Economy: What China Threat? Mexico's manufacturing slump was the result of its own problems, not rising competition from the East.

Byline: Joseph Contreras

Sinophobia was short-lived in Mexico. As the only big manufacturing exporter to the United States in Latin America, Mexico was uniquely worried about the threat posed by cheaper labor in Asia. More than 800 assembly plants known as maquiladoras closed their doors between 2001 and 2004, resulting in the loss of over 200,000 jobs. From late 2001 through 2003, the maquiladora industry shrank by 0.4 percent annually, and everyone assumed they knew the cause. The "China threat" quickly became the stuff of popular headlines--and has faded just as quickly now that Mexico is back.

And how: manufacturing output is soaring again, and exports rose 26 percent in the first quarter this year, lifting Mexico's trade surplus to its highest level in nearly a decade. Alfredo Thorne, senior Latin America economist for JPMorgan Chase, says in a recent report that the diagnosis behind the China scare was "hasty and superficial": Mexico's slump was due mainly to internal factors. Yet fear of China also helped spur recovery by triggering an aggressive response from Mexican companies. They shifted from cheap exports like $199 TVs into more-valuable export products like fiber-optic transmission equipment, and took steps to remedy the slowdown in productivity and run-up in labor costs that were the primary causes of the manufacturing recession. Those moves in turn helped lure back foreign investors, whose capital drives the maquiladoras. The lesson: no question China is a competitive threat, but it is not the bogeyman behind every piece of bad economic news.

Mexico learned that lesson the hard way. Its manufacturing industry is centered in states on the U.S. border, which are reminiscent in some ways of the boom provinces of southern China. And the western state of Jalisco has emerged as the Silicon Valley of Mexico. The capital city of Guadalajara hosts giants like Hewlett-Packard and Texas Instruments, as well as subcontractors that build the printers and laptops sold under those brand names. During the slump, two such subcontractors--On Semiconductors and Multek--closed their plants. Some firms that remained began to transfer operations to China. "We lost several production lines--low-cost ink-jet printers, laptops, cell phones--that moved to China," says Federico Lepe, Jalisco's deputy secretary for foreign trade and investment. "We needed to transform ourselves from being a perspiration industry to an inspiration industry."

And so they did: the plant outside Guadalajara where IBM began making electronic typewriters in 1975 now makes high-capacity data-storage cartridges and assembles self-service kiosks for clients like DHL. Electronics companies accounted for nearly 77 percent of the $15.5 billion in annual exports from Jalisco last year, up from 55 percent in the slump year of 2003.

The resurgence of Mexican ...