Promoting the Development of the Semiconductor Ecosystem in Mexico

Annex F. Trade analysis methodology

Understanding a country’s competitive standing within the different steps of the supply chain is crucial to determine trade dependencies and detect possible supply disruptions. This analysis uses two complementary metrics to assess specialisation and market concentration for Mexico’s imports: the revealed comparative advantage (RCA) and the Herfindahl-Hirschman Index (HHI). Box A F.1 presents the detailed definitions and criteria used in this report.

Box A F.1. Methodological framework

The RCA is a metric that compares a country’s share of exports in a particular segment to the global share of those exports. Therefore, the metric is useful for assessing and understanding a country’s specialisation in each segment within the global market. The expression of the RCA is as follows:

${RCA}_{Ai}= \frac{\frac{X_{Ai}}{\sum _{j \in P}{X}_{Aj}}}{\frac{X_{wi}}{\sum _{j \in P}{X}_{wj}}}$

Where $X_{Ai}$ represents the exports of country $A$ in segment $i$, $\sum _{j \in P}{X}_{Aj}$ represents the total exports of country $A$.¹ $X_{wi}$ is the worlds’ exports of segment $i$, $\sum _{j \in P}{X}_{wj}$ accounts for the world’s total exports of all goods. Therefore, a value of the RCA above 1 indicates a comparative advantage.

The Herfindahl-Hirschman Index (HHI), which is calculated as the sum of the squared market shares of each country for a certain good, is used to measure the level of concentration in each market. To mitigate the impact of noise and outliers, a three-year average of trade flows is used throughout the analysis. The index would equal 1 in the case of a monopoly and converge to 0 with a large number of atomistic suppliers. Thus, the closer to zero, the lower the concentration.

The interpretation of the HHI level varies depending on the context. Vicard and Wibaux (2023[1]) and Bonnet and Ciani (2023[2]) deem a product to be concentrated when the index is above 0.4. Following Kowalski and Legendre (2023[3]), this paper considers that markets with an HHI between 0.15 and 0.25 are moderately concentrated, while markets with an HHI greater than 0.25 are highly concentrated.

This report establishes three criteria to assess Mexico’s dependence on its imports. First, gross imports of good $k$ by Mexico need to be overall highly concentrated (HHI >0.4). Additionally, the ratio of exports to imports of good $k$ in Mexico must be lower than the 90th percentile of the distribution and the imports from Mexico of good $k$ need to amount to USD 10 million or more. In the absence of production data, these criteria help identify trade dependencies while avoiding misclassification of countries with significant domestic production of good $k$.

Note: 1. The set {P} contains all of the goods available in the UN Comtrade database.

Sources: Vicard, V. and P. Wibaux (2023[1]), “EU Strategic Dependencies: A Long View”, http://www.cepii.fr/PDF_PUB/pb/2023/pb2023-41.pdf; Bonnet, P. and A. Ciani (2023[2]), “Applying the SCAN methodology to the Semiconductor Value Chain”, https://publications.jrc.ec.europa.eu/repository/handle/JRC133736; Kowalski, P. and C. Legendre (2023[3]), “Raw materials critical for the green transition: Production, international trade and export restrictions”, https://doi.org/10.1787/c6bb598b-en.

References

[2] Bonnet, P. and A. Ciani (2023), “Applying the SCAN methodology to the Semiconductor Value Chain”, JRC Working Papers in Economics and Finance, No. JRC133736, https://publications.jrc.ec.europa.eu/repository/handle/JRC133736.

[3] Kowalski, P. and C. Legendre (2023), “Raw materials critical for the green transition: Production, international trade and export restrictions”, OECD Trade Policy Papers, No. 269, OECD Publishing, Paris, https://doi.org/10.1787/c6bb598b-en.

[1] Vicard, V. and P. Wibaux (2023), “EU Strategic Dependencies: A Long View”, CEPII Policy Brief, No. 41, Centre d’études prospectives et d’informations internationales, http://www.cepii.fr/PDF_PUB/pb/2023/pb2023-41.pdf.