Signs of Mexico’s Ascendance Versus China

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Mexican President Calderon tours Dorval Challenger Plant with Bombardier Inc. president Beaudoin in Montreal (Christinne Muschi/Courtesy Reuters).

Mexican President Calderon tours Dorval Challenger Plant with Bombardier Inc. president Beaudoin in Montreal (Christinne Muschi/Courtesy Reuters).

Over the past two decades China emerged as a manufacturing powerhouse, dominating production in industries ranging from textiles to solar panels, semiconductors to wind turbines. Among the countries hardest hit by China’s rise – and ascension to the WTO in 2001 — was Mexico. In its wake, Mexico’s maquila industry shed thousands of jobs. On factory floors and the halls of government alike everyone talked about the possibility – and in many cases actuality – of plants leaving for the Far East.

But the decade long status quo seems to be shifting again, this time back in Mexico’s favor. More and more plants are opening in Mexico – a mix of new businesses as well as some returnees. One reason is the rising cost of labor in China.  Where once China’s wages undercut countries such as Mexico several times over, today the differential is much lower. With China’s strong economic growth and rising per capita incomes, wages too have risen — increasing 22 percent in 2011 alone. When combined with an ever more competitive Mexican peso, many analysts estimate the labor differential between China and Mexico at just 15 percent today.

This much smaller difference no longer offsets Mexico’s geographic advantage. Particularly in a scenario of high oil prices, the long plane or boat ride away from American shores – still the world’s largest economy and consumer — is a drawback. Mexico’s maquila industry too transformed in the last decade, making the most of its strengths. Where once most of the factories lining the border were purely labor arbitrage — sewing blue jeans and crafting Converse sneakers — today an increasing number run highly sophisticated, customized manufacturing operations. Aerospace companies, including Goodrich and Bombardier, have opened operations in Mexico in the last few years, as have many other high tech manufacturers that depend on fast, efficient, technically advanced responses and that create high value added products.

This shift bodes well for Mexican growth, if it continues and expands. To do this, Mexico will need to tackle a few stubborn issues. The most obvious is security. While foreign investment continues, nearly all executives think twice before opening new facilities near the border. One can’t measure the counter-factual, but a safer Mexico undoubtedly would bring more investment, more jobs, and higher economic growth.

A second challenge is the still antiquated and at times overwhelmed border crossings. Many of the current crossings need major renovations or upgrades to help shoulder their part of the now $1 billion dollars of goods and thousands of trucks that cross each day. Waits are not only at times quite long, but also often unpredictable, throwing the delicate just-in-time delivery dance of modern manufacturing into turmoil. The new U.S.-Mexico trucking agreement should alleviate some of these costs, but only if it becomes a full-fledged, permanent – as opposed to pilot – program. With the current mandate still limited, most trucking companies are holding off on the technological investments needed to enter the U.S. market, uncertain about the future payback.

Resolving these issues should give Mexico an edge over China. But in addition, it would strengthen North America vis-à-vis its competitors in the global marketplace, benefiting the United States in the process.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.