Are Mexican Factories Gaining an Upper Hand Against China’s?

Editor’s Note: This commentary was originally published in the Inter-American Dialogue’s Latin America Advisor on September 18, 2012.

With the rising cost of wages in China, manufacturers are increasingly considering Mexico an attractive location to ‘reshore’ production, McClatchy reported Sept. 10. Is Mexico gaining a competitive edge over China in terms of manufacturing? Or will other low-wage countries come to replace both China and Mexico as manufacturing destinations? What are the challenges and benefits of moving production facilities to Mexico? Can Mexico leverage the low cost of wages into more sustainable growth?

Andrés Rozental: Low wages have never been the sole determining factor for companies to decide in which country to site manufacturing facilities; otherwise countries such as Haiti or Bangladesh would be the manufacturing capitals of the world. Many other factors, such as availability of skilled labor, infrastructure, certainty of rules and regulations and fairness of the justice system, all play a significant role. True, China’s wages are rising and no longer represent an overwhelming advantage for labor-intensive industries, but salaries in Mexico and other middle-income countries are also climbing. Studies show that the all-in cost for an average factory worker in a Chinese industrial zone is more or less equal to a Mexican working in a maquiladora near the U.S. border. Where Mexico does have a clear advantage over China—and this is what is driving companies to relocate facilities to our country—is in our geographic proximity to one of the largest consumer markets in the world, economic and political stability, ability to provide just-in-time sourcing and a relatively transparent regulatory framework in which to do business. One shouldn’t forget that Mexico is fundamentally a sophisticated manufacturing economy that is growing at a very acceptable rate when compared to other emerging market economies. While it is true that we depend enormously on the strength of the U.S. economy because of NAFTA and our huge bilateral trade and investment relationship, it is equally true that Mexico, together with Canada, will always be the first to benefit from an economic recovery in our neighbor. Tens of thousands of companies have taken advantage of Mexico’s benefits and foreign direct investment flows continue to show robustness even in the face of the insecurity and violence that affect parts of the country as a result of the fight against organized crime and drug trafficking.