There's Hope for Mexico and Central America | Mexico

There's Hope for Mexico and Central America
Andres Oppenheimer

The conventional wisdom says that the U.S. economic slowdown will be devastating for Mexico and Central America because of their excessive dependence on the United States. But the conventional wisdom may be wrong.

A new phenomenon is turning out to be a blessing for Mexico and Central American countries -- China's rising wages. The appreciation of China's currency and China's increasingly skilled labor force are driving up Chinese salaries, moving growing numbers of U.S. companies to relocate their manufacturing plants to Mexico, and to a lesser extent to Central America.

Granted, most international economists are stressing that the U.S. economic slowdown will mean fewer U.S. imports, smaller family remittances, and fewer tourists, all of which will hurt Mexico and Central America harder than the rest of Latin America.

The International Monetary Fund said in a recent report that a protracted U.S. economic slowdown will have a substantial negative impact on Mexico's economy. And left-of-center Nobel prize winning economist Joseph Stiglitz reminded me in an interview that "when the United States sneezes, Mexico gets a cold."

To make things worse, Mexico's bloody drug wars, which have cost more than 40,000 lives over the past five years, are contributing to the idea that Mexico, as well as its violence-ridden southern neighbors, are doomed for the foreseeable future.

But there is another school of thought, one which says that the impact of rising wages in China will largely offset the latest wave of bad economic news for Mexico.

According to a recent study by J.P. Morgan, while wages in China's manufacturing sector were 237 percent cheaper than in Mexico's 10 years ago, they are only 14 percent cheaper today -- virtually nothing if you take into account the fact that transporting goods from China to the United States is much more expensive than doing it from Mexico.

Mexico's share of U.S. manufacturing imports grew from 11.3 percent in 2005 to 14 percent last year, the study says.

"The salary gap between China and Mexico has shrunk dramatically," Gabriel Casillas, J.P. Morgan's chief economist in Mexico, told me this week. "We are seeing a major relocation of companies from China to Mexico."

The auto industry has taken the lead.

Ford, Volkswagen, Toyota and Mazda have announced that they will set up new manufacturing plants or expand existing ones in Mexico.

And the aerospace industry is following suit, with Airbus, Eurocopter and Bombardier expanding operations in the country, according to press reports.

Won't this trend be affected by the wave of violence? I asked Casillas.

"Surely, violence is a factor, and minimizing it would be irresponsible," he responded. "But violence has been mostly limited to northern Mexico, Guerrero and Michoacán, while most of the new investments are taking place in the center of the country."

Other upbeat economists tell me that the recent downgrading of the U.S. credit rating by Standard and Poor's and its economic aftershocks is likely to result in a further appreciation of the Chinese currency.

Faced with a weaker U.S. demand for its goods, China will accelerate its shift from an export-led economy to a domestic consumption-led one, and that will require a stronger currency and higher wages, they say.

Rogelio Ramirez de la O, head of Mexico's Ecanal economic forecasting firm, told me that is somewhere in the middle between optimists and pessimists.

"Higher wages in China will mitigate the impact of the U.S. economic impact, but will not offset it," he says. He foresees Mexico's economy growing by 3.8 percent this year, a little less than previously expected.

My opinion: China's rising salaries are a blessing for Mexico, and could be a big boon for Central America. It could be Mexico's biggest opportunity in recent years to come back from economic stagnation and join Brazil, India, South Africa and other booming emerging powers.

But to take full advantage of it, Mexico will have to reduce its violence levels and pass long-delayed labor, fiscal and energy reforms after the 2012 presidential elections. It's a golden opportunity. We shall soon know whether its politicians have the guts to grab it.

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