The interdependence among manufacturing facilities in the United States, Canada, Mexico, and the Caribbean Basin region is growing, reports the U.S. International Trade Commission (ITC) in its report Production Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations, 1995-1998.

The ITC, an independent, nonpartisan, factfinding federal agency, has published the report annually since 1986. This year's report focuses on the motor vehicle, television receiver, and apparel industries and examines cross-border rationalization of production and other strategies employed by those industries to reduce costs or to achieve other competitive advantages in U.S. and third-country markets. Highlights follow.

• Collectively, U.S. exports of all products to Canada, Mexico, and the Caribbean Basin rose by 5 percent ($11.3 billion) in 1998 to $232.3 billion, whereas exports to other regions of the world fell by 5 percent ($19.9 billion) to $402.4 billion. U.S. trade with these North American partners accounted for 37 percent of total U.S. exports and 31 percent of U.S. imports in 1998.

• Imports under the production-sharing provisions of the Harmonized Tariff Schedule of the United States (HTS) continue to account for an important portion of U.S. trade with its North American partners despite a shift by some firms to enter imports free of duty under the North American Free Trade Agreement (NAFTA), the Caribbean Basin Economic Recovery Act (CBERA), or the Information Technology Agreement. The official reported value of products entered under the production-sharing provisions declined by $5.1 billion (6 percent) in 1998 to $74.1 billion. Similarly, the reported value of U.S. content in such imports from all countries decreased by 5 percent ($1.4 billion) in 1998 to $25.2 billion.

• Increased investment in maquiladora plants during the past five years can largely be attributed to currency devaluations in Mexico that have further lowered the cost of Mexican labor; provisions for duty-free U.S. imports of apparel from Mexico under HTS heading 9802.00.90 (created by NAFTA); expansion of assembly operations in Mexico (using U.S. components) instead of importing from Asia, which allows firms to take advantage of preferential tariff treatment under NAFTA; and sustained demand in the U.S. market.

• U.S. and foreign automakers have accelerated the degree to which their product lines are rationalized between Mexico and their other North American operations in response to the NAFTA's market access provisions. Although the level of integration between Mexican and U.S. operations has not reached that of the U.S. and Canadian industries, Mexico's expansion of preferential trade agreements with non-NAFTA trade partners provides automakers with duty-free access to more countries from their assembly facilities in Mexico than from their plants in the United States, encouraging further investment in Mexico.

• Production-sharing operations for smaller screen color television receivers, located almost exclusively in Mexico, have evolved from simple component assembly to highly integrated operations that produced $3.5 billion of finished receivers in 1998, of which 90 percent was exported to the United States. These operations have permitted North American-made televisions to maintain price competitiveness with imports from Asia (especially Malaysia and China).

• U.S. color picture tube production is likely to remain strong and continue growing as long as cathode-ray tubes (CRT) remain the dominant display technology. CRT technology will likely remain the choice for smaller screen television receivers where price is the key factor. The rising trend toward larger screen sizes will benefit U.S. production of large screen television receivers vis-a-vis production in Mexico until new flat-panel display technologies become dominant.

• U.S. imports of apparel from Mexico and the Caribbean Basin exceeded the growth of such imports from Asia, in large part due to the elimination of tariffs and quotas under NAFTA on garments and other textile articles assembled in Mexico from "fabric wholly formed and cut in the United States." Such apparel imports from Mexico rose by $983 million (23 percent) to $5.2 billion during 1998 as the value of U.S. fabric employed in the Mexican assembly process increased by $519 million (18 percent) to $3.4 billion.

• In contrast to Mexico, apparel from certain Caribbean Basin countries qualify for guaranteed access levels (GALs) in the U.S. market, but importers must pay duty on the value added to garments outside the United States. Nonetheless, imports of apparel under the production-sharing provisions from the Caribbean Basin also continued to expand, rising by $529 million (8 percent) to $6.9 billion in 1998. The U.S. content of these entries increased by $306 million (7 percent) to $4.4 billion.

• The phase-out of U.S. import quotas by 2005 under the World Trade Organization textile agreement will gradually erode the preferences of CBERA countries under the GALs, possibly resulting in a gradual shift of some assembly operations from CBERA countries to Mexico. Major textile manufacturers also indicate that the establishment of vertically integrated operations, as well as integrated manufacturing networks, in Mexico is likely to help those firms recapture some of the business previously lost to Asian competitors in the North American market.

Production Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations, 1995-1998 (Inv. No. 332-237, USITC Publication 3265, December 1999) will be posted on the ITC's Internet server at www.usitc.gov/reports.htm (search by title or publication number). A printed copy may be requested by calling 202-205-1809 or by writing to the Secretary, U.S. International Trade Commission, 500 E Street, SW, Washington, DC 20436. Requests may also be faxed to 202-205-2104.