chinese exports at the 4 digit SITC level ranked by the largest export shares (Tables 6 and 7). The top 50 exports ranked by China's world export share comprised 21.9 percent of all Chinese exports in 1980, and 41.8 percent in 1992. This list does not necessarily imply that the industries for which China has the largest world export market shares are also those industries which comprise the largest components of China's exports by value. For example, in 1992, China controlled 81 percent of the world export market for caster oil seeds. However, these exports totalled only $14 million, or 0.02 percent of all Chinese exports. The top ten industries on this list only account for 4.8 percent of total Chinese exports in 1984, and 1.6 percent in 1992. In other words, China is the largest world exporter is some very small international export industries. The fact that China dominates the caster oil seed market does not tell us very much.

Table 8 gives a list of the top 50 Chinese exports ranked by value. This list comprised 61 percent of total Chinese exports. For the 1980-1992 period, the top 10 industries were footwear (4.8 percent), outer garments of textile fabrics (4.2 percent), toys and games (3.7 percent), petroleum and crude oils (3.3 percent), mens shirts (2.5 percent), undergarments (2.2 percent), jerseys, pullovers and sweaters (1.9 percent), radio broadcast receivers (1.7 percent), travel goods and hand bags (1.7 percent), and cotton fabrics (1.6 percent). These top 10 industries comprise 27.6 percent of total Chinese exports. The average growth rate by value for these top 10 industries was 21 percent, almost twice the average of 12.5 percent for all Chinese exports.

The top 10 industries ranked by growth rates over the 1980-1992 period were calculating machines (46.8 percent), television receivers (41.2 percent), miscellaneous articles (37.8 percent), ships and boats (37.2 percent), telecommunication apparatus parts (36.3 percent), maize-corn (35.8 percent), appliances (35.4 percent), fabrics (35.4 percent), radio broadcast receivers (32.9 percent), and children's toys (31.2 percent). The average growth rate for these top ten exports was 37.0 percent, and these industries comprised a total of 12.6 percent of all Chinese exports. Of this list of the top 10 industries by growth rates, only 2 were in the top 10 when ranked by value over the 1980-1992 period (children's toys and radio broadcast receivers).

The top 10 industries ranked by growth rates over the 1988-1992 period were-electro-thermic appliances (71.8 percent), electric power machinery and parts (61.9 percent), refined sugars and other products of beet and cane (58.8 percent), miscellaneous articles (54.8 percent), insulated electrical wires, cable, bars, strip and the like (54.1 percent), watches, watch movement and cases (51 percent), jewellery, goldsmiths and other articles of precious metals (47.8 percent), small-wares and toilet articles, feather dusters etc (45.7 percent), electrical appliances such as switches, relays, fuses, plugs etc (45.2 percent), and coats and jackets of textile fabrics (43.6 percent). The average growth rate for these industries was 53.5 percent and these 10 industries comprise only 8.1 percent of total Chinese exports.

Only two of the industries that grew the fastest in the 1988-1992 period also grew quickly over the entire 1980-92 period: miscellaneous articles and-electro-thermic appliances. But what is clear from this list is the prevalence of light manufactures in the high growth export industries. None of the fastest growing industries in the 1988-92 period were also in the top ten exports ranked by value in 1992.

 In the early 1980s, manufactured goods comprised the largest component of total Chinese exports. Petroleum products experienced a large surge in growth in this period. Since 1985, the growth in Chinese exports has been concentrated in manufactured goods and apparel. Referring back to Table 8, we see that export growth has shifted from primary products to labour intensive manufactured goods such as textiles, apparel, footwear, sporting goods, and toys. These goods are in line with China's comparative advantage, as reported in the World Bank's revealed comparative advantage calculations (World Bank, 1994).

We next consider the link between the export industries ranked by the highest value, ranked by highest world market shares, and ranked by high growth rates. It is intuitive that the exports experiencing the largest growth rates over the 13 year period 1980-1992 should also be ranked in the top 50 industries by Chinese world export shares and value. Of the top 50 industries ranked by export value, 21 also ranked in the top 50 industries ranked by world export market share. Furthermore, of the top 50 industries ranked by export value, 38 had average growth rates that exceeded the average growth rate of 12.5 percent for all commodities over the-1980-1992 period.

It is clear that the Chinese are specializing in light manufacturing industries that are labour intensive and are relatively quick to develop. This is the strategy used by the Tigers (South Korea, Hong Kong and Taiwan) during the 1960s and 1970s. Now that these countries have moved up the value added ladder, China is filling the gap in world markets, just as the Tigers did earlier. China is doing in the 1990s what the Tigers did in the 1960s and 1970s. These results are also consistent with the revealed comparative advantage calculations of Magun and Sirimanne (1995) which find that Chinese comparative advantage is shifting away from primary goods toward low-skilled labour intensive manufacturing. The data in the following table reinforce these conclusions.

Table 9. China's Exports

Source: Magun, and Magun and Sirimanne 

THE ROLE OF FOREIGN FIRMS 

Foreign firms have played a key role in the growth of Chinese exports over the 1985-1993 period (Table 10). Although in 1985, foreign firms accounted for only 1.1 percent of total Chinese exports, this number has steadily increased over the period, reaching 27.5 percent in 1993. Furthermore, Lardy (1994) reports that foreign firms accounted for 70 percent of total export growth in 1993. Lardy concludes that an implication of this is that Chinese state-owned firms have not been heavily involved in export growth, and hence total factor productivity in China may not be increasing as fast as the trade statistics may seem to imply. That is, the trade statistics are more a reflection of the activities of foreign invested firms and less a reflection of the activities of state-owned firms. 

Table 10. Exports of Foreign Firms*

*Exports are inclusive of those produced by equity joint ventures, contractual joint ventures, and wholly foreign-owned firms. 

These results therefore clearly support the hypothesis that trade and investment are complements, especially in the early development stages. Furthermore, to the extent that trade and investment are complements, and to the extent that exports are leading Chinese growth, then foreign investment is an important source of growth. Recognizing the importance of FDI has strong policy implications. 

The Trade-Investment Nexus 

The role of foreign direct investment (FDI) is fast becoming recognized in the literature as an important determinant of economic growth, especially in the Asia-Pacific region. International trade theory has modelled multinational enterprises and international technology transfer in some detail. However, data limitations prevent full implementation of these theoretical results empirically. What studies do exist generally find that FDI and growth are closely related. Some policy analysts therefore treat trade and FDI as one in the same. Both Mexico and China have experienced a tremendous increase in foreign direct investment over the 1980s and 1990s. Consider Table 11.

Table 11. Inward Stocks of Foreign Direct Investment* (US$ millions)

Source: United Nations, 1995.

* In 1994, 35% of all inward stock of FDI in Mexico came from the United States, whereas the US only accounted for 2% of inward stock of FDI in China. These percentages are virtually unchanged from their 1990 values. 

However, these Chinese data are overstated as they are approved FDI. Lardy (1996) reports that on a realized basis, Chinese inward FDI is only $34 billion, less than that of Mexico. On a per capita basis, therefore, Chinese inward FDI is tiny in comparison to that of Mexico. Also, much of the investment in China is really Chinese money that has been moved off-shore and recycled back into China disguised as foreign investment. This is done to take advantage of incentives provided to foreign-invested firms. Therefore, as Lardy (1996) states, China is not heavily dependent on foreign capital to finance investment.

Many researches attribute the growth in FDI in these countries to the shifting structure of comparative advantage in the world economy. High wage countries lose competitiveness in labour intensive products, and resource abundant countries tend to specialize in resource-intensive activities. In trying to understand FDI patterns, economists refer to the "flying geese" pattern of the stages of development, which is akin to Porter's stages of development: 

Stage 1. Production and export of labour intensive manufacturing industries such as clothing and textiles, small appliances and the development of some domestic oriented heavy industry

 Stage 2. Production of basic manufacturing goods and the establishment of export markets in goods such as steel, electrical equipment, autos and chemicals

 Stage 3. Shifting production out of labour-intensive manufactures, and shift into component and other high value added industries such as electronics, transportation equipment, materials and services.

Although both Mexico and China are in the first stage of development, the large inflow of FDI and the embedded technology is allowing for the creation of sectors of the economy that are more advanced. The creation of NAFTA and National Treatment will certainly assist Mexico in this process. That is, although both countries are in the first stage of economic development, and both are receiving large inflows of FDI, Mexico is much further ahead in convincing foreign investors of the future. As a result, Mexico has been very successful in creating, for example, an automobile industry that is linked to the international production networks of transnational corporations.

CHINA-NORTH AMERICA TRADE

China-Canada Trade. Chinese exports to Canada and the United States are difficult to measure accurately because of re-exports through Hong Kong. Hong Kong firms play an important role in the marketing of Chinese goods to other countries. As a result, a majority of Chinese exports to Hong Kong are re-exported to other nations. For example, Chinese exports to Hong Kong totalled $32.9 billion in 1990. Of this $29 billion was re-exported to other nations. Once re-exports are accounted for, the US was the largest market for Chinese exports (25 percent), followed by the EC countries (19 percent) and Japan (12 percent). This is an export structure similar to that of other East-Asian countries in the sense that the US market absorbs a large portion of Asian exports, followed by Europe and Japan. Hong Kong's share of China's exports in 1990 dropped from 54 percent to 6 percent once re-exports were accounted for (World Bank, 1994). 

As seen in Table 12, 70 percent of all Chinese exports to the United States are re-exported through Hong Kong, and 40 percent of all Chinese exports to Canada are re-exported through Hong Kong. The issue of re-exports is therefore quite important in determining the overall trade balance between any country and China. For example, without taking account of such re-exports, Canadian trade data indicates that it had a trade surplus with China since 1980 (Figure 4). However, once re-exports are used to adjust both the Chinese and Canadian trade data, it becomes evident that this surplus has in recent years turned into a deficit (Figure 5). Since detailed product data for re-exports are not available, analyses of Chinese exports by detailed categories will be subject to this critical bias.

Figure 5. Canada - China Trade, 1988 - 1992

 Three products have dominated Chinese exports to Canada over the 1980-1992 period (Table 13). Apparel, fabrics, and agricultural food products have accounted for an average of 70 percent of all exports to Canada. Apparel has accounted for an average of 37.7 percent of total Chinese exports to Canada, followed by fabrics with 22.3 percent, and agricultural food products with 10.6 percent. Although this may describe the current trading patterns, current trends indicate a decline in the importance of these industries. These exports have been growing at below average rates over the period. Although the average proportion of total exports accounted for by these three exports has been over 70 percent for the entire 1980-1992 period, the ratio has not been stable over the sample. In the 1980-1987 period these exports accounted for 75 percent of total exports, and this fell to 65 percent in the 1988-1992 period. In other words, there is a shift underway in Chinese exports to Canada, similar to that noted in the aggregate Chinese data (see Figure 6).

 Increasingly important Chinese exports to Canada now include: toys and jewellery; iron, steel, and other metal manufactures; footwear; electrical manufactures; chemicals; manufactured housing fixtures; bicycles; meat, fish and dairy products; non-metallic manufactures; and industrial machinery. Although these 10 industries only accounted for 14.8 percent of all Chinese exports in 1980, this ratio has increased to over 36 percent in 1992.

The products exhibiting fastest growth in recent years have been more technologically intensive resource goods such as electrical and metal manufactures, and given that China is presumably more dependent on Hong Kong companies to market such products, the actual proportion of these goods would probably be higher if re-exports were included.

China-US Trade

The United States is China's largest export market. Chinese exports to the US, including re-exports from Hong Kong have grown from $4.8 billion in 1986 to $25.7 billion in 1992. This translates into an average annual growth of 28 percent (World Bank, 1994). Over the same period, US exports to China (not including re-exports through Hong Kong) have risen from $3.1 billion to $7.5 billion. Therefore, the US bilateral trade deficit with China has climbed to $18.3 billion in 1992, second in magnitude only to Japan. Lardy (1994) estimates that once re-exports from Hong Kong are taken into account, the US-China deficit is closer to $12.5 billion.

The major Chinese exports to the United States are displayed in Figure 7. In 1992, apparel accounted for 17.4 percent of all Chinese exports, followed by toys, games and sporting goods (14.4 percent), footwear (13.2 percent), electronics (13.4 percent), leather (6.0 percent), power generating machinery (4.1 percent), and plastics (3.1 percent). Chinese exports to the United States are therefore mainly in labour intensive manufactures such as apparel, toys, footwear, and electronics.

MEXICO-NORTH AMERICA TRADE AND THE LIKELY IMPACT THE NAFTA WILL HAVE ON CHINESE EXPORTS TO NORTH AMERICA

An examination of Mexican exports to the Canada and the US (Tables 14 and 15) quickly dispels the perception that the export structures of Mexico and China are very similar. Motorized vehicles and parts together with mineral fuels made up close to 60 percent of Mexican exports to Canada and 45 percent of Mexican exports to the United States in 1992. These two products are of little importance for Chinese exports to these two economies. Furthermore, the Mexican-NAFTA trade in auto vehicles and parts, which has grown at an explosive pace in recent years, is mostly of an intra-industry nature, and China is unlikely to be involved in this area given the great distance between it and North America.

Magun and Sirimanne have calculated an export similarity index for Chinese and Mexican exports to North America (Table 16). 

Table 16

Export Similarity Index (ESI):

Chinese and Mexican exports to Canada & US

year ESI

1980 7.4

1981 6.4

1982 14.1

1983 13.0

1984 21.1

1985 29.7

1986 20.9

1987 22.1

1988 25.9

1989 28.3

1990 28.5

1991 31.7 

Source: Magun and Sirimanne (1995) 

This analysis indicates that almost one-third of Chinese exports to Canada and the US overlap with Mexican exports (ie. exports in the same product classifications). The most important industries according to

their contribution to the overall export similarity index in 1991 are: petroleum products; low-skilled, labour intensive products such as men's outer garments; children's toys, games, and sporting goods; footwear; light manufacturing goods like parts and accessories; furniture and parts; electrical/mechanical domestic appliances; calculating machines/cash registers; light fixtures and fittings, taps, cocks, and valves; and radio broadcast receivers. Magun and Sirimanne therefore conclude that China's concerns about the NAFTA are well founded and that Chinese industries will lose some of their North American market share to Mexican firms.

Chinese exports to Mexico peaked at US$125 million in 1981, and fell to US$25 million in 1985. They have since been rising, reaching US$180 million in 1992 (see Figure 8). In the 1980-1988 period, Mexico regularly enjoyed a trade surplus with China. However, this trend reversed after 1988. Mexican exports to China have shrunk by more than half since 1988, while Chinese exports to Mexico have increased dramatically from under $10 million in 1986 to $180 million in 1992. 

Synthetic fibres, metal manufactures, and chemicals made up the majority of Mexican exports to China in 1992 (Table 17), while the main Chinese exports to Mexico that year were light manufactured goods such as bicycles, apparel, fabrics, footwear, and television sets (Table 18). Since Canada and the US are unlikely to compete with China in these goods even with the lowering of tariff barriers brought about by NAFTA, it is unlikely that the NAFTA will impact on China's exports to Mexico.  

However, how will the NAFTA affect China's exports to North America? To answer this question, we must determine what will happen to Mexican exports to Canada and the United States, and hence whether these Mexican exports will displace China's exports to North America. For this, we turn to a dynamic analysis.

Dynamic Analysis

 The major Mexican exports to Canada and the United States are motorized vehicles, industrial machinery, mineral fuels and agricultural food products. These are also among the fastest growing of Mexican exports. These are exports that are not important Chinese exports to Canada and the United States. Therefore, to the extent the NAFTA increases Mexican exports in these same industries, there will be little trade diversion.

 However, a major Chinese export to North America will likely be diverted: apparel. The provisions in the NAFTA will rid Mexico of burdensome quotas in apparel and also impose strict rules of origin on outsiders. Apparel is one of Mexico's fastest growing exports to North America, and it is likely that we will see trade diversion in this sector. Other sectors will also benefit from NAFTA provisions. And it is here where the message from the Rugman model is important. Mexico's entry into the NAFTA will give Mexico a large boost in its drive to complete the diamond. As Rugman and Gestrin point out, the National Treatment provisions within the NAFTA will cause a complete restructuring of Mexican manufacturing industries. Clearly, Mexican firms will be more competitive than Chinese firms in supplying North American markets. But given that much of Mexico's manufacturing will be financed by FDI, using more sophisticated production techniques, then it is also likely that Mexico will move to higher value added industries. This will push China further into the trap of supplying low-value added, labour intensive manufactures unless China attracts technology intensive FDI.

 While we cannot forecast which Mexican industries will become world class, they are likely to be those best able to integrate into North American production patterns. We would expect to see Mexican industry upgrading and replacing East Asia imports especially as we have noted in automobiles and components, apparel and electronics. Thus, we feel that NAFTA will in the longer term, in a dynamic analysis, present significant trade diversion for East Asia.

 The only card the Chinese can offer here is to offer an even more liberal investment climate. Although China's investment climate is much better than its other East-Asian nations at similar stages of development and even at a contemporaneous level, numerous barriers still remain—local content requirements, trade balancing requirements, restrictions in certain sectors and in access to the Chinese domestic market. Only through the elimination of these investment barriers will China be able to make itself more attractive for foreign investors than Mexico. The lack of a legal institutional framework or commitments to intellectual property and National Treatment are conditions that may be necessary to encourage the foreign investment necessary. Without this deregulation, China may, at least in the North American market, face superior competition in many products in which it wishes to compete.

BARRIERS TO CHINA-NORTH AMERICAN TRADE

 Although the Chinese government has decreased its involvement in export planning, it remains heavily involved in the import sector. Import patterns reflect a strategy of ensuring a supply of raw materials and acquiring technology and have followed trends in planned domestic activity (World Bank, 1994). To control China's imports, the government uses various trade barriers such as tariffs, import restrictions, licensing requirements, export subsidies, foreign exchange controls, and restricting access to the service sector.

 The weighted average tariff rate in China is currently 32 percent, higher than the average of the developing countries (23 percent) and clearly much bigger than the developed countries (5 percent). In addition, imports are usually subjected to taxes, and customs valuation has been inconsistent. The World Bank (1994) has estimated that approximately 50 percent of all Chinese imports are subject to some form of non-tariff barrier, the most important of which are the designation of import rights (32 percent of all imports). This practice involves the assignment of import rights of certain products such as timber and fertilizers to one or a few trading companies. The World Bank has concluded that import controls and licensing are used to control three groups of imports: agricultural raw materials subject to domestic control, critical domestic production goods (e.g., steel and textiles), and nonessential consumer goods.

 Aside from a few product areas such as textiles and apparel, tariffs are not a significant trade barrier for Chinese exports to Canada. Chinese textile and apparel products are also subject to Multifibre Agreement (MFA) quota restrictions, although the Chinese quotas have been allowed to grow at 5 percent a year as opposed to 1 percent or less for Hong Kong, Taiwan, and Korea. The ultimate effect of these two restrictions is to raise the price of Chinese textile exports by 40 percent to 75 percent.

 Anti-dumping Laws

 Canada's anti-dumping laws pose a serious barrier to the continued expansion of Chinese exports to Canada. Under the relevant provisions of Canada's Special Import Measures Act (SIMA), China continues to be treated as a non-market economy in anti-dumping investigations. Thus when Revenue Canada tries to calculate the export price or the production cost of a Chinese product in question, it is allowed by the WTO to use the export price or production cost of the product in a surrogate market economy. This approach disregards any progress the Chinese have made in price reform. Even assuming that it is legitimate to apply this surrogate approach in anti-dumping cases against Chinese products at the present time, Revenue Canada’s choice of using surrogate countries that have higher levels of economic development than China is still questionable.

 A review of Canadian anti-dumping cases involving China undertaken between 1981 and 1994 reveals that most surrogate countries in these cases do not appear to have been chosen on the basis of cost comparability. In these eleven cases, six surrogates are developed countries while the remaining five are developing countries at a higher level of development than China. This surrogate approach led to high normal values for Chinese products and resulted in large dumping margins. Also, because the choice of the surrogate country is not known in advance, Chinese producers and exporters, as well as Canadian importers are unable to predict prices and implement stable pricing policies that comply with Canadian-anti-dumping law.

 Chinese goods are also heavily subjected to non-tariff barriers in the US market. A World Bank study (1993) found that 47 percent of all Chinese exports (and 62 percent of manufactured exports) to the US were subject to quotas or other barriers in the US. Furthermore, the effective protection from the non-tariff barriers range from 40 percent to 80 percent, exceeding the protection rate of tariffs (World Bank, 1993). An example of US barriers is the latest bilateral textile agreement that took effect in 1994 which does not allow for an increase in the import of Chinese garments in 1994 and only allows a 1 percent increase in 1995 and 1996. As well, anti-dumping allegations against Chinese products and its associated difficulties are a problem for the Chinese in the United States.

CONCLUSION AND POLICY IMPLICATIONS

 The policy implications of this study are clear. In order for China to maintain access to existing export markets, and to compete successfully with Mexico, progress must be made in terms of liberalizing access to the Chinese market itself. This would improve China's negotiating position with trading partners. For example, liberalization of Chinese imports would very likely lead to reciprocal acts on the part of Canada and the United States, as well as expedite China's admission into the World Trade Organization. This would improve China's competitive position vis à vis Mexico in terms of supplying the North American market.

 The investment environment in China, and the protection of intellectual property in particular are important issues that must be addressed by the Chinese government. As Porter's study shows, it is the advanced creative factors that are essential in the determination of a country's ability to innovate, and to become internationally competitive. The existence of an abundance of the basic inherited factors may cause a country to become trapped in industries that utilize these inherited factors. Since such industries are typically characterized as low value added, utilizing unskilled labour, they have low potential for converting the country into an industrialized economy that creates wealth for its citizens. The abundance of inherited factors can therefore serve as a trap that policy makers should be aware of.

 Mexico's inclusion in the NAFTA and the extension of national treatment are measures that will push Mexico out of the low-value added trap. Mexico's exit from the lowest-value added industries and its inclusion in the NAFTA will serve to further push (entrench) China into the lower-value added industries, thus reinforcing the trap Porter discusses. The provision within the NAFTA, for example with respect to apparel, will assist Mexico's development in the sense that these sectors will employ the vast pools of unskilled labour.

 Liberalization of both trade and investment environments are necessary conditions that must be satisfied by China if it is to continue to grow. This growth has two dimensions: first, China must act to maintain its existing export markets. The inclusion of Mexico in a NAFTA will improve Mexican competitiveness as compared to China in many higher value added industries, as well as some lower value added industries such as apparel. If export-led economic growth is to provide high and rising standards of living for Chinese citizens, Chinese growth must be in high value added production processes, and to do this, China must both liberalize its trade and investment environments. Otherwise, China will be "trapped" in low-value added labour intensive manufacturing. Assuming that China moves in the direction of liberalization, China can continue to pose serious competition for Mexican prducers and exporters.

BIBLIOGRAPHY 

Statistics Canada. World Trade Database (CD-ROM).Ottawa, 1994.

World Bank. China: Foreign Trade Reform, Washington: World Bank, 1994.

World Bank. China Foreign Trade Reform: Meeting the Challenge of the 1990s, Washington: World Bank, 1993

World Bank. World Development Report, Washington: World Bank, various issues.

United Nations. World Investment Report: Transnational Corporations and Competitiveness. 1995.

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