
Put me in coach
In the run-up to this weekend’s G20 meeting in Huntsville, Ontario, much ink has been spilled regarding the value of the Chinese currency. Economists, pundits and observers of all stripes have taken positions on various sides regarding the question of how much and how fast the yuan (or Renminbi, if you prefer) needs to appreciate against other major currencies. And, of course, how willing Chinese authorities are to allow this to happen.
Hypothetical scenarios projected in some circles of a rapid appreciation of 40% have China’s export competitors salivating. Basic trade theory holds that by hiking the value of the yuan, Chinese exports become more expensive, making competing products made in countries such as Mexico that much more cost competitive. Gaining ground of this type is seen as critical in the hotly disputed U.S. market for goods such as appliances and electronics. Trade data for 2009 suggests that Mexico is already gaining some overall market share from China in the United States, and we have touched on the relative cost competitiveness between Mexico and China in this space before.

As 2009 draws to a close, Mexico, like many countries, will be happy to see the back of this year. Not only did 2009 see the worst economic decline in decades, but the steep recession was exacerbated by the outbreak of the H1N1 flu in April, which had a devastating effect on tourism and, to a lesser degree, business travel. Mexico’s deep economic integration with the United States is a key motor for the economy, and as a result, the contraction of demand for vehicles and other durable goods in the U.S.A. hit Mexico’s productive sector hard. The first two quarters of the year were practically catastrophic, as the precipitous dropoff in demand for vehicles led to layoffs and temporary plant closings in Mexico’s large vehicle manufacturing industry. Tourism, hit by the one-two punch of the slumping U.S. economy and then the flu outbreak in April, is showing tepid signs of recovery, but the sector is still expected to close the year approximately 20% below 2008 levels.