By Jesus Cañas, Roberto Coronado and Robert W. Gilmer
Published 5/12/2006
Globalization has become a widely used term to describe the forces knitting economies closer together. For the United States and Mexico, it’s just a new word for an old phenomenon. The two economies—one highly advanced, the other still developing—have for decades been on a path toward ever greater integration.
The U.S. is Mexico’s top trading partner by far. About 88 percent of Mexico’s exports go to the U.S., and 56 percent of its imports come from U.S. sources. At the same time, 14 percent of U.S. exports go to Mexico and 11 percent of imports come across the Rio Grande. Perhaps more important, U.S.–Mexico trade has grown exponentially since the signing of the North American Free Trade Agreement (NAFTA), growing from $89.5 billion in 1993 to $275.3 billion in 2004, a threefold increase.
Americans are the biggest investors in Mexico, further evidence of NAFTA pulling the two countries together. Since 1994, the U.S. has accounted for 62 percent of all foreign direct investment in Mexico.
The two economies are also linked by the flow of Mexican immigrants to the U.S. and the remittances they send back home to their families. The approximately 10 million Mexican nationals who reside in the U.S. sent back an estimated $20 billion in 2005, an amount equivalent to 3 percent of Mexico’s GDP.
The U.S. and Mexican economies have become increasingly synchronized. The coincident indexes for economic activity for both countries show that the degree of synchronization since 1993 is about a third higher than it was in 1980–93. The two economies now march almost in lockstep.[1]
The facts of U.S.–Mexico economic interaction are clear, but new questions continue to arise. How is China affecting trade between the countries? What has been the impact of NAFTA on Mexico’s economic growth, specifically on regional wages? Is the maquiladora industry tied to the U.S. business cycle? Are remittances reducing poverty levels in Mexico? What skills does the typical Mexican immigrant bring to the U.S.?
In November 2005, researchers from the U.S. and Mexico gathered in Houston to address these issues at a Dallas Fed conference, “The U.S. and Mexico: Are We Still Connected?” The presentations pointed to even greater interdependence for the two economies, a conclusion in sync with the worldwide trend toward increasing globalization.
U.S.–Mexico Trade
Mexico opened its economy to trade in two important steps: joining the General Agreement on Tariffs and Trade in 1985 and signing NAFTA in 1994. Reducing trade barriers represented an epochal change in Mexican policy, and it has brought a sustained increase in the inflow of foreign direct investment, made the country more competitive and insulated it against external shocks.
How have two decades of market opening impacted Mexicans’ pay? Daniel Chiquiar, a researcher from Banco de México, considered the role of trade in changing the distribution of wages in Mexico.
Several economic geography models have noted that Mexico’s trade liberalization had dramatic impacts that differed greatly by region, especially in manufacturing. The traditional Mexico City factory belt, located in the middle of the country, was optimal for a closed economy. After 1985, central Mexico lost at least some of its advantage. Led by maquiladora expansion, manufacturing employment and wages grew sharply in the states close to the U.S., and these gains came at the expense of the center of the country.
Chiquiar entered the debate by dividing Mexico into five regions and classifying them according to the strength of their ties to globalization through trade, migration and foreign direct investment. He treats globalization as a regionally heterogeneous shock to Mexico’s economy, with a slowly operating adjustment mechanism. Thus, globalization’s effects may be felt first and most strongly in regions with closer ties to the international economy.
Chiquiar showed that in regions with significant trade ties, wage inequality declined. Other regions, less tied to trade, saw inequality rise for reasons possibly unrelated to trade. Chiquiar concluded that further diminishing wage inequality will require the rest of the country to strengthen its linkages to the global economy.
Forming the backbone of U.S.–Mexico trade are programs of temporary imports to be re-exported, which bring parts into Mexico and return assembled products to the U.S. Industrial goods make up 82 percent of Mexico’s exports to the U.S. and 91 percent of imports from the U.S. According to Enrique Dussel-Peters, economics professor at Universidad Autónoma de México, about half of U.S.–Mexico trade is considered intra-industry trade, again mostly due to temporary imports. Mexico’s intra-industry trade with the U.S. achieved its highest level in 2000 and has declined since then, while intra-industry trade with countries such as China is substantially lower.
These interconnections suggest the maquiladoras are closely tied to the U.S. industrial sector. Gustavo Félix Verduzco, professor at Universidad Autónoma de Coahuila, investigated the degree of synchronization between the U.S. business cycle and the maquiladoras, finding that the Mexican plants’ production and employment are sensitive to relative wages between the U.S. and Mexico and fluctuations in the U.S. economy.
Félix Verduzco also concluded that the economies of northern Mexico’s border states, where the maquiladora industry is concentrated, are more affected by U.S. business-cycle fluctuations than the rest of the country.
Next week the SBDC Business Report will continue this three-part discussion of U.S./ Mexico economic interaction.
To learn more about international trade, the “2006 New Mexico-Chihuahua Business Encounter; NAFTA Institute and Supplier Meet the Buyer” conference May 25 and 26 in Chihuahua, Mexico. For more information contact the Small Business Development Center at 538-6320 or sbdc@wnmu.edu.
Note: This article is reprinted with permission from “Southwest Economy,” Issue 1, January/February 2006, Federal Reserve Bank of Dallas. Mr. Cañas and Mr. Coronado are assistant economists at the El Paso Branch of the Federal Reserve Bank of Dallas. Mr. Gilmer is a vice president at the Federal Reserve Bank of Dallas.
