1 The Recent Evolution of Mexico’s Manufacturing Exports

Abstract. In this paper, we use the gravity model of trade to decompose Mexico’s export growth into components associated with export-supply capacity, import-demand conditions, and other factors. Some have argued that Mexico’s recent sluggish export performance is due to China’s expansion in global markets. Others have cited Mexico’s inability to make needed economic reforms, which have hurt the country’s competitiveness in manufacturing. Our results suggest that negative import-demand shocks associated with both China and the U.S. recession have contributed to the slowdown in Mexico’s export growth. Had U.S. GDP growth not decelerated after 2000, Mexico’s annual manufacturing export growth would have been 1.4 percentage points higher. Had China’s growth in export capabilities remained unchanged after 1995, Mexico’s annual export growth rate would have been 1.5 percentage points higher in the late 1990s and 3.0 percentage points higher in the early 2000s. We also examine factors that contribute to growth in Mexico’s export supply capacity