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The American manufacturing renaissance has become one of the biggest emerging economic stories in the world.
The basic idea is that rising overseas labor costs and falling domestic energy costs will encourage manufacturers to bring production back to the U.S.
This is bad news for many of the emerging markets, which tend to be the low-cost producers.
However, one emerging market could come out a big winner:
Here's Morgan Stanley's Manoj Pradhan and Jonathan Garner on the basic points for Mexico:
The clear likely beneficiary here for three reasons: i) recent outperformance on competitive grounds – it has gained market share in the US and automobile production remains an indirect threat to other less efficient LatAm manufacturers; ii) Mexico has always been strongly plugged in to the US manufacturing cycle and should remain a key part of the supply chain, thanks to NAFTA; and iii) Mexico’s structural reforms are likely to reduce structural rigidities at the same time as the tailwinds outlined above kick in.
Morgan Stanley's Nikolaj Lippman and Luis Arcentales add to the conversation:
A sustained manufacturing revival in the US – driven by factors including a weaker US dollar and lower energy costs – will create a new competitor for the EM world, but a partner for Mexico, and the benefits could be felt across the Mexican economy for years, perhaps even decades. Persistent market share gains by Mexico in recent years, importantly, suggest that the Mexican industrial sector has been restructuring just in time to benefit from renewed US competitiveness.
Countries like China are well known for offering cheap labor. But those costs have been rising rapidly, and they are on the verge of passing Mexico's labor costs.
Here's a chart from Lippman and Arcentales:
Morgan Stanley