Size and Distance are Destiny 

The Future of Economic Relations between Mexico and the United States1

Antonio Ortiz-Mena L. N.

Size and Distance are Destiny 
The current political discourse sometimes overlooks the great significance and complexity of the commercial exchange between Mexico and the United States. It also forgets that our country is likely to become one of the six largest economies in the world. This article measures the economic integration of North America and lays out its main challenges.

Just the facts

 

Geography is destiny, and Mexico’s economic fate is inextricably tied to that of the United States (U.S.). Mexico has sought to diversify its international economic relations at least since the Porfiriato, but the power of geography and the market is greater than political will (see Figure 1).

 

 

Economic relations with the U.S. have been a perennial factor in Mexico’s foreign economic policy, but their nature changed in the last quarter century.2 While the bulk of Mexican exports traditionally went to the U.S., foreign trade is increasingly important to the Mexican economy: the trade openness coefficient increased from 27% in 19803 to 67% in 2015.4

This is linked to the growing importance of direct foreign investment: in 1993, just before the coming into force of the North American Free Trade Agreement (NAFTA), it was 4.38 billion usd,5 and by 2015, it was 28.38 billion usd.6 The U.S. remains the largest foreign investor in Mexico. Increasing trade and investment have in turn led to increased intra-industry and intra-firm trade. One way to appreciate this is by measuring value-added in trade in a country and added in the exports of the other (see Figure 2).

 

 

In short, countries in North America not only trade with each other and invest in the region but produce jointly. In all likelihood, these trends will continue to intensify in the next decades. PricewaterhouseCoopers (PWC) estimates that in 2050 Mexico will be the sixth largest world economy, only behind China, India, the U.S., Indonesia and Brazil, but with a greater economy than those of Japan, Russia, Germany, the United Kingdom and France. According to these estimates Canada will be the nineteenth largest economy.7

At the same time, the global economy is changing radically. According to McKinsey, there are a group of factors that are changing business models, the global economy and everyday life: mobile internet; the automation of intellectual work; the internet of things; the information in the “cloud”; advanced robotics; autonomous or semi-autonomous vehicles; genomics; energy storage systems; additive manufacturing; advanced materials; advanced exploration and recovery of oil and gas, and renewable energy.8 The interaction of these twelve factors will produce a radically different economy to the one we know today.

Given the increasing volume of traditional trade, intra-industry and intra-firm trade, the peak in production sharing and radical technological change underway and the outlook for the Mexican economy in the medium and long term, the U.S.-Mexico economic relationship will be increasingly important not only for the future of Mexico but also for that of the U.S., although this reality does not seem to have sunk in among certain U.S. circles (see Figure 3).

 

 

At least six million U.S. jobs are related to its bilateral trade with Mexico,9 and Mexico is the leading Latin American investor in the U.S.: there are Mexican companies in virtually all U.S. states, which all together generate at least 80 thousand direct jobs.10

 

The challenges

 

Economic integration between Mexico and the U.S. is becoming deeper, so the opportunity cost from barriers to economic interaction is growing. Although Canada’s economy will be smaller than that of Mexico, from the perspective of production sharing and the allocation of resources (human and energy, among others), greater economic integration will bring benefits for both countries and for all of North America. In this context it is possible to identify at least five challenges that will impact the economic future of the region:

1. The Trans-Pacific Partnership (TPP). Will it be ratified? If so, how can it best be used?

2. The Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the European Union (EU). If TTIP negotiations are successful, each country in North America will have its own trade agreement with the European Union. Without close coordination, there is a risk of trade diversion and production chain segmentation.

3. Growing nationalism and the risks of protectionism in the U.S. The rise of Republican presidential candidate Donald Trump is a reaction to an underlying problem: the growing dissatisfaction fueled by stagnating wages, income concentration, fear of globalization and pessimism about the economic future. Even if Trump loses, the conditions that enabled his rise will remain.

 

 

4. Inadequate infrastructure. Mexico cannot take full advantage of NAFTA nor the big trade agreements in the making if it continues to invest less in this sector than other countries in Latin America, China and India.11

5. Corruption in Mexico and the tarnished image of Mexico in the U.S.12

 

What to do and how

 

Economy and trade are essential components of foreign policy. In its relationships with the rest of the countries in North America, Mexico must promote joint actions to ensure the flow of goods and services, investment and human capital. This is vital for the prosperity and therefore the security of the country. There are no magic recipes for meeting the challenges of the economic relationship with the United States and among the countries of the region, but Mexican actions at the national, bilateral and regional levels can strengthen its economic insertion in North America. Below are some proposals involving this complex subject:

The Trans-Pacific Partnership

TPP ratification would help reduce U.S. protectionist tendencies and “shield” NAFTA. Its ratification by the U.S. is of vital importance and the lessons from NAFTA can help this purpose and, in the event that it prospers, help in a thorough use of the mechanism.13

Should the U.S. not ratify the TPP, Mexico should seek a deepening of NAFTA using the elements that the agreement itself offers, especially Article 1504 on cooperation in competition policy and Articles 1907 and 2022, which allow strengthening of dispute settlement mechanisms.

The actions of foreign economic policies could also be strengthened in order to emphasize Mexico’s role as a natural bridge between North America and Latin America, particularly through the Pacific Alliance.

 

The Transatlantic Trade and

Investment Partnership (TTIP)

It must be ensured that there is no trade diversion nor that the production chain operation is blocked in North America. Mexico will have to adjust its trade agreement based on the recent Canada-European Union agreement and an eventual TTIP.

   

 

 

Protectionism in the U.S.

and  the image of Mexico

Changing the image and reputation of Mexico in the U.S. will not be achieved in the short term nor merely through a public relations campaign. The importance of its economic links with Mexico is not well understood in the United States. Clear and accessible information in this regard should be provided to the key decision makers.

Research on Mexico in the U.S., both in universities and think tanks, needs to be fostered. Mexico’s profile in the U.S. is lower than that of other countries that are much less relevant to U.S. security and prosperity.

 

Corruption

Without changes in international rankings on corruption, it will be difficult for Mexico to use trust as a comparative advantage in attracting foreign investment. Public statements, media campaigns, legal initiatives and channeling of financial or human resources will be absolutely irrelevant so long as there are no tangible results and real accountability.

 

Infrastructure and connectivity

Improvements in international rankings on infrastructure competitiveness are necessary for Mexico to attract more investment. The improvement in physical infrastructure must be accompanied by the necessary regulatory framework for costs and transport times between Mexico and the U.S. to be the lowest possible.

There have been advances in cross-border connectivity, like the Joint Customs Clearance Program and the Single Cargo Manifest. Infrastructure has been improved in some crossings and in August 2016 a new Mexico-United States Bilateral Air Agreement came into force, which will boost cargo and passenger connectivity between the two countries. These are important advances, but much remains to be done.

 

From issues to mechanisms

 

There are two key mechanisms driving the bilateral economic relationship: the High Level Economic Dialogue (HLED) and the U.S.-Mexico Business Dialogue. The HLED facilitates coordination between agencies in each country that affect the bilateral economic relationship, as well as coordination between authorities of both countries. The relationship is multidimensional, and with segmented actions it will not be possible to solve complex obstacles or strategically promote the relationship. A central challenge will be to ensure that the HLED transcends the current administrations in Mexico and the U.S.

The U.S.-Mexico Business Dialogue was established in 2013 as an initiative of the U.S. Chamber of Commerce and Mexico’s Business Coordinating Council (CCE). It aims to establish joint policy positions on issues that impact bilateral economic relations and has allowed the private sectors of Mexico and the United States to have a shared vision and a more strategic dialogue with the authorities on both sides of the border.

 

Decision-making in the U.S.

In 2014, the Council on Foreign Relations (CFR) issued a report on the future of North America. Among its recommendations it highlighted one: the designation of “a senior U.S. official as the North American ‘champion’, who will press for the implementation of consistent policies across all public organizations and on all the topics”.14

U.S. policy on North American issues is at times somewhat fragmented and reactive. If there is no change in the U.S. that enables the designation of a “champion,” Mexico will have to redouble its efforts so that the common destiny of shared prosperity for both countries prevails.  

 

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Antonio Ortiz-Mena L. N. is a senior advisor at Albright Stonebridge Group.

 

 

[1] This article is based on a presentation the author made at Mexico’s Ministry of Foreign Relations on May 3, 2016, as part of the seminar on Principles and Interests in Mexico’s Foreign Policy, organized by the Foreign Ministry, the Center for Research and Teaching in Economics (CIDE) and the National Autonomous University of Mexico (UNAM). The ideas presented in this article are more fully developed in a chapter of a forthcoming book on the US after Obama, edited by Susana Chacón and Carlos Heredia, to be published by Fondo de Cultura Económica. The author would like to acknowledge the valuable assistance of Fernando Tonone in the preparation of charts and verification of figures.

[2] P. Riguzzi and P. de los Ríos, ¿Destino no manifiesto?1867-2010, volume II of Las relaciones México-Estados Unidos, 1756-2010, UNAM-Secretaría de Relaciones Exteriores, Mexico, 2012.

[3] Estimated on the basis figures in Secretaría de Programación y Presupuesto, Anuario estadístico de los Estados Unidos Mexicanos 1980 (tables 4.1.1 y 4.1.4).

[4] Estimated on the basis of figures from INEGI and IMF, World Economic Outlook, Spring 2016. The trade openness coefficient measures international trade as a proportion of GDP.

[5] Secretaría de Economía, “Inversión extranjera directa en México y el mundo”, in Carpeta de información estadística, April 2015.

[6] Secretaría de Economía, Informe estadístico sobre el comportamiento de la inversión extranjera directa en México (January-December 2015).

[7] This ranking is based on purchasing power parity (PPP). If market exchange rates are used, the rankings are slightly affected: Mexico would be the seventh economy and Canada the seventeenth one.

[8] J. Manyika, M. Chui, J. Bughin, R. Dobbs, P. Bisson and A. Marrs, Disruptive Technologies: Advances that Will Transform Life, Business, and The Global Economy, McKinsey Global Institute, New York, 2013.

[9] Estimated by the US Chamber of Commerce.

[10] Estimated by the US Chamber of Commerce.

[11] Mexico invests less than 1.5% of GDP in infrastructure, compared with double that figure in Latin American and the majority of OECD countries. T. Serebrisky, A. Suárez Alemán, D. Margot and M.C. Ramírez, Financiamiento de la infraestructura en América Latina y el Caribe: ¿Cómo, cuánto y quién?, Banco Interamericano de Desarrollo, Washington, D.C., 2015; and P. Rozas, J. L. Bonifaz and G. Guerra-García, El financiamiento de la infraestructura: Propuestas para el desarrollo sostenible de una política sectorial, CEPAL, Santiago, Chile, 2013. In addition, Mexico has very low rankings in international comparisons on infrastructure, such as those of the World Bank’s Doing Business, and in the infrastructure category of the World Economic Forum’s Global Competitions Index.

[12] Mexico’s rankings are also quite low regarding transparency and corruption. See, for example, Transparency International’s Corruption Perceptions Index 2015 and the Global Corruption Barometer.

[13] A. Ortiz-Mena L.N., What Does NAFTA Have to Teach Us About the Trans-Pacific Partnership?, conference hosted by the San Diego Global Forum and the University of California, San Diego (UCSD), March 30, 2016.

[14] Council on Foreign Relations, North America: Time for a New Focus. Task Force Report, October 2014 (page 63).