China Vs. Mexico: Manufacturing Transitions
The Fall of China
When we think of manufacturing powers, the first country that comes to mind for many Americans is China. China has boasted meteoric economic growth and governmental development for decades, leading many analysts like Ray Dalio to arrive at the conclusion that China is the next global superpower, set to rival or overtake America in the coming years. Even CIA Director William Burns stated back in 2018 that the Pacific, and specifically China, should be America’s primary region of concern in the next decades. While I mean to cast no aspersions on these individuals for their qualifications, China is simply a paper dragon, and it is in fact Mexico that should be America's primary focus.
Let’s first talk about the “Chinese threat”. The CCP has a habit of inflating their population statistics worse than Russia, and has been steadily increasing their debt holdings far in excess of anything maintainable. Many analysts have argued that China does not need to worry about debt, as the CCP’s interpretation of Modern Monetary Theory enables the government to take actions prioritizing the health of the Chinese economy decades in the future. This analysis is moronic. China owes most of its debt internally, and the local governments are running out of money to throw at their failing companies in what Jack Ma, the founder of Alibaba, referred to as a, "Pawn Shop Economy”. To be more accurate, the CCP runs its local municipalities more like an MLM, with the governments stockpiling vast quantities of useless goods and selling them at a loss to maintain favorable loans from the government. For comparison, America has a bad habit of increasing debt with little restraint: here in the US we’ve seen an almost 300% increase in total private credit since 2000. In China the increase in private credit has been over 3000% since 2000.
In addition to the debt crisis, Chinese labor costs have been skyrocketing due to the lack of young workers. 40 years after the one child policy, China is running out of 40-year-olds. Labor cost increases in China have been more severe than during the Black Death in Europe, and has climbed 1400% since 2000, while labor productivity has only increased by 200-300% depending on the industry. Current projections of China’s demographics argue that the Chinese population will be halved by 2050. The only reason we still refer to China as a manufacturing power is because of the sunk costs of the manufacturing plants. China’s economy is a bloated corpse unable to sustain itself, and now with Covid lockdowns ruining what few profitable industries the country had, it is difficult to see how manufacturing will persist in China.
The Mexican Life Raft
So what does all of this have to do with Mexico? Mexican labor costs less than ⅓ of Chinese labor, and is comparably educated. Mexico boasts free trade with the United States, and has the healthiest demography in the developing world. Mexico is culturally connected to the United States, and many in the northern provinces are happy to do business with Americans without violating any American property. Already, 77% of Mexico’s exports come to the United States, and we are lucky to have a trade partner as stable as Mexico. The population of Mexico is young and growing. With a healthy proportion of men to women, a religious culture that encourages population growth, and rapidly growing professional cohorts, Mexico represents the best of what a developing country could have to offer.
Demographic pyramid of Mexico
There are two major issues that companies will have to work through when rehousing their manufacturing centers from China to Mexico:
Finding Workers
Dealing with the Cartels
Workers are a precious commodity. Under every economic theory that has survived to this day, a young cadre of able-bodied workers are required to propel economic prosperity and regional stability. While Mexico has fantastic demographic ratios built into their population pyramid, there is not an indefinite supply of young Mexicans. Once a company hits a town somewhere in the desert, or up in the mountains, that population is out of commission for other entrepreneurs. The nature of Mexican family values prioritizes consistency over short-term benefits, so the companies that open up manufacturing centers in Juarez or Monterrey will be immovable interrelations of the family. Essentially, the first mover advantage will also be a spoiler effect for any latecomers to the Mexico party.
The second main issue in Mexico are the cartels. In some ways, the cartels are a benefit for manufacturers. The violence they perpetuate on the populace and each other are a major reason average labor costs have been maintained close to $400 a month per person since 2000. The issue for manufacturers is that not all cartels are created equal. While the Sinaloa practice extortion, they avoid hampering the activities of American companies working in their provinces as American money fuels both the cocaine trafficking industry and local commercial enterprises with foreign direct investment. Jalisco, however, is run by literal cannibals (I wish I was joking). East of Juarez, the Gulf Cartel and Jalisco have brutalized the east and south of Mexico into submission. The violence has gotten so bad that the Mexican government and Navy will often ignore Sinaloan advances so that they can focus on keeping Jalisco contained. Sinaloas are not bad for business, but Jalisco is terrible for business.
As Mexico moves from a developing country to a developed country, these problems are going to have to be resolved by both Mexican and American actors, effectively raising the value of young workers to manufacturers as they seek to escape the crumbling Chinese markets. As long as there is a supply of young Mexicans in areas that are hospitable to development, there will be opportunity for companies to salvage their Chinese losses.
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