The Past, Present, and Future for the Textile Industry in Mexico
October 31, 2019
In 1994, the North American Free Trade Agreement (NAFTA) was ratified, causing an upheaval in the global trade and manufacturing landscapes. The restrictions, stipulations, and incentives within the newly minted trade deal suddenly made Mexico an attractive, cost-effective manufacturing option for American and Canadian countries. Consequentially, this foreign interest created a manufacturing resurgence and completely revitalized and transformed the Mexican economy.
Now, in the wake of United States-Mexico-Canada Agreement (USMCA), also referred to as NAFTA 2.0, Mexico is optimally positioned to carve even further into China’s manufacturing share of the market, particularly within the textile industry. Seemingly every day there is an increasing number of US companies manufacturing in Mexico.
But what makes Mexico such an attractive alternative? Below, you’ll discover answers to that and more.
Mexico’s Emerging Textile Manufacturing Companies
A Look at Pre-USMCA Textile and Apparel Industry
In 2013, Mexico had a $1.26 trillion economy, making it the 15th largest economy in the world. At the time, the Mexico textile and apparel industry was the 4th largest manufacturing sector within the country behind automobiles, medical devices, and aircraft. The vast majority of manufacturing operations were located in central and northeast Mexico, namely:
- Distrito Federal (DF)
- Estado De México
- San Luis Potosí
Textile manufacturing companies accounted for nearly 4.7% of Mexico’s manufacturing GDP (1.3% textiles, 2.5% apparel) and employed more than 415,000 Mexican textile laborers. Per the U.S. Department of Commerce, they specialized in the following:
- Synthetic fibers mixed with rayon, and other artificial fibers
- Fabrics with textured polyester dyes
- Taffeta fabrics with discontinuous dyes made of polyester fibers
- Fabrics of upholstery, industrial fabrics for the automotive industry
- Other fine wool fabrics
- Silk (for garments to be exported)
- Textile Machinery and Equipment
And while Mexico textiles were initially thriving in the wake of the deal, two decades after NAFTA, it appeared to have plateaued. One economist sought to see whether or not this was the case and concluded:
The results show that underlying dynamic manufacturing exports is a high dependency on manufacturing imports, particularly of capital and intermediate goods and high technology inputs. This has led to important deficits in the trade balance for important manufacturing sectors. In addition, although the Mexican economy has had trade surpluses with both Canada and the United States, it has shown increasing trade deficits vis-à-vis China, Japan, Korea, and the European Union, particularly in the manufacturing sector.
This would change after the USMCA acted like a Vitamin B booster shot to the manufacturing industry.
The Impact of USMCA on Mexican Textiles
As the Trump administration initiated the initial discussions for the USMCA, one of its stated goals was to wrest China’s control of the textile and apparel market and further integrate textile and apparel production between the U.S. Canada, and Mexico. Per the Summary of Objectives for the NAFTA Renegotiation: “[We seek to] maintain existing duty-free access to NAFTA country markets for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities.”
Seeing as this was one of the primary objectives, the trade deal kept and clarified NAFTA’s “yarn-forward” rule of origin (RoO), which allowed for textiles and clothing materials sourced from those countries to be imported duty-free. In his analysis of how this trade deal might impact the manufacturing industries, Dr. Sheng Lu writes:
The “yarn-forward” RoO means that fibers may be produced anywhere, but each component starting with the yarn used to make the apparel garments must be formed within the free trade area, i.e., by USMCA members. The “yarn-forward” rule sometimes is also called “triple transformation,” as it requires that spinning of the yarn or thread, weaving or knitting of the fabric, and assembly of the final apparel garments all occur within the free trade area. Specifically, if an apparel item is made of the following yarns and fabrics, the sourcing of these yarns and fabrics need to be done from the USMCA region so that the apparel item can be eligible for the import duty-free treatment under USMCA.
Since the new trade bill’s ratification, requirements such as this have made China an increasingly less attractive option for clothing manufacturing companies in comparison to Mexico. This has led to a diaspora of American-based companies fleeing China in favor of greener pastures and closer proximity to home. Consequentially, Mexican textile imports and exports have seen notable increases over the past two years with projections expecting this growth will continue through 2019 and into 2020. Per Exports.Gov:
U.S. Textile Export to Mexico:
- Total Textiles & Apparel: $5.99 Bn
- Apparel: $.88 Bn
- Total Textile Mill: $5.11 Bn
- Yarn: $.54 Bn
- Fabrics: $3.87 Bn
- Total Textiles & Apparel: $6.35 Bn
- Apparel: $.99 Bn
- Total Textile Mill: $5.36 Bn
- Yarn: $.65 Bn
- Fabrics: $4 Bn
U.S. Textile Import from Mexico:
- Total Textiles & Apparel: $2.46 Bn
- Apparel: $.83 Bn
- Total Textile Mill: $1.63 Bn
- Yarn: $.26 Bn
- Fabrics: $.58 Bn
- Total Textiles & Apparel: $2.58 Bn
- Apparel: $.84 Bn
- Total Textile Mill: $1.73 Bn
- Yarn: $.3 Bn
- Fabrics: $.59 Bn
Benefits of Textile Manufacturing in Mexico
There are a host of reasons why there is a growing number of US companies doing business in Mexico. These include:
- Rising Labor Costs in China – In recent years, China has lost a major part of its competitive advantage in textile manufacturing due to the fact that labor costs have increased dramatically over the past decade. According to a McKinsey study: “In 2005, labor costs in China were about one-tenth what they were in the US, according to McKinsey. Today they’re about one-third. The rise has made it so that labor in some “nearshore” countries is not much more expensive—or possibly even cheaper than in China.” Today, labor costs in China are estimated to be $5.51 US/hour.
So, although the USMCA created provisions allowing Mexican labor to congregate into unions, the labor costs remain competitive on a global scale. Presently, a fully burdened Mexican textile employee costs approximately $4.75/hour; cut and sew employees with base salaries and incentives typically range from $5.80 to $6.00. Thus, even if you take the high-end estimates, the comparative advantage over China is readily apparent, particularly when you consider our next factor—specialization of the labor force.
- Specialized Labor – Despite the fact that the cost of labor is relatively flat between China and Mexico, Mexican labor becomes increasingly more attractive an option when you consider the fact that Mexico has encouraged and promoted the specialization of workers within the textile and apparel industry. This is evidenced by the following textile goods:
- Seat covers
In addition, there has been a congruent increase in the number of manufacturing education programs within the country. Such programs produce employees that are highly educated, technically trained, and intimately understand the “going-ons” within a textile maquiladora.
- Proximity to the U.S. – As oil and labor prices skyrocketed, it became costlier to not only make the goods but ship them back to the U.S. Consequently, American businesses have been forced to reconsider whether or not there was a true cost advantage of doing business overseas.
Mexico’s proximity to the U.S. has removed many of the logistical costs and headaches caused by doing business in Asia. The nearness and increased infrastructure investments across Northern Mexico have made transport back to the U.S. a relatively simple and cost-effective process due to the following factors:
- Shortened supply chain
- Decreased turnaround timelines
- Decreased shipping costs
- Operating in a similar time zone
- Increased visibility and oversight
Per Miguel Angel Andreu, a leading Mexican textile and apparel consultant, “the Mexican apparel and garment industry is increasingly using its low costs and proximity to the US to counter the messaging used by Chinese firms. “Manufacturers are focusing on their ability to offer flexibility and fast turnaround times, especially as US buyers appear increasingly reluctant to source high volumes of clothing from China due to the continuing uncertainty in the US market.”
- Higher quality production – There has been a growing effort within the Mexican textile and apparel industry to distance itself from the image of cheaply made high-volume production and instead shifting the focus on moving into niche markets and producing high-quality materials. As a result, Mexican clothing producers are working hand in glove with American brands to help them hit their quality standards.
Mexican Clothing Manufacturing Companies
If you’re an American textile or apparel business considering a move down south, there’s no reason to wait. An increasing number of businesses are rushing to join the throng of competitors already enjoying the benefits of setting up shop in Mexico. And as the saying goes, “If you can’t beat them, join them.”