Economy and Trade

Symbiosis: Cooperation for Growth and Competitiveness

by Luis de la Calle & Christopher Wilson

Introduction

US MEXICO TRADE

Source: US Department of Commerce, 2013

Tied together by both an accident of geographic proximity and through the deliberate integration institutionalized in the North American Free Trade Agreement (NAFTA), the United States and Mexico are economic allies. In 2012, bilateral goods and services trade topped a half-trillion dollars.[1] For Mexico, trade with the U.S. is one of the country’s main engines of economic growth, with 78% of Mexican exports being bought by U.S. customers. U.S. trade with Mexico represents a much smaller share of its overall economy, but Mexico is nonetheless the second largest buyer of U.S. exports. The crux of the partnership, though, lies in the way cooperation within North America supports our performance in the context of the global economy. The U.S.-Mexico economic partnership has the potential to play a key role in strengthening the competitiveness of regional exports to the rest of the world, which would accelerate the pace of the U.S. recovery and help reduce its current account deficit. At the agreement of presidents Obama and Peña, bilateral relations have begun to focus greater attention on economic issues, and the U.S.-Mexico High Level Economic Dialogue was launched in September, 2013. The prioritization of economic cooperation is itself an advance, given the strong mutual interests the United States and Mexico have in this area, but in the end, the initiative will be judged by its results.

In order to understand the enormous potential of economic cooperation, one must first appreciate the unique nature of U.S.-Mexico trade. While imports from most countries are what they appear to be, foreign products, the United States and Mexico actually work together to manufacture products, with parts and materials zigzagging their way back and forth across the border as finished goods, from flat screen televisions to automobiles, are produced. Testament to special relationship is the fact that, on average, 40% of the value of U.S. imports of final goods from Mexico actually comes from materials and parts produced in the United States, and the domestic content in Mexican imports from the United States is also very high.[2] This means that forty cents of every dollar U.S. consumers spend on Mexican imports actually goes to U.S. companies and workers. Canada also participates in this economic alliance, but the same cannot be said for goods coming from anywhere outside of North America. U.S. imports from China, for example, have an average of only 4% U.S. content. The integration of the North American economy profoundly links our two nations and has synchronized our business cycles. Each country gains from the advances of the other, and to a large extent we will sink or swim together. Improved productivity in Mexico, for example, reduces the cost of goods made with U.S. parts, making them more attractive vis-à-vis their Asian or European competitors and thereby increases sales for domestic consumption and international export alike.

But global competition is fierce, and rebalancing the North American trade and current account deficits will not be easy. Low most-favored-nation duties have eaten away at the preferential treatment given to intra-regional trade by NAFTA and post-9/11 security measures at the U.S.-Mexico border have added new costs for regional manufacturers. The challenge is to deepen integration to strengthen competitiveness and grow exports, especially to Asia, and it is a challenge made all the more pressing since the restructuring of the world economy and the need for deleveraging mean that the United States will have to significantly reduce its current account deficit.

To achieve this, North American trade policy should go on the offensive, working to open the relatively closed BRICs. While U.S.-Mexico collaboration in using the WTO dispute resolution mechanisms might be appropriate in some cases, a more positive approach designed to incentivize countries to open their economies could probably achieve greater progress. With no clear path toward a conclusion of the Doha Round negotiations at the WTO, the Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP) and the Pacific Alliance (PA)[3] have taken on a magnified importance. The United States was right to support the accession of Mexico and Canada to the group of Pacific Rim nations negotiating TPP, and the North American bloc must now work to successfully implement the agreement with the transparent intention of inviting China to join an ambitious negotiation. Given the fact that Canada, Mexico and the United States are already among the most open nations in the world, this would boost North American exports and may even impel progress at the WTO level, which would act as a multiplier in terms of export promotion.

Context: Mexico – A Burgeoning Middle Class, A Rising Middle Power

While the international and domestic press have focused much attention on drug related crime and violence in recent years, Mexico has quietly transformed into a largely middle class country with solid bases for steady economic growth.[4] This is not to say that poverty is not still prevalent or that serious structural reforms are not still necessary—it is and they are—but demographic changes, macroeconomic stability, increased access to health care, low consumer prices due to free trade, and a number of other factors have all contributed to an increasingly competitive Mexican economy. After Mexico’s economy shrank by a full 6.0% in 2009 as a result of the U.S. financial and economic crisis, it turned right around and grew 5.3% in 2010 before growing 3.9% in 2011 and 2012. Weak global demand combined with challenges in the residential real estate market and a lapse in government spending following the elections have caused growth to slow significantly in 2013, but the economy is expected to pick back up in 2014.[5] Mexico’s manufacturing export sector has led its recovery. After U.S.-Mexico trade fell by 17% between 2008 and 2009, it has grown at an average annual rate of 16% from 2009 to 2012. Though bilateral trade slowed during the first part of 2013, it is expected to pick up steam again in the third quarter 2013, with manufacturing exports growing at a good clip in June, July and August.  A number of trends, including an increasingly skilled labor force in Mexico, rising fuel costs and an important shift in exchange rates, have increased the competitiveness of Mexican industry by raising transportation costs between North America and Asia while chipping away at the exchange rate disparity vis-à-vis the Chinese Yuan. Events abroad, such as the Eurozone crisis, and lower than needed productivity at home have both cut into potential GDP growth, but the push to implement domestic reforms in several key sectors has the potential to set the stage for strong growth. As of this writing, Mexico had passed education and telecom reform, while energy, fiscal and financial reforms were being considered by its congress.  These reforms are expected to be approved by end 2013.  The key, of course, is that they are ambitious enough and properly implemented so that significant new sources of growth give a boost to the Mexican economy regardless of the difficult international context.

Context: United States – Seeking Balance to Accelerate Growth

The U.S. economic recovery since the Great Recession has been sluggish, with the unemployment rate stuck above seven percent and real GDP growth between one and three percent.[6] Fortunately, some of the same factors that led to the resurgence of Mexican manufacturing are placing similarly positive pressures on the U.S. industrial sector. Regionalized production is reemerging. Many multinationals have found themselves overexposed to Chinese risk; high fuel prices have increased shipping costs; and the technological and logistics improvements of advanced manufacturing are making labor a smaller portion of overall production costs, thus diminishing the attraction of chasing cheap wages across the globe. Moreover, the large discoveries and exploitation of shale gas are beginning to push down electricity costs in the United States. Some of the gas and energy intensive industries (steel, glass, synthetic fibers and others) that had left for Asia will again be profitable in the region. Given these factors and the integrated nature of regional manufacturing, it is unsurprising that just as in Mexico, the manufacturing sector is leading the U.S. recovery as well.

Source: IMF, World Outlook Database

 

Rather than leave this needed reindustrialization to chance, the United States should support it with robust policies to promote export growth, including an aggressive trade policy as well as domestic investments in human capital and infrastructure. This is because despite the fact that the United States is still the largest economy in the world, 95% of the world’s consumers, 75% of its economic growth, and 73% of total production occur outside its borders.[7] Exports link the U.S. economy to the world’s many dynamic emerging markets, harnessing their growth. At the same time, the United States needs to rebalance its own economy in order to avoid future crises and establish a strong base for long-term prosperity. Since 2006, the U.S. current account balance has declined, but there is a long way to go. If this adjustment is not to impose a significant welfare cost in terms of forgone consumption, exports have to increase sharply. Faced with this challenge, President Obama launched the National Export Initiative in 2010, a plan to double U.S. exports within five years. For this program to succeed, the United States neighbors and top export markets, Canada and Mexico, clearly must play a vital role, but not only as markets but rather through joint exports to the world.

Policies to Make North America a Net Exporter

As the central architecture of North American economic relations, NAFTA has spurred huge growth in regional trade and investment. Unfortunately, even as bilateral trade skyrocketed, the United States and Mexico did not make the infrastructure investments or policy advances needed to efficiently move a massive quantity (now over a billion dollars worth) of goods back and forth across the U.S. Mexico border each day. In short, progress on regional economic relations stagnated. The divisiveness of the NAFTA debates and the increased focus on security issues (both international terrorism and regional organized crime) left trade and economic relations at the margins of the bilateral agenda. Some progress has been achieved, largely regarding the full implementation of NAFTA, but the potential is much greater than what has been realized. The path forward includes both intra-regional measures to strengthen competitiveness and cooperative efforts on the global stage to incentivize the opening of markets and ensure the proliferation a fair, open and rule based international trade regime. Within the region, blockages need to be cleared so that regional manufacturers and the service providers that support them can take advantage of the incredible size and richness of the North American economy without paying—whether in the form of waiting in long lines at the border or fulfilling onerous customs paperwork burdens, for example—what amounts to a border tax each time they seek to move products or do business across the U.S.-Mexico border. Internationally, through TPP, TTIP, PA and the relevant international organizations, the United States, Mexico and Canada should negotiate agreements and work to implement them as a bloc, recognizing that each countries shares in the advantages of a competitive North America.

The Border

The capacity of the ports of entry to process goods and individuals entering the United States in a secure and efficient matter has not kept pace with the expansion of bilateral trade. Instead, the need for greater security following the terrorist attacks of 9/11 led to a thickening of the border that added costly, long and unpredictable wait times for commercial and personal border crossers alike. This congestion is a drag on regional competitiveness. Moderate investments to update infrastructure and to fully staff the ports of entry are needed, as long lines and overworked staff promote neither efficiency nor security. But in a time of tight federal budgets, asking for more resources cannot be the only answer. Strategic efforts that do more with less, such as the expanded use of trusted traveler and trusted shipper programs, may be the most cost-effective way to facilitate trade at the border. These “trusted”-programs (Global Entry, SENTRI, FAST, C-TPAT) allow vetted, low-risk individuals and shipments expedited passage across the border, increase efficiency while strengthening security by giving border officials more time to focus on unknown and potentially dangerous individuals and shipments. Finally, given the fact that border improvements offer significant economic benefits to local communities and trade-dependent industries, state, local and private entities are often willing to contribute funding to border infrastructure projects. Legislative changes in the United States are, however, needed to allow U.S. Customs and Border Protection to accept funding from sources other than the federal government in a way that guarantees the integrity and independence of its mission and agents.

Mexico’s recognition of technical standards for electronics, medical devices and other goods, coupled with the elimination of antidumping duties on hundreds of Chinese products in December 2011 sharply reduced the incentive to smuggle goods into Mexico and make for safer and more efficient border crossings.  Working along these lines and eliminating unnecessary and burdensome obstacles to trade in other sectors, the United States and Mexico could make significant contributions to create a border less attractive to contraband and criminal activity.

Energy

Advances in drilling techniques (hydraulic fracturing, horizontal drilling), the downward trend in the cost of producing renewable energy, and the introduction of a major energy reform bill in Mexico have dramatically changed the North American energy outlook. These developments are increasing the competitiveness of regional manufacturers by lowering electricity costs, which has an especially strong impact on energy intensive industries. At the same time, current Mexican energy reform efforts could boost the prospects for a significant increase of investment in Mexico. There is also strong potential for the development of renewable energy, especially solar and wind, in the U.S.-Mexico border region, although cross-border transmission (and in the case of natural gas, pipeline) infrastructure needs to be strengthened in order to take full advantage of the potential.

Services

As a “first generation” trade agreement, NAFTA paid less attention than necessary to services trade than for regional competitiveness, and as a result there remain incredible opportunities for cooperation in this area. These are just a few:

  • In transportation, an open skies agreement would improve the efficiency of regional airlines and cargo shipments. Similarly, the current pilot program to allow trucks access to deliver goods throughout Mexico and the United States without unloading and reloading at the border should be expanded and made permanent.
  • At a time when rising healthcare costs are draining precious resources from the U.S. economy, it makes sense to open the market to Mexican health service providers, allowing U.S. residents the option to use their Medicare or insurance to seek lower-cost treatment at authorized hospitals and clinics in Mexico.
  • Promoting expanded higher education student exchange programs would not require legislative changes so much as commitment and support by U.S. and Mexican governments and universities alike. Together, Mexico and the United States could develop an ambitious public-private partnership for educational exchange to help Mexico expand access to quality graduate education (especially in science and technology), while helping the United States address its serious need for greater inter-cultural and language competencies. To this end, when Presidents Obama and Peña met in May, 2013, they announced the creation of the Bilateral Forum on Higher Education, Innovation, and Research. The success of the initiative will ultimately hinge on bringing together the right mix of federal, state and private stakeholders to design, fund and promote innovative educational exchanges.

Global Trade

In the end, the goal must not be to deepen trade ties with select markets in order exclude others, such as China and Brazil, but to incorporate them. An aggressive North American approach to world trade could put the BRICs and other closed economies on the defensive, and there is no greater incentive to join in on global trade negotiations than a fear of being left out and left behind as others advance.

Note: Applied, weighted mean, all products. More recent available data (World 2012, US 2011, China 2011, Brazil 2011, Mexico 2010, India 2009). Source: World Bank, 2013.

Note: Applied, weighted mean, all products. More recent available data (World 2012, US 2011, China 2011, Brazil 2011, Mexico 2010, India 2009).
Source: World Bank, 2013.

In the absence of multilateral progress in the WTO Doha Round, a number of important super-regional trade agreements have emerged. The biggest is TPP, which includes the United States, Mexico, Canada, Japan, and eight other members of APEC. With each of the NAFTA countries involved, TPP has become an alternative way to deepen NAFTA without reopening the politically divisive agreement, and although this has not yet been taken advantage of, TPP could be the venue to develop and unveil a cooperative North American approach to international trade negotiations.

It also creates an opportunity to set a new standard for regional and multilateral agreements on next generation issues such as intellectual property and services trade. The United States recently began negotiations with the European Union to create a Transatlantic Trade and Investment Partnership. Mexico already has a trade agreement with the E.U., and Canada is working to finalize its own agreement. Given the integrated nature of manufacturing in North America, it makes sense, then, to combine each of these efforts in one and to begin negotiating an E.U.-North America FTA, creating the largest economic region in the world. In the absence of a coordinated approach, the countries of North America risk losing out, since rules of origin would limit the ability of products with a mix of U.S., Mexican and Canadian inputs to qualify for tariff-free access to European markets. Finally, Mexico has joined together with Chile, Peru, Colombia and Costa Rica to form the Pacific Alliance, which will deepen and integrate trade ties throughout the region. The United States should consider how to best relate to this group so that, in a manner similar to TTIP, goods co-produced between the U.S. and Mexico have free access to each of these Latin American markets.

Conclusion

There is no doubt that the economies of the United States and Mexico are facing serious challenges. Some risks are caused by external factors, including competition from Asia and the Eurozone crisis, while others lie within, like the current account and fiscal deficits of the United States or the need for productivity enhancing structural reforms in Mexico. Nevertheless, to an extent rarely understood by policymakers or the public, many of the solutions to these issues lie in measures to strengthen regional competitiveness and to work as a North American economic bloc to pursue an aggressive global trade agenda. With such an approach, North America could become a net exporter and the most competitive region in the world, but significant leadership will be needed from the private and public sectors alike. Business leaders from the United States and Mexico worked hard and worked together to assure the passage of NAFTA in the Nineties, but the coalition largely fell apart after the agreement was implemented. Efforts ought to be made to reengage business leaders on issues of regional competitiveness and cooperation on global trade. The private sector can encourage movement on policy issues but cannot substitute governmental action. With a relationship as complex and multidimensional as the one between the United States and Mexico, leadership from the highest levels—The White House, Los Pinos and members of congress—is a vital ingredient for success.

Recently, presidents Obama and Peña Nieto established a high level dialogue (led in the US by Vice President Biden and in Mexico by Secretary Videgaray) to find innovative ways to deepen North American economic integration.  The HLED also includes a consultative process with private sector participants to give relevant business facilitation content to the discussions. During the inaugural meeting in Mexico City in September, 2013, the consensus was that to be effective it is necessary to raise the level of ambition.  The 20th anniversary of NAFTA is the right time to begin transforming an agreement that has been quite successful in expanding trade and investment among Canada, Mexico and the US into an arrangement to make North America the most competitive region in the world, with an export base strong enough to jointly win in Asian markets and around the world.

Luis de la Calle is the managing director and founding partner of De la Calle, Madrazo, Mancera, S.C., a consulting firm based in Mexico City.  Christopher Wilson an Associate at the Mexico Institute of the Woodrow Wilson International Center for Scholars where he manages research and programming on regional economic integration and U.S.-Mexico border affairs.


[1] Data from U.S. Department of Commerce, Census Bureau and Bureau of Economic Analysis, 2013.

[2] Robert Koopman, William Powers, Zhi Wang and Shang-Jin Wei, Give Credit Where Credit is Due: Tracing Value Added in Global Production Chains, National Bureau of Economic Research Working Paper No. 16426, Cambridge, MA: September 2010, revised September 2011, Appendix, pg. 7.

[3] An ambitious, and already implemented, integration process involving Colombia, Chile, Mexico and Peru.

[4] Luis de la Calle and Luis Rubio, Clasemediero: Pobre No Más, Desarrollado Aún No, Mexico City: CIDAC, 2010. English version published by the Woodrow Wilson Center in 2012.

[5] International Monetary Fund, World Economic Outlook Database, April 2013.

[6] The unemployment rate was 7.3% in August, 2013: US Bureau of Labor Statistics.

[7] Authors calculations with data from World Bank, 2013. Respectively, US share of world population, US share of real GDP growth, and US share of world GDP in current US dollars.

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