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Great Graphic: Mexico and China Unit Labor Costs

byMarc Chandler
January 25, 2017
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Great Graphic: Mexico and China Unit Labor Costs

by Marc Chandler

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.

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.

Disclaimer

This post was originally published by Marc Chandler at his blog, MarcToMarket.com

Copyright © Marc Chandler

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Author
Marc Chandler
Marc Chandler has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks.

After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

Disclaimer
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.
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