Ease up on the anti-Mexican sentiments
After filming a Nassau Humane Society rock concert on Saturday night in the Atlantic Rec Center I came home to relax and my preferred way to do that is turning on the Comedy Channel. One of my favorite bad boy comedians was on, Ron White, also known from his contributions to the Blue Collar Comedy Tour with Jeff Foxworthy.
Cigar in hand and whiskey on the table, Ron was in the middle of a rant explaining why it would be good to buy the country of Mexico with cheap dollars. His reasoning was obviously full of great logic taken over the top with the final result of his dialog being that the US would not have to build a ridiculous wall if it would economically annex every country in Latin America all the way down to the Panama Canal. This got me thinking about the latest, not so obvious, economic moves that are creating a Ménage a Trois.
Here is what’s happening to the South of Us
When it comes to global manufacturing, Mexico is quickly emerging as the “new” China. Insiders know that Mexico has leapfrogged China to be ranked as the cheapest country in the world for companies looking to manufacture products for the U.S. market. India is now No. 2, followed by China and then Brazil.
Geographic Proximity
In fact, Mexico has become so cheap that even Chinese companies are moving there to capitalize on the trade advantages that come from geographic proximity. The influx of Chinese manufacturers began early in the decade and by 2005, there were 20-25 Chinese manufacturers operating in such Mexican states as Chihuahua, Tamaulipas and Baja. Since then the numbers and investments are rapidly rising and companies are taking these steps with the ultimate goal of selling cars and other products to U.S. consumers.
Mexico’s allure as a production site that can serve the U.S. market isn’t limited to China-based suitors. Even U.S. companies are increasingly realizing that Mexico is a better option than China.
There is already a term for it “nearshoring” or “reverse globalization.”
But the reality is this: with wages on the rise in China, ongoing worries about whipsaw energy and commodity prices, and a dollar-yuan relationship that’s destined to get much uglier before it has a chance of improving (if ever), manufacturers with an eye on the still huge American market are increasingly realizing that Mexico trumps China in virtually every equation the producers run.
The real eye opener was the 2008 speculative oil price hike that sent crude oil prices up to a record level in excess of $147 a barrel – an escalation that caused shipping prices to soar. Suddenly, the labor cost advantage China enjoyed wasn’t enough to overcome the costs of shipping finished goods thousands of miles from Asia to North America.
Mexico’s advantages
•    The U.S.-Mexico Connection: There’s no question that China’s role in the post-financial-crisis world economy will continue to grow in importance. But contrary to the conventional wisdom, U.S. firms still export three times as much to Mexico as they do to China. Mexico gets 75% of its foreign direct investment from the United States, and sends 85% of its exports back across U.S. borders. As China’s cost and currency advantages dissipate, the fact that the United States and Mexico are right next to one another makes it logical to keep the factories in this hemisphere – if for no other reason that to shorten the supply chain and to hold down shipping costs.
•    The Lost Cost Advantage: A decade or more ago, in any discussion of manufactured product costs, Asia was hands-down the low-cost producer. That’s a given no more. Recent reports show that Asia’s production costs are 15% to 20% higher than they were just four years ago. A U.S. Bureau of Labor Statistics report from last March reaches the same conclusion. Compensation costs in East Asia – a region that includes China but excludes Japan – rose from 32% of U.S. wages in 2002 to 43% in 2007, the most recent statistics available. And since wages are advancing at a rate of 8% to 9% a year, and many types of taxes are escalating, too, East Asia’s overall costs have no doubt escalated even more in the two years since the BLS figures were reported.
•    The Looming Currency Crisis: For the past few years, U.S. elected officials and corporate executives alike have groused that China keeps its currency artificially low to boost its exports, while also reducing U.S. imports. The U.S. trade deficit with China has soared, growing by $20.2 billion in August alone to reach $143 billion so far this year. The currency debate was part of the discussion when President Obama visited China last week and the news is not encouraging. Because China’s yuan has strengthened so much, goods made in China are already not the bargain they once were. Those currency crosscurrents aren’t a problem with the U.S. and Mexico however. As of last Monday, the dollar was down about 15% from its March 2009 high. At the same time, however, the Mexican peso had dropped 20% versus the dollar. So while the yuan was getting stronger as the dollar got cheaper, the peso was getting even cheaper versus the dollar.
•    Trade Alliance Central: Everyone’s familiar with the North American Free Trade Agreement (NAFTA).  But not everyone understands the impact that NAFTA has had.  Mexico’s trade with the United States and Canada has tripled since NAFTA was enacted in 1994. Even better, Mexico has 12 separate free-trade agreements that involve more than 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade. Mexico can export – duty-free – to the United States, Canada, the European Union, most of Central and Latin America, and to Japan.
China will still be a leading force to reckon with.
In the current short term global scheme of things, none of this is probably a game-changer when it comes to China. That country is an economic monster and is a market that U.S. investors cannot afford to ignore.  Given China’s emerging strength and its increasingly dominant financial position, it’s going to have its own consumer markets to service for years to come. 1.5 Billion people is a lot of marketplace.
From a regional standpoint, these developments all show that we’re in the earliest stages of what will be an even-closer Mexican/American relationship – enhancing the existing trade partnership in ways that benefit companies on both sides of the border.
So my advice to anything dealing with the Mexican border is to quit being quasi serious about building walls to block off the US border with Mexico. Get real and with the times. Understand what Geographic Proximity means. It means that your next door neighbor is more important when you’re in trouble in the middle of the night, than your best friend who lives a hundred miles away. It also may mean that American will go and find jobs in Mexico in the future.
While you are working on your attitude adjustment we’ll be watching for signs of a resurgent Mexican manufacturing industry that’s ultimately driven by Chinese companies – because we know the American companies doing business with them will enjoy the fruits of their labor. Just ask Walmart or Coca Cola.
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