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Great Graphic: Mexico and China Unit Labor Costs

Summary:

 

Mexico has been gaining competitiveness over China before last year’s depreciation of the peso.

The depreciation of the peso, and other US actions can contribute to the destabilization of Mexico.

An economically prosperous and stable Mexico has long been understood to be in the US interest.

 

This Great Graphic was posted by David Merkel on his AlephBlog with a hat tip to Sober Look.  It looks at the divergence of unit labor costs in China and Mexico since 2007 through 2015.

The Mexican peso depreciated 17% last year.  The yuan fell 6%.  That 11% differential likely swamped the change in productivity and wages.  That would translate into even greater divergence in unit labor costs.  The depreciation of the peso, if not offset by rising inflation or other costs, can boost the competitiveness of Mexico but also could create destabilizing dislocations.

Mexico has a number of macroeconomic challenges, including drug lords, corruption, and declining oil output, which are quite separate from trade and currency issues.   Some part of the peso’s decline in H2 16 (~11.8%) was a function of a more confrontational attitude toward Mexico by Trump.  Most of that loss was recorded after the US election.   Ironically, the depreciation of the peso may boost Mexico’s competitiveness.  It also risks further destabilizing Mexico.

Unit Labor Costs in China and Mexico

- Click to enlarge

 

If the US Administration thinks Mexico is a challenge now, imagine the challenge if the peso continues to depreciate on a trend basis and the economy suffers.  In the last few years, more Mexicans have left the US to return home than entering the US.  Economic stress could see a reversal and new flight into the US.  Mexico has elections next year.  The Administration’s antagonistic stance may undermine the center and facilitate the election of Mexico’s brand of a populist like AMLO (Andrés Manuel López Obrador).   Mexico’s Economic Minister Guajardo is in Washington DC today and tomorrow.  Today President Trump indicated the border wall would being in months.

Many American businesses and officials had recognized that American prosperity requires prosperity outside the US, including Mexico, Europe, and Asia.   The issue may be how expensive it will be to learn the lesson again.

 

Full story here
Marc Chandler
Marc Chandler is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. He regularly appears on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH
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