Monday, August 6, 2012

Mexico's Economy: Coming to Terms with China

By: Sean Goforth


Has China’s economic rise come at the expense of Mexico? To many casual observers and experts alike, the answer is yes. The International Economy, a trade journal, once concluded, “China is eating Mexico’s lunch.” “China competes with Mexico and buys from Brazil,” noted The New York Times on June 17. 

China’s entry into the World Trade Organization in 2001 marked the onset of a decade-long slowdown in Mexico, where economic growth averaged 1.8 percent annually. Foreign investment flocked to China, setting up factories where hourly wages were among the lowest in the world. Other factors supported China’s export-led growth model, including low fuel prices that allowed for profitable trans-Pacific shipment of manufactures. Seven years after NAFTA granted Mexico privileged access to the US market, Mexico’s position appeared undercut by China’s incorporation into the global economy. 

In some industries, such as clothing assembly, China certainly hurt Mexico. However, the impact has been more limited than widely supposed.  China and Mexico manufacture different classes of products, cheap baubles in the case of the former and heavy industrial goods in the case of the latter. Hence, as the Dallas Federal Reserve Bank put it in 2004: “There is little correlation between China’s gains and Mexico’s losses.”

The notion that Mexico simply lost out to a more productive China is even less persuasive as one moves toward present-day. From 2005-2010, the percentage of US imports from Mexico increased, from about 10 to 12 percent, as did China’s share, 14 to 17.5 percent. China’s gains accrued alongside Mexico’s gains, not at the expense of Mexico. (Over the same period, the percentage of US imports from Canada, Japan, Germany and Britain decreased.)

Instead, in this more recent period Mexico may have lost out by not having China as an investor. According to the UN Economic Commission on Latin America, China invested $1.1 billion in Mexican industry from 2003-2008, a sliver given the $25 billion it invested across Latin America in 2008 alone. In a list of China’s largest foreign investments in Latin America prior to 2009, Mexico is notably absent. 

Now, as the global economy shifts gears away from the commodity boom brought on by Asia’s rise, several trends behoove Mexico. China has absorbed most of its vast labor pool, driving up wages. Wages in southeastern China are increasing at 15 percent a year, and for the country as a whole worker pay is expected to double by 2015. Inflation is a worry as food prices and apartment rents shadow wage increases. As a result, the US Chamber of Commerce estimates that hourly wages in China are nearly on par with Mexico’s. 

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