Factor Price Equalization – Outsourcing to China or Mexico?

Twenty years ago, one of the arguments for NAFTA was that free trade would boost the demand for Mexican workers hopefully increasing their real wages. Ten years we opened our markets to Chinese produced goods. Over the last decade, a lot of the demand for Mexican workers shifted towards Chinese workers. Pan Kwan Yuk reports on an interesting analysis by Carlos Capistran, an economist at Bank of America Merrill Lynch:

Not only are average hourly manufacturing wages in Mexico now lower than those in China in constant dollar terms, they are 20 per cent less.

Capistran produced a chart of Chinese and Mexican hourly wages in US$. Back in 2003, Mexican wages were around $2 an hour and are now around $2.50 an hour. Chinese wages ten years ago were around $0.60 an hour and are now almost $3 an hour. The story continues:

But is this necessarily a good thing for Mexico? True, stagnant salaries over the past decade have been credited with reviving Mexico’s manufacturing sector, which was hard hit by China’s entry on to the world stage following membership into the World Trade Organisation in 2001. A study by Barclays last year reckoned that the rise of China as the “world’s factory floor” chipped about 60 basis points off Mexico’s gross-domestic-product growth every year between 2002 and 2006. Some of the biggest casualties in Mexico’s manufacturing sector were textiles, clothing and shoes. And now thanks to soaring wages in China, high transportation costs and the steady recovery seen in the US economy, the tide is turning back in Mexico’s favour ... Optimism over Mexico’s growth prospects has made the country a darling among international investors … By contrast, in Mexico, wage stagnation, under-employment and inflation have eroded the income level of some 31m Mexicans ... as many as 60m people are living below the poverty line. This in a nation of 113m.

We should forgive the Mexican workers for not being overjoyed at this news. Maybe they have gained their competitive advantage but only because wages in Mexico remain very low. Then again – one should have expected the benefits from free trade over the past decade to accrue to two parties – the multinationals hiring low cost foreign workers and Chinese workers with Mexican workers not faring so well from freer trade.