A massive level of economic activity is taking place with a country right next door, 17.5 times smaller than the U.S. in nominal economic terms. Mexico purchased $236 billion dollars of U.S. goods in 2015, plus an additional $31 billion in services. We export twice as much to Mexico than to China, and yet our deficit with Mexico is more than six times smaller than our deficit with China.
Our deficit with Mexico is the equivalent of 3/10 of 1% of U.S. GDP, an amount that hardly qualifies as a “catastrophe,” as stressed by President Donald Trump. On top of this, close to 40% of the products we import from Mexico is U.S. content. Mexico incorporates an estimated 9.5 times more American components in relative terms than China in its exports to the U.S., and 1.6 times more than Canada. A visit to the Toyota plant in San Antonio will give the reader a good tasting of this.
U.S. sales to Mexico have grown 5.7 times since 1993, the year before NAFTA came into effect. This is almost twice as much as the growth of our exports to the rest of the world. Our deficit with Mexico is 8% of our total deficit (China’s is 50%). Our trade deficit with Mexico and Canada has been low and stable for 20 years, in sharp contrast to the exponential increase and towering levels of our deficit with China. By far, we have a much more balanced and productive business relationship with both our neighbors than with the rest of the world.
To put things in perspective, we sell more to Mexico than to our four most important country destinations in Asia combined (China, Japan, South Korea and Taiwan); or our five largest ones in Europe bundled together (U.K., Germany, the Netherlands, Belgium, and France); or 35% more than to the sum total of the rest of Latin America.
Four American states have Mexico as their first destination of exports; 25 additional ones have Mexico as their second destination. Today, Texas is the nation’s top exporting state. Over the past 20 years, Texas exports grew 13% per year, while those of the rest of the country only grew 6%. Texas sells more to Mexico than to Canada, China, and the following 10 destinations combined. Republican Senator John Cornyn has expressed his strong support for Texas-Mexico trade and for our role as a gateway between Latin America and the entire United States. The Federal Reserve Bank of Dallas reports the benefits of NAFTA, including the positive transition in manufacturing in our border cities. All this sustains more than one million of the best jobs available in our state.
Yet, nationally we seem to be obsessed with our trade deficit. In the case of Mexico, it is not a sign of unfair trade practices, consumerism, or the decline of our competitiveness. In fact, focusing on trade alone is a mistake; more than trade flows, economic interdependence in North America is now embodied by the emergence of shared production processes, supply chains, clusters, and corridors, particularly in sectors like the auto industry.
This means bolstered competitiveness vis-à-vis other regions in the world. In its absence, our industry would have to survive cloistered in our domestic market. International competitiveness is the key ingredient of 21st century economic success.
The most important challenge for U.S. manufacturing is not Mexico or current free trade deals; it is a dramatic, unprecedented, exponential change in technology, automation, economic sectors, business models, and relocation within the U.S. Close to 90% of manufacturing job losses during the last decade were caused by productivity improvements. If we expect to bring steel jobs back to Ohio and coal industry to West Virginia by decree, we better remember that the combination of economics, technology, and the environment outdoes politics. Any artificial barriers and incentives built in the name of industrial renaissance will be ineffective, and at great expense to taxpayers and consumers. More importantly, the unintended consequences in terms of economic modernization, productivity, and competitiveness could be considerable.
As Robert Zoellick, former president of the World Bank and U.S. trade representative under President George W. Bush stressed, “the U.S. share of global manufacturing has held at around 20% for 40 years. To compete, U.S. companies have had to boost productivity with new supply chains, technologies, and products. Every month, the U.S. economy creates, and loses, about five million jobs because of innovation, competition, changed consumer tastes, and trade.” We should “help people adjust to change, not pretend that change can be prevented.”
Trade policy by itself fosters growth, and is a necessary but not sufficient condition for equality. There are two dramatic mistakes that those who have benefitted and believe in NAFTA have made over the past 23 years: we have been remiss in showcasing the net gains, and we have been grossly unable to develop the right programs and sustained efforts to help those workers, sectors, and regions affected by technology and open markets to retrain and rebound.
In the absence of solidarity and effective responses, the backlash is here, understandably so. But as we strive to address the shortcomings of globalization and regional economic complementarity, it is senseless to think we should throw the baby out with the bathwater.
For Mexico, NAFTA has represented much more than a significant shift in the region’s trade and investment flows. It turned a drastically entrenched economy into one of the most open in the world, to our benefit. Foreign trade as a percentage of GDP went from 20% to 73% over the past 50 years, while the U.S. remains below 30%. Mexico’s political and macroeconomic evolution (clearly unfinished, but tangible) would have been untenable otherwise.
Needless to say, a 21st century economic “architecture” for North America needs to be developed, and that should be at the core of the new bilateral engagement with President Trump. One that boosts our regional competitive edge and privileges broad social benefits. Among others, the George W. Bush Institute has come up with a set of policy recommendations. It also would serve us well to review the 2008 Pathways to Prosperity in the Americas initiative, which outlined strategies for ensuring that the benefits of globalization could be broadly shared in our societies.
NAFTA needs prudent revamping after 23 years. We also need better formulas for market access, logistics, border management, training, and labor mobility. The latter will lead us in the third and last part of our series to the second key ingredient in the rift evolving between the two sides: immigration.