Mexico and China Unit Labor Costs

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This chart 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.

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 be built 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.