Mexican President Calderon tours Dorval Challenger Plant with Bombardier Inc. president Beaudoin in Montreal (Christinne Muschi/Courtesy Reuters).

Over the past two decades China emerged as a manufacturing powerhouse, dominating production in industries ranging from textiles to solar panels, semiconductors to wind turbines. Among the countries hardest hit by China’s rise – and ascension to the WTO in 2001 — was Mexico. In its wake, Mexico’s maquila industry shed thousands of jobs. On factory floors and the halls of government alike everyone talked about the possibility – and in many cases actuality – of plants leaving for the Far East.

But the decade long status quo seems to be shifting again, this time back in Mexico’s favor. More and more plants are opening in Mexico – a mix of new businesses as well as some returnees. One reason is the rising cost of labor in China.  Where once China’s wages undercut countries such as Mexico several times over, today the differential is much lower. With China’s strong economic growth and rising per capita incomes, wages too have risen — increasing 22 percent in 2011 alone. When combined with an ever more competitive Mexican peso, many analysts estimate the labor differential between China and Mexico at just 15 percent today.

This much smaller difference no longer offsets Mexico’s geographic advantage. Particularly in a scenario of high oil prices, the long plane or boat ride away from American shores – still the world’s largest economy and consumer — is a drawback. Mexico’s maquila industry too transformed in the last decade, making the most of its strengths. Where once most of the factories lining the border were purely labor arbitrage — sewing blue jeans and crafting Converse sneakers — today an increasing number run highly sophisticated, customized manufacturing operations. Aerospace companies, including Goodrich and Bombardier, have opened operations in Mexico in the last few years, as have many other high tech manufacturers that depend on fast, efficient, technically advanced responses and that create high value added products.

This shift bodes well for Mexican growth, if it continues and expands. To do this, Mexico will need to tackle a few stubborn issues. The most obvious is security. While foreign investment continues, nearly all executives think twice before opening new facilities near the border. One can’t measure the counter-factual, but a safer Mexico undoubtedly would bring more investment, more jobs, and higher economic growth.

A second challenge is the still antiquated and at times overwhelmed border crossings. Many of the current crossings need major renovations or upgrades to help shoulder their part of the now $1 billion dollars of goods and thousands of trucks that cross each day. Waits are not only at times quite long, but also often unpredictable, throwing the delicate just-in-time delivery dance of modern manufacturing into turmoil. The new U.S.-Mexico trucking agreement should alleviate some of these costs, but only if it becomes a full-fledged, permanent – as opposed to pilot – program. With the current mandate still limited, most trucking companies are holding off on the technological investments needed to enter the U.S. market, uncertain about the future payback.

Resolving these issues should give Mexico an edge over China. But in addition, it would strengthen North America vis-à-vis its competitors in the global marketplace, benefiting the United States in the process.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

An elderly Guatemalan woman rests before leaving Bolivia from Santa Cruz (David Mercado/Courtesy Reuters).

For those of you that haven’t seen this yet — the Economist’s Americas editor Michael Reid provided a great overview of Latin America’s progress in recent years, as well as the challenges that lie ahead in his testimony before the Senate Foreign Relations Committee Sub-Committee on the Western Hemisphere two weeks ago.

The following are two, slightly less optimistic pieces – based on economics, and in particular income inequality. FOCAL recently released a policy brief authored by Guillermo Perry and Roberto Steiner on “Economic Growth and Inequality” in Latin America. Two graphs stand out here. The first, on page 3, reflects that while inequality is getting better in Latin America, the situation is still pretty abysmal, as the most equal countries in the region are still more unequal than most countries across the globe. The figure on page 5 suggests a possible explanation: Latin American countries have among the least progressive taxation systems in the world.

A World Bank study from 2008, “The Measurement of Inequality of Opportunity: Theory and an application to Latin America” gives a sense of just how much this matters in the lives of Latin Americans. Analyzing data from 6 countries in the region, it shows that up to half of differences in income are due to structural inequalities. Getting ahead in Latin America today, it seems, still depends on being born a specific race, in a particular place, and within a certain kind of family.

Lastly, CFR’s independent Task Force report “Global Brazil and U.S.-Brazil Relations” argues that the U.S. must take Brazil seriously as the newest pillar in a multipolar world.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

U.S. President Barack Obama and Brazil's President Dilma Rousseff toast during lunch in Brasilia (Ho New/Courtesy Reuters).

Today the Council on Foreign Relations is releasing its independent Task Force report, “Global Brazil and U.S.-Brazil Relations”.  I sat in as an observer for the Task Force, ably led by co-chairs Samuel W. Bodman — former Secretary of Energy under George W. Bush — and James D. Wolfensohn — chairman of Citigroup’s international advisory board and former president of the World Bank Group — and directed by my CFR colleague, Julia Sweig. The project’s 30 participants hail from diverse backgrounds, some old Brazil hands and others with functional and/or wide-ranging expertise. Needless to say, the four meetings that took place over the course of a year yielded a stimulating and fruitful dialogue. Although there were some differences of opinion among Task Force members (some of which are noted in the additional comments and dissents section of the report), everyone agreed to Brazil’s rising importance.

We addressed a wide range of issues, including Brazil’s economic health, its energy agenda, its role as a dominant regional power and its relationship with the U.S. government. The report’s core recommendations focus on deepening cooperation between Brazil and the United States so that both can more effectively advance their common interests (and better manage areas where we might come into conflict). In particular, the Task Force points to Chinese monetary policy, climate change mitigation, the expansion of the biofuels industry and regional counternarcotics policy as issue areas that provide opportunities for bilateral cooperation.  It calls for Washington to better appreciate Brasilia’s increasing potential as a global strategic ally. As a sign of goodwill, the Task Force recommends a particular concrete step: fully endorsing Brazil as a permanent member of the United Nations Security Council.

The report’s most basic takeaway is that Brazil is the newest pillar in a multipolar world and must be treated as such. Slotted to become the world’s fifth largest economy within the next decade, it grew at a stunning pace of 7.5% in 2010 (whether this is sustainable remains a big question mark), and is expected to expand 4.5% this year. Unemployment and inequality — perennial concerns for the nation—have fallen. Still, Brazil’s economic outlook is not entirely rosy. In the short to medium term, rising exchange rates and inflation threaten Brazil’s growth. Decrepit infrastructure and an overwhelmed public education system threaten its longer term competitiveness. Whether Brazil can take on these myriad obstacles effectively remains to be seen.

Whatever its economic future may hold, the Task Force report is worth a full read, as it provides important insights and ideas on how both Brazil and the U.S. can manage the challenges that lie ahead, and the U.S.-Brazil relationship, for the better of both nations.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A resident rides a tricycle past the head of a bullet train outside an exhibition for the Seventh World Congress on High Speed Rail in Beijing (Jason Lee/Courtesy Reuters).

China’s recurring 10 percent annual average growth rate has won it predominantly accolades (and not a little envy); making it the global economic powerhouse it is today. But as Brazil nears these numbers – growing 7.5 percent in 2010 — it is the naysayers and doubters that have come to the fore. Even the government has labored to reassure investors and the public that it is working hard to “slow down” growth: Finance Minister Guido Mantega assured last week that “[Brazil] will grow moderately” due to proactive measures to raise interests rates and cut public spending.

Why the stark contrast?

One reason is the source of economic growth. China’s has been primarily investment led. From 2000-2008 China invested an average of 41 percent of GDP, a ratio more than double that of Brazil (and other countries such as the United States). In 2009, in the depths of the worldwide global downturn, investment soared to almost 50 percent of GDP, much dedicated to infrastructure. Thousands of factories, millions of miles of road, new ports, high speed railway lines, and airports have sprung up over the past decade. The country is now populated by entirely new cities and manufacturing centers that then drive growth.

Brazil, by comparison, invests less than 19 percent of GDP a year. Infrastructure is notoriously bad – which some economists estimate will curtail future growth by nearly 1 percent a year. Instead, consumption fuels Brazil’s recent rise. In 2009 a whopping 84 percent of GDP was consumption – compared to 17 percent in the United States and just 13 percent in China. Brazil now ranks at the top of the list of the world’s best shoppers led by booming credit, the expansion of foreign and domestic retailers, and the now 100 million strong middle class. The current over reliance on consumption leads economists and policymakers alike to worry about overheating.

Furthermore, China’s transformative growth has been mostly self-funded. It leads the world in internal domestic savings, which has risen steadily since the turn of the 21st century and in 2007 topped 54 percent of GDP, dwarfing the 23 percent average rate of OECD countries. Brazil’s internal savings rate, meanwhile, is only 15 percent, making it more reliant on foreign investment (both long term FDI and more worryingly shorter term portfolio or “hot money” flows) to fund needed investment. Even with these inflows, the savings available don’t approximate those China wields, limiting the potential pace of growth.

But another real and important reason for the discrepancy is that Brazil is already a much more developed economy. Brazil’s per capita income is more than double China’s – $8,230 vs. $3,650 in 2009. Its mortality rates, education rates and urban development rates all top China’s. The basic health improvements, spread of education, and urbanization behind much of China’s growth occurred in Brazil from 1967-1979, when it too grew at rates of almost 9 percent a year. 

This current growth differential between China and Brazil isn’t a permanent status quo.  China’s per capita income has now already risen, and much of the “easy” productivity gains are behind it. Some China observers point to the growing speculative real estate bubble, the rapid aging of its population, and a less than open government as further obstacles to sustainable high growth. Brazil, in turn, has many advantages – a sizable and diversified economy, low government debt and healthy banks. But going forward, for Brazil to grow quickly (and sustainably) it must increase its productivity (and not rely on just high commodity prices and consumption). This will depend on more investment, better education, and other structural reforms. If these changes happen, then the skeptics should fade, and a true second “Brazilian miracle” will be possible.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations

A shaman performs a ritual in front of a photograph of President Barack Obama in Lima (Mariana Bazo/Courtesy Reuters).

Between March 19 and 23, President Obama will take his first foreign trip this year – and his first ever to South America. He will kick it off in Brasilia and Rio de Janeiro, then head to Santiago, and finish up in San Salvador. The trip’s goal, as announced in his State of the Union address, is to “forge new alliances across the Americas.” Alongside the obvious meetings between presidents, in the works are business roundtables, a visit to one of Rio’s favelas, an Egyptian style speech to “all Latin Americans” in Santiago, and educational activities for his daughters, who, along with the First Lady, will accompany him.

Why these three nations?

Brazil is the obvious choice. It has grown into an economic and diplomatic powerhouse, weighing in on world issues from financial reform to climate change. Under Lula, it flexed its muscle at times to the discomfort of the United States – on nuclear proliferation and Middle East politics, U.S. bases in the region, and the Honduran standoff. With newly installed President Dilma Rousseff’s openness to deepening U.S.-Brazil ties, there are high hopes on both sides that the trip will open a new chapter in the relations between the two largest economies of the Americas.

On the table will be trade and investment, particularly on clean energy and Brazil’s infrastructure needs in the lead up to the World Cup and the Olympics games. Also up for discussion will be China and its currency, as companies in both countries struggle to compete with Chinese imports and investments.

The other two nations are less obvious stops. Important as nations with which the United States maintains strong friendly ties, they are also examples of pragmatic and progressive governments from across the ideological spectrum. Chile’s Sebastián Piñera is leading one of the region’s most prosperous and stable nations from the center-right– the first elected conservative leader since the end of the Pinochet dictatorship. Obama’s visit will put the finishing touches on a nuclear pact, and the two leaders will work on clean energy and intellectual property issues (in particular the steps to get Chile off the U.S. priority watch list for failing to protect IP rights). Both leaders are keen to discuss innovation and entrepreneurship – part of their domestic political platforms.

El Salvador’s Mauricio Funes rules from the other side of the spectrum. A reformed revolutionary, he is the United States’ strongest partner today in Central America. The presidents will focus on security– Funes presented a $900 million plan to Hillary Clinton last fall, which would quadruple U.S. commitments under the Merida Initiative to Central America – as well as issues of economic cooperation and poverty reduction. The future of the 2.5 million Salvadorans (roughly one of every four) living in the United States will also be on the table, as Funes hopes to replace the Temporary Protected Status under which most live with a path to permanent residency.

What is also interesting is who is not on the list. The President, First Lady, and family will not be stopping in Buenos Aires, Argentina; a decision said to upset President Cristina Fernández de Kirchner. Behind the scenes, many feel that the old aphorism once attributed to Brazil is perhaps now more applicable to Argentina, that it is “not a serious country.” Also not on the itinerary is Colombia, in part because Obama has no good news to bring his counterpart on the long-delayed free trade agreement.

Though timed to coincide with the 50th anniversary of the Alliance for Progress, nothing so grandiose will be in the works. Nevertheless, as the heads of state meet and talk about an array of issues, Obama has the opportunity to make a significant change. In addition to the usual bilateral and regional topics, it is important that Obama bring Latin America into his thinking about global challenges. This shift, though subtle, would be the start of a real transformation in U.S.-Latin America relations.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.