Mexico is the world’s 12th largest economy in terms of Gross Domestic Product ($1.657 trillion), growing at an average rate of 3.8% annually. With a 47.7 million labor force, Mexico has GDP per capita of $15, 100 which is the 81st highest in the world. Mexico’s leading industry include food and beverages, tobacco and cigarette production, chemicals, iron and steel manufacturing, petroleum, mining, textiles, clothing, manufacture of motor vehicles, consumer durables, and an active tourism sector.
Ninety percent of Mexico’s trade is under free trade agreements with countries from the whole North America, most of Central America, the European Free Trade Area and Japan. Mexico is the 14th largest exporter in the world in terms of value (at US$ 292 billion), exporting consumer goods, processed foods, coffee, LCD screens and other electronic devices, cotton, automobiles, and aircraft engines.
Mexico trades most with the Germany (1.7% of total exports), Canada (6% of total exports) and the United States of America (76.5% of total exports). In terms of imports, Mexico imports goods and services from Japan (4.1% of total), South Korea (5.4%), Chile (9.3%), China (5.4%), Brazil (31.4%) and the United States (at 55.5%)! In fact, according to the US Department of State website, not only is the United States of America the largest trade partner of Mexico, it’s also the largest foreign investor. Mexico trades with America with a lot of “intermediary” goods, or those that require finishing or further processing. The result of this mutual dependence is a free-flowing trade market and an improvement in competitiveness of both countries.
The trade relationship of the United States and Mexico is so critical to both countries and is critical even to the economies of some important states in the US such as California, Illinois, Michigan and Texas. The fortified trade relationship between the two countries flourished in 1994, after the implementation of the North American Free Trade Agreement or NAFTA. The NAFTA is a trade agreement between the United States, Canada and Mexico. Its goal was to eliminate trade barriers between the three countries, turning it into the largest economic block in the world.
Prior to NAFTA, Mexico was following a protectionist economic policy from 1930 to 1970. In 1986, Mexico joined the General Agreement on Tariffs and Trade, bringing it to the forefront of the trade market. With NAFTA, Mexico’s economy was propelled further into development and competition, raising the country’s economic development metrics higher than ever in the last 50 years.
Villareal (2012) points out that the NAFTA has brought economic and social benefits to the Mexican economy. However, it was pointed out that the benefits are not evenly distributed throughout the whole country. The effects of the trade agreement between Mexico and the United States and Canada have been average, with periods of economic growth and contractions.
NAFTA was designed with the idea of lowering the income disparities between the three trade partners. So far, the income disparities have been reduced modestly, meaning the trade agreements have not reached full effect. According to Lederman (2005), wages in Mexico rose from 1980s to mid 1990s, dropped slightly in 1996 but continued to increase steadily until 2000. The average growth rate of wages in 2000 was 11.8%. Skilled labor to unskilled labor ratio in Mexico is at a stable 2.9. The study further showed that while wages increased, the wage disparity within Mexico increased as well.
One of the reasons why this income distribution is as separated as they are now between the US and Mexico is Mexico’s inability to change or improve the fundamentals to make economic progress happen. These fundamental changes include Mexico’s investment in education, infrastructure, the quality of its national institutions (government agencies, etc.) and its position on commercial innovation.
Other studies indicate that the next level of NAFTA integration must take place before more pronounced benefits take effect. This includes the harmonization of agricultural policies, focusing on research, food security and phyto-santiary standards for food products from Mexico and to its trade partners, the harmonization of the NAFTA Bloc as a trade bloc instead of individual countries competing, and harmonization of legal policies on critical issues such as fuel, agriculture and health.
In contrast, the effect of the trade agreement with the United States is less than 3% of the country’s GDP, which may not be substantial, with respect to the size of trade considered by Mexico. Some studies show that while there have been an increase in demand for products from the United States, the more significant effect is the loss of jobs for some industries due to a shift in the production centers for those products.
Other issues encountered under the NAFTA trade agreement include issues on safety and protection due to the prohibition of Mexican long-haul trucks which should have been given full access to US territories, which has since been discussed and resolved by the Bush Administration, resulting in a pilot program for Mexican trucks with open access to US territories. This pilot program failed, ushering a retaliatory tariff move by Mexico. The sudden increase in tariff for goods going into the US was valued at $ 2.4 billion in 2009. These tariffs were eliminated in 2011, when President Barack Obama and Mexican President Calderón agreed to move forward and resolve both the tariff dispute and to initialize a hauling system to implement the trade agreement. As a sign of good will and strategic purpose, President Calderon reduced tariffs by 50% and provided a condition that the 50% balance will be suspended, once the hauling program is implemented.
In July 2011, a Memorandum of Understanding between both countries was ratified. After 10 days, Mexico implemented a suspension of the remaining 50% tariff. This issue is still panning out, with major interest groups opposing and supporting the move.
Other disputes include the dolphin safe tuna labeling dispute and a sugar dispute concerning raw sugar and high fructose corn syrup. The US and Mexico reached accord on both issues, and in 2006 both countries reached a Sweetener Agreement.
According to the World Bank, Mexico still has tremendous potential to increase trade flows and economic growth if it “changes” its economic fundamentals a bit more and facilitate trade reform. Trade reforms pertain mostly to national agency reforms and infrastructure reforms, and these broadly include improvements of ports and shipping facilities, information technology, regulatory standards and customs administration policies.
Lessons Learned
The US-Mexico trade history is a story of classic big brother-small brother economies in motion. Clearly, there is a benefit to the US improving the economy of Mexico, being a neighbor, a market for goods and services, a supplier of major requirements, and a political and economic ally. Mexico obviously benefits from bilateral trade agreements, especially under a Free-Trade arrangement such as the North American Free Trade Agreement (NAFTA), both with the infusion of investments to support trade and the actual trade of goods and services going from Mexico to the United States. This translates to jobs, wage increases, agricultural productivity, and rural progress. The “noted” failures of the US-Mexico trade history are well documented, but are trivial at best.
In my opinion, the US – Mexico trade history has been measured against the wrong metrics. Take job employment as an example and the subsequent issue on wage increase. The NAFTA was not designed to eliminate wage differences in any of the participating countries. That was the desired effect but the intended purpose was to make both economies more efficient. We know that factors of production move from less efficient to more efficient environments, in this case from higher labor wages to lower labor wages. If wages were equal from both, there would not be trade balances, no investments changes, no economic development. It is true that value is created, but it is in terms of value created from the trade of goods, not in the employment generated.
Also trade agreements were not designed to create social miracles. Some protesters in the US and their counter parts in Mexico believe in the creation of a Utopian state after the implementation of the NAFTA. This was never part of the US – Mexico trade agreement by design. They were designed for trade, not for any social interpretation. Hence side agreements are made, especially for critical aspects such as the environment. But by leaving that out of the trade mechanisms, trade agreements essentially say we are all business.
The most important lesson, from a Latin American stand point, of the trade history between the United States and Mexico, is the importance of a Free Trade Agreement (FTA). To put it in proper perspective, the NAFTA is the largest FTA ever conceived. It is larger than the Asian or European economic blocks in terms of value, making it one of the most potent economic powers. It is also, by far, the most successful model where a free trade agreement is reached between developed countries and a developing country. Except for more sophisticated integration such as a harmonization of agricultural, defense and energy policies, the NAFTA is a success. It has increased, albeit not in totality, the economic size of Mexico, its trade capabilities and its inert productivities. That cannot be highlighted more. The Free Trade Agreement has spurred Mexico into its position in the world trade arena. No other country in South America, has been able to achieve this without massive investments in its own resources or very long gestation periods before it reaches development.
However, having an FTA does not prove success instantly. The current problems with Mexico and the US, despite a solid trade framework stems from a disconnection between real policies. Does the US really want to bring up the economy of its neighbors by acting as one consolatory block? Is the NAFTA solely an economic agreement? Has it served its purpose?
If the trade agreements do not go deeper than that, then the chance of it achieving its intended purpose is close to nil, and the benefits it has brought, no matter what magnitude to both the US and Mexico, will ultimately be lost.
References
Lederman, D., William F. Maloney, and Luis Servén, 2005. Lessons from NAFTA for Latin America and the Caribbean, The World Bank. Retrieved from http://www.piie.com/publications/chapters_preview/375/02iie3616.pdf
Ochoa,Rene, 2007, Lessons Learned from Other Blocks, the NAFTA experience. Retrieved from http://www.eclac.cl/mexico/capacidadescomerciales/TallerCRActH/PPTS/ochoa_pres.pdf
The CIA Factbook: Mexico. Retrieved from http://www.theodora.com/wfbcurrent/mexico/mexico_economy.html
Wiki-answers: Mexico Retrieved from http://wiki.answers.com/Q/What_are_Mexico's_imports_exports_partners_and_amounts_in_trade#ixzz1t405uiiF
