NUEVA ÉPOCA NÚMERO 8 OCTUBRE-DICIEMBRE 2016 ISSN: 2395-8324 $ 45.00 MÉXICO
Comercio Exterior Bancomext HECHO EN AMÉRICA DEL NORTE Comercio Exterior MADE IN Bancomext NORTH AMERICA
HECHO EN AMÉRICA DEL NORTE Origen, actualidad y tendencias de la producción compartida MADE IN NORTH AMERICA Origin, the present day and trends in shared production
October - November 2016 North America 1
NORTH AMERICA CONTENTS
2 MADE IN NORTH AMERICA: For a Future with More Regional Integration / Gustavo Vega Cánovas and Francisco E. Campos Ortiz
6 A REGIONAL MANUFACTURING PLATFORM / Christopher Wilson
13 HOW U.S. INVESTMENTS IN MEXICO HAVE INCREASED INVESTMENT AND JOBS AT HOME / Theodore H. Moran and Lindsay Oldenski
21 NORTH AMERICA’S AGENDA FOR 2017 AND BEYOND / Gary Clyde Hufbauer and Earl Anthony Wayne
25 SIZE AND DISTANCE ARE DESTINY / The Future of Economic Relations between Mexico and the United States / Antonio Ortiz-Mena L. N.
30 THE GOP’S MEXICO DERANGEMENT / Bret Stephens 2 North America Comercio Exterior 8
MADE IN NORTH AMERICA: For a Future with More Regional Integration / Gustavo Vega Cánovas and Francisco E. Campos Ortiz
One of the most uring the integration process and eighties in Mexico encouraged noticeable effects of of North America there were trade liberalization. Trade openness nafta is the development two important turning points was devised to promote the export of complex value chains that ensued in 1965. Firstly, of goods manufactured with greater Dthe agreement on automotive prod- added value —minimizing primary that deal with the ucts signed by the United States and goods— and attracting foreign invest- economic integration Canada which provided an incentive ment. This policy, along with the of the region. This for the creation of a more comprehen- acknowledgement of the United States agreement, however, has sive free trade agreement between the as a key exporter of goods and an reached its peak, making two countries in 1988. Secondly, the es- important source of investment, led it necessary to adopt new tablishment of new promotion policies Mexico to consider the establishment of formal mechanisms to manage the commercial exchange for the textile export industry (maquila- doras), aimed at creating employment, economic exchange between the two instruments. strengthening trade balance, attracting countries. This event led to an increase foreign currency and boosting technol- in regional integration proceedings. ogy imports to our country. On the The completion of these proceed- Gustavo Vega Cánovas and Francisco other hand, the textile industry had ings took place in the last decade E. Campos Ortiz are, respectively, the particular effect of encouraging of the 20th century. The Mexican research professor and associate productive integration in the Mexico- Government observed the growing professor at the Center of International United States border region. tendency towards a greater regional Studies at El Colegio de México. The economic crises of the sixties integration worldwide and acknowl- Fotolia/pornsakamp October - November 2016 North America 3
edged the importance of keeping up with this transformation. Its response followed Canada’s example and pro- posed the creation of an integration project that could position Mexico in North America. In this way, the North American Free Trade Agreement (nafta), signed in 1993 by Mexico, the United States and Canada emerged. nafta is one of the most relevant in- ternational economic policy measures that Mexico has implemented. From the perspective of the goal that guided its negotiation, trade promotion and regional investment have been suc- cessful. Furthermore, it has encour- and 2007— that did not have any rela- after decreasing between 2001 and aged the integration of key industries tion to the agreement that in any event 2007, during the subsequent period, and the reinforcement of value chains helped the country overcome them. the average annual trade growth of in diverse segments. Thus, it has been During the first 20 years ofnafta each nafta member with their coun- a key instrument in the integration of (1994-2014), trade among its members terparts surpassed third party trade; North America. tripled, with an average annual growth this had already been observed However, regarding other impor- of 7.2%. However, performance has not during the most dynamic period tant goals, nafta has fallen short of been consistent. Trade under nafta between 1994 and 2000. expectations. The per capita income had an outstanding development be- A similar trend can be perceived in of Mexico and the United States has tween 1994 and 2000, with an average the foreign direct investment flows not converged as required and the annual growth rate of 12%, compared (fdi) in the region. The Mexican contribution of the agreement towards to the worldwide average of 8% during fdi assets in the United States and the creation of employment opportuni- the same period. In turn, since 2001, Canada grew, respectively, 701% and ties has not been sufficient. One has annual trade growth under nafta has 748% in the first year of the agree- to consider, nevertheless, that during not surpassed international averages. ment. The fdi assets in Mexico that nafta, Mexico went through three dif- Despite this fact, regional integration originated in the United States and ferent economic crises —in 1994, 1997 has continued. We can observe that Canada doubled between 1994 and Fotolia/James Steidl Fotolia/furuoda Fotolia/auremar Fotolia/furuoda Steidl Fotolia/James
In the last decade of the 20th century, the government focused its attention on regional integration and acknowledged the need to not be left on the outskirts 4 North America Comercio Exterior 8
2000. Nevertheless, the flow drive has weathered. Whereas between 1994 and 2000 the fdi flows to Mexico under nafta on average grew exponentially faster than the rest of the world, this was thwarted in the 21st century. This reveals that the period of time following 2001 has been complex for nafta. The first element that helps to understand this halt is the fact that China entered the wto in 2001. This affected the position of Mexican exports to the United States. In 1994, Mexico controlled 7% of the American import market; this figure grew to 13% in 2015. During the same period, China increased its shares in the same market from 6% to 21%, without acting in a context similar to those dictated by nafta. Another governed the American border, which national security concerns, stands out. element that halted the agreement was severely affected trade in the region. Moreover, the Security and Prosperity the economic crisis suffered in 2008, To put it into perspective, 70% of trade Partnership of North America (spp), the worst in the United States since The between Mexico and the United States which included competitive encourage- Great Depression. This crisis thwarted goes through its border by land. The ment schemes, is worth mentioning. economic exchanges in the region and, changes in border management proce- More recently, a high level economic in turn, the integration process. dures were considerably detrimental to dialogue (dean) was implemented. It Despite the fact that the impact of regional integration. highlighted the importance of boost- these events was crucial, the events Each of the three North American ing productivity, connectivity and eco- that had a more negative influence partners has made efforts towards nomic growth. These undertakings have on the integration of North America strengthening the process of integra- shown modest but significant results. are the terrorist attacks of September tion. The “intelligent borders” program, Notwithstanding the difficulties 11, 2001. These occurrences resulted which was designed to encourage afflictingnafta , it is important to men- in the alteration of the policies that trade while dealing with the American tion that the agreement has boosted Fotolia/AGcuesta Fotolia/Westend61 Fotolia/geargodz Fotolia/Westend61 Fotolia/AGcuesta
nafta is one of the most relevant international economic policies that Mexico has implemented October - November 2016 North America 5
the consolidation of regional value opted for a renovation of the integra- brought actual important benefits for chains and production sharing in tion procedure. This update will be the three countries. Nevertheless, it is North America. The intensification of carried out through the Trans-Pacific crucial to recognize that the instru- production sharing procedures implies Partnership (tpp), an agreement — ments designed to encourage integra- that diverse products cross the border currently under ratification process— tion in the 20th century are no longer on multiple occasions during their among 12 countries, including the sufficient. The key schemes in global manufacturing phases. This entails three members representing North trade have been modified, thus, the that Mexican imports of “American” America. The tpp is a mechanism instruments that regulate them should products, as an example, often contain whose goal is to ‘modernize’ nafta be modified as well. Mexican added value. This is probably and, thus, to restore the integration The challenge is to adopt new the most important long term legacy process in North America. mechanisms that encourage regional of nafta. This does not mean that the tpp will integration and competitiveness. The In only a few sectors has this proce- override nafta but rather that they will best scenario —to create a customs dure reached this level of visibility as coexist. However, since it’s applicable union or a common market— is not so in the automotive. This industry has to the three North American mem- promising due to the political environ- been crucial to the integration of North bers, tpp guidelines will renovate the ment of the three members of nafta. It America, making Mexico the fourth trade integration process. This will be is important to search for alternatives. most important exporter and the achieved through new guidelines in One of them is to modernize trade eighth largest producer of vehicles in areas such as rules of origin, electronic guidelines in the region. There are the world. From 1994 to 2014, vehicle commerce, telecommunications, intel- several options to take into consider- production in nafta countries grew lectual property, competitiveness and ation. At this moment, the most viable 16%. In 2014, the region contributed investment; key sectors in the 21st —aside from renegotiating nafta— 19% of vehicle production worldwide. century economy. would be to rely on the tpp. Its ambi- Thus, the performance of the automo- The integration process in North tious agenda, though improvable, has tive industry in North America is funda- America gave rise to various difficul- the capacity to ignite economic links mental to the regional economy, above ties that Mexico, the United States in the region. Nowadays, it is the best all because it provides inputs from a and Canada had to deal with. Despite alternative to enhance the integration wide range of similar local industries. these circumstances, our countries process of the region. Walking this road Despite its achievements, nafta have achieved the promotion of trade means encouraging economic vitality is no longer a useful instrument. and investment as well as the creation and prosperity in North America. t Production and trade practices have of value chains and shared production changed. For this reason, each member in the region. These accounts have Translated by Sonia Georgette Alfaro Victoria
Despite its achievements, nafta is no longer an adequate instrument. Production and trade practices have changed 6 North America Comercio Exterior 8
A REGIONAL MANUFACTURING PLATFORM1 / Christopher Wilson
Measuring the final ince the 1990s, trade be- As impressive as it is, the magnitude goods trade between tween the United States and of the U.S.-Mexico trading relation- Mexico and the United Mexico has grown tremen- ship is probably not its most important States is vital but not dously, with bilateral goods feature. Instead, it is the deepening of Sand services trade in 2015 reaching manufacturing integration between sufficient. The author a total six times greater than before the United States and Mexico which turns to recent databases the North American Free Trade has truly changed the nature of the on intra-industry and Agreement (nafta) was implement- bilateral economic relationship. The intra-firm trade, routes ed in 1993.2 In 2015, bilateral trade United States and Mexico do not of intermediate goods reached 584 billion dollars, meaning simply sell finished products to one and trade in value added that the United States and Mexico another, but rather produce them trade more than a million dollars together. Supply chains crisscross the to show how deep worth of goods and services every U.S.-Mexico border, such that parts commercial integration is minute. The United States is Mexico’s and materials often cross the border in North America. top export market, and Mexico is multiple times during the course of the second largest foreign buyer of production. Christopher Wilson is Deputy U.S. goods, second only to Canada. Mexican oil, for example, might Director of the Mexico The bilateral trade relationship is be sent to the United States to be Institute at the Woodrow enormous in size, and the U.S. and refined and turned into raw plastic Wilson International Center Mexican economies each depend in Louisiana, before being sent to an for Scholars. significantly upon one another. injection molder in the U.S. Midwest Fotolia/Mike Mareen Fotolia/Mike October - November 2016 North America 7
that creates the components for a car’s dashboard. Those parts might return to Mexico for assembly at a factory along the border and then be used in the final production of a car in the Bajío. Most of those cars would probably return to the United States to be sold to consumers, but they may very well be shipped to customers around the world as well. Through these types of operations, the main components of cars built in North America have been found to cross the United States borders with Canada and Mexico an average of eight times as a vehicle is being produced.3 With such deep integration, there is no longer any such thing as an American car, a Canadian car, or a Mexican car. acteristic of the U.S.-Mexico economic a number of newer datasets to learn There are only North Americans cars, relationship, but with only traditional what we can about the development incorporating parts and materials trade statistics, it was for years very and current status of production from across the continent. Although difficult to measure and monitor the sharing networks between the United competition can, does, and should still depth of economic integration that States and Mexico. exist between producers on both sides was occurring. Regular trade data can of the border, at this point the United tell us that bilateral trade has grown Intra-Industry and Intra-Firm Trade States and Mexico are better conceived more than six-fold since 1993 to its as business partners working together current level of more than a half-trillion Traditionally, the expectation was to improve the competitiveness of their dollars, and while that is huge growth that when two countries trade, each joint operations than as competitors and an impressive total, it does little would specialize in creating the types fighting for market share (Figure 1). to describe the unique nature of the of goods they produce best. In the Since nafta was implemented in U.S.-Mexico manufacturing partner- context of U.S.-Mexico trade, this 1994, complex cross-border value ship that has developed over the past would mean that Mexico specializes chains have become the defining char- decades. This short essay will look at in labor-intensive production, and the Fotolia/nastassia Fotolia/Fotolia RAW Fotolia/ronniechua RAW Fotolia/Fotolia Fotolia/nastassia
The U.S. and Mexico trade more than a million dollars worth of goods and services every minute 8 North America Comercio Exterior 8
United States in capital-intensive in- show us that bilateral trade among wholesale and retail networks, but by dustries. While this type of specializa- the relevant nations does not simply far the largest part of bilateral intra-firm tion has played out to a certain extent, consist of exchanges of wine for cloth trade is in the manufacturing sector.7 trade between the two countries is —to cite Ricardo’s famous example— This suggests that a very large por- largest in product categories in which or avocados for grains. tion of the intra-firm trade within the both countries have large, special- Not only does a large portion of U.S.- region happens within the context of ized industries. In fact, the top four Mexico trade take place within the same the strong joint production platform broad categories of U.S. exports to industries, but also within the same for manufactured goods throughout Mexico are also the top four catego- companies. Since 1993, the total stock North America. Businesses in the region ries of Mexican exports to the United of bilateral foreign direct investment have created highly competitive value States: machinery, vehicles, electrical has grown from 16 billion usd to 106 chains that span the continent, taking machinery, and mineral fuels.4 This billion. When U.S. and Mexican compa- advantage of economies of scale and suggests a very high degree of intra- nies open up subsidiaries in the other the unique comparative advantages of industry trade between the United country, they tend to develop cross- each country in North America. States and Mexico, and measure- border trading networks to supply their ments for each of the United States’ operations. In 2013 (the most recent Cross-Border Supply Chains top trading partners support such a year for which this data is available), bi- conclusion. As seen in the Table, only lateral trade between U.S. and Mexican Of course, most of the value chains in U.S. trade with Canada demonstrates a parents and their majority-owned the region involve not only the participa- higher degree of intra-industry trade. affiliates operating in the other country tion of multiple facilities of a single firm, High levels of intra-industry trade do represented 97.8 billion dollars, or 19% but rather a complex web of suppliers, not necessarily signify vertical integra- of all U.S.-Mexico trade in goods.6 Some material makers, and assembly plants
tion (joint production), but they do of this intra-firm trade takes place in involving numerous companies. The Fotolia/Pixelbliss Fotolia/nastassia
Table Figure 1 Intra-industry trade with top U.S. trading partners5 U.S.-Mexico trade in goods and services (1993-2015)
Grubel-Lloyd Index of Intra-Industry Trade, 2015 700
Canada 63% 600 500
Mexico 53% 400
Billions USD 300 Germany 52% 200
100 Japan 41% 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 China 20% Total goods Total services
SOURCE: Author’s calculations based on four-digit data from the North American Industry Classification SOURCE: U.S. Census Bureau for goods trade; U.S. Bureau of Economic Analysis and OECD for services trade. System (NAICS). See footnote two for more details. October - November 2016 North America 9
World Input-Output Database allows one in 2011 was also imported in 2011, they Trends in Production Sharing to track the use of intermediate goods would account for 42% of all U.S. im- produced in one country, which are then ports from Mexico. In the same sense, Even as the value of U.S. and Mexican traded and used as inputs for production if each U.S. input used in Mexican participation in each other’s supply in another country.8 In 2011, the most re- production in 2011 was imported dur- chains has continued to grow consis- cent year for which this data is available, ing that year, those transactions would tently, some important developments Mexican industries consumed 140 bil- account for 53% of all U.S. exports to can be appreciated by viewing how lion dollars in U.S. intermediate goods, Mexico. Figure 2 shows the growth the relative share of this participation and U.S. industries consumed 111 billion in the use of inputs from across the has changed over time and by analyz- dollars worth of Mexican inputs. This is border in U.S. and Mexican production ing related data from the recently direct evidence of joint production tak- since 1995. In 2011, the two countries created World Trade Organization ing place between the United States and used a combined 251 billion dollars (wto) / Organization for Economic Co- Mexico on a massive scale. in inputs from each other, growing Operation and Development (oecd) Though this data is not directly com- nearly four-fold from the 65 billion in Trade in Value Added Database (tiva). parable to trade data and any attempt cross-border inputs used in 1995. As The tiva numbers distinguish between to do so should be taken with a grain neighbors, and through nafta, the gross trade, or traditional import and of salt, comparing these figures to United States and Mexico have come to export statistics that capture the full U.S. and Mexican imports and exports be tightly bound together, contributing value of a product each time it crosses for the same year is revealing. If each extensively to each other’s systems of an international boundary, and trade Mexican input used in U.S. production production. in value added, which separates out
Figure 2 Figure 3 Value of foreign inputs for domestic production, Mexican share of inputs for U.S. production billions of USD (1995-2011) and Mexican value in U.S. gross exports (1995-2011)
$ 150 % 1.5
100 1.0
50 0.5
0 0.0 1995 1999 2003 2007 2011 1995 1999 2003 2007 2011
% Mexican value % Mexican inputs Value of U.S. inputs Value of Mexican added in U.S. exports in U.S. production used in Mexican inputs used in U.S. production production
SOURCE: OECD-WTO, Trade in Value Added Database, 2016, and author’s calculation based on data from the SOURCE: Author’s calculations with data from World Input-Output Database
the foreign and domestic content intermediate goods used as inputs As shown in Figure 2, the United of traded goods and services. These for production in the United States States sells even more inputs to Mexico figures allow us to look at the extent and the percentage of Mexican value than Mexico sells to the United States. to which intermediate goods traded added embodied in U.S. exports to Given that Mexico sends approximately between the United States and Mexico the world (see Figure 3). This shows 80% of its gross exports to the United end up embodied in each country’s us U.S. industries are finding that by States, it should be no surprise that the gross exports. Interestingly, and logi- relying on Mexican suppliers, they can vast majority of the inputs sent from cally, we see in Figures 3 and 4 that improve the productivity and com- the United States to Mexico make their the share of a country’s inputs used in petitiveness of their businesses. The way back to consumers in the United another country’s production and the percentages of Mexican participation States. In this sense, a study using data share of a country’s value added em- in U.S. exports and intermediate goods from 2004 found that U.S. imports of bodied in another country’s exports consumption are overall still relatively final goods from Mexico contained are closely related. low, reflecting the massive size of the 40% U.S. value added, a number For Mexico, and its participation in U.S. economy and robust domestic significantly larger than was found for U.S. production, the story is simple. supply chains (which produce a full U.S. imports from any other country It is one of continual growth. Just as 85% of the value in U.S. exports), but included in the study (other examples: the absolute value of Mexican inputs the continuous growth of Mexican 25% for Canada; just 4% for China).9 used in U.S. production has experi- participation demonstrates the value Nonetheless, the portion of total enced secular growth since the 1990s, producers are finding in regionalizing inputs used in Mexican production that
so has the Mexican share of all the their supply chains. come from the United States, as well as Fotolia/larryhw
Figure 4 U.S. share of inputs for Mexican production and U.S. value in Mexican gross exports (1995-2011)
% 30
20
10
0 1995 1999 2003 2007 2011
% U.S. value added % U.S. inputs in in Mexican exports Mexican production
SOURCE: OECD-WTO, Trade in Value Added Database, 2016; and author’s calculation based on data from the World Input-Output Database,
the U.S. value embedded in Mexican more weight in the second argu- Conclusions exports, has experienced some ups ment, especially given the continued and downs (see Figure 4). During the growth of absolute U.S. participa- The United States and Mexico are 1990s, after the passage of nafta, tion in Mexican value chains and the profoundly linked, with value chains both measures rose, but as value overall strength of the North American that span the region and crisscross the chains became more global and China economy, but there is no space for border. This deep level of integration in particular grew its participation in complacency. There are plenty of rea- has important consequences for the global systems of production, the U.S. sons to believe that the thickening of regional economy and for the policy share fell.10 the U.S.-Mexico border after the ter- makers charged with its management. This trend, this arc of increasing rorist attacks of 9/11 did indeed raise First, the business cycles of the United North American integration across costs for those employing regional States and Mexico are now tightly all measures in the 1990s and then production sharing,12 and there are a linked. The two countries experience decreasing relative trade dependence wide range of domestic and bina- growth and recession together, neces- in the first decade of the 2000s, has tional policy initiatives that should be sitating coordination and communi- been the subject of some discussion implemented to strengthen regional cation on issues of macroeconomic among scholars.11 Some have inter- competitiveness, ranging from infra- management. Second, the United preted the data as a sign of regional structure planning and investment to States and Mexico are linked in terms dis-integration, others as a natural education reform, strengthened work- of productivity and competitiveness. consequence of economic growth in force training programs, and improved Productivity enhancing reforms or
Fotolia/mannromann emerging economies. I tend to put labor mobility, to name a few. investments in either country increase
The most notable feature of the trading relationship between the U.S. and Mexico is the deepening of their manufacturing integration 12 North America Comercio Exterior 8
the competitiveness of that country’s 1 This article has been adapted from the 7 There is almost certainly additional in- contribution to regional value chains, production sharing section of the forth- tra-firm trade between the United States thereby increasing the competitive- coming second edition of the Wilson and Mexico not included in the numbers ness of the region as a whole. Finally, Center publication, Working Together: cited here, which would include trade the integrated nature of the regional Economic Ties between the United States between the U.S. and Mexico-based manufacturing platform creates a and Mexico. I would like to thank Miguel subsidiaries of European, Asian, or other multiplier effect on the importance of Toro and Andrea Conde for their valu- parent companies. trade and border management. Every able research assistance in the prepara- 8 M. P. Timmer, E. Dietzenbacher, B. time cargo crosses a border, there are tion of this article. Los, R. Stehrer and G. J. de Vries, “An costs associated with it —whether 2 Author’s calculation with data from Illustrated User Guide to the World tariffs, transportation costs, added the U.S. Census Bureau, Bureau of Input–Output Database: The Case transportation costs due to border Economic Analysis, and the OECD. of Global Automotive Production,” congestion, the costs associated with Please note there was a change in defi- Review of International Economics, 23: filing the proper import and export nitions used to collect services trade 575–605, 2015. paperwork, or others. But in the case data, so the 1993-1998 OECD data and 9 Robert Koopman, William Powers, Zhi of the U.S.-Mexico border, which is of- the 1999-2015 BEA data are not directly Wang, and Shang-Jin Wei, “Give Credit ten crossed multiple times during the comparable. Total trade refers to the Where Credit Is Due: Tracing Value production process, those border costs sum of imports and exports. Added in Global Production Chains,” end up being paid multiple times. The 3 Robert Pastor, “The Future of North NBER Working Paper No. 16426, negative side of this is that even small America,” Foreign Affairs, July-August, Cambridge, MA, September 2010, inefficiencies in the management of 2008, p. 89. Revised September 2011. the border can easily add up to have 4 Though the order of importance of 10 Other potential drivers of this de- major impacts on regional competi- the four categories differs for Mexico crease include dual recessions in the tiveness. The positive side, though, is and the United States, at the two-digit United States, the thickening of the that infrastructure investments and HS level these are the top four export U.S.-Mexico border following the ter- process improvements that make U.S.- categories for each. United States Trade rorist attacks of September, 2001, and Mexico border and regional logistics Representative
HOW U.S. INVESTMENTS IN MEXICO HAVE INCREASED INVESTMENT AND JOBS AT HOME / Theodore H. Moran and Lindsay Oldenski
The effect of the transfer nactment of the North American ment of home country economic of operations from the Free Trade Agreement (nafta) activity), and that the complementary 20 years ago was accompa- effects may be even greater than the United States to Mexico by nied by dire predictions that substitution effects. transnational companies Ean increase in United States (U.S.) This essay builds on our recent has been widely investment in Mexico would lead to Peterson Institiute for International documented. Various job losses and investment reduction Economics (piie) Policy Brief, The studies show that the at home. The rhetorical highpoint for U.S. Manufacturing Base: Four Signs benefit to employment, this concern was captured by H. Ross of Strength, which presents empirical sales and investment has Perot’s assertion in the 1992 presiden- evidence that increased offshoring tial campaign that nafta would create by U.S. manufacturing multinational been mutual. The results a “giant sucking sound” as U.S. jobs and corporations (mncs) —a phenomenon of one of those studies are investors rushed south of the border. criticized for contributing to domestic set out here. But that warning overlooked the job losses— is actually associated with possibility that foreign direct invest- greater overall investment and an
Fotolia/industrieblick Fotolia/industrieblick ment (fdi) and job creation abroad increase in jobs at home. This update Theodore H. Moran and Lindsay are complements to investment and focuses on the subset of U.S. firms Oldenski are non-resident job creation at home, that offshoring that offshore to Mexico. We find that senior fellows at the Peterson strengthens the competitiveness of they too use their foreign activities to Institute for International the U.S. outward investor (leading to complement, and not just substitute Economics. both substitution for and enhance- for, their employment, sales, invest- 14 North America Comercio Exterior 8
ment, and exports in the United States, those sold by affiliates of U.S. firms in the United States to 5.9% employment with the net result not a loss but an Mexico, has grown over two decades. by U.S. mncs in the United States in 2011. increase in jobs and investment at Sales by affiliates of U.S. firms in As was the case with sales, it is clear home that can be directly linked to Mexico grew from about 32 billion from Figure 2 that employment by U.S. investment abroad. dollars in 1990 to 252 billion dollars mncs in the United States and Mexico in 2011. In 1990 these sales were 2.2% both follow similar trends, with the rate Profile of U.S. Direct Investment of sales by U.S. mncs that originated of growth varying with times of overall in Mexico in the United States, and in 2011 they economic growth and contraction. were 3.6% of U.S.-based sales. Foreign Trade between U.S. mncs and their In 2012, Mexico was only the 23rd and domestic sales by U.S. mncs follow affiliates in Mexico has also grown largest recipient of fdi worldwide, but similar trends, with the rate of growth since the signing of nafta. Trade in it was the 11th largest destination for varying with times of overall economic both directions increased rapidly in the investment by U.S. firms. In 2011 (the growth and contraction. second half of the 1990s, and was close most recent year for which detailed Figure 2 shows the employment trend to being balanced during that period. data are available), affiliates ofU.S. by U.S. mncs in the United States and at In the early 2000s, U.S. mncs imported firms in Mexico sold 252 billion dollars their affiliates in Mexico over the same more from their affiliates in Mexico worth of goods and services, and em- time period. Employment by affiliates than they exported to them, though ployed 1.3 million Mexican workers. of U.S. firms in Mexico grew from about the trade gap began to narrow in 2008. Figure 1 shows that the volume of 553,000 workers in 1990 to 1.34 million U.S. firms with affiliates in Mexico sales by U.S. mncs, both sales that in 2011. Employment in Mexico went operate in a variety of different indus- originated in the United States and from 3% employment by U.S. mncs in tries. Not surprisingly, given the extent
Figure 1 Figure 2 Sales by U.S. manufacturing multinational Employment by U.S. multinational corporations (MNCs) originating in the U.S. corporations (MNCs) in the United States and affiliates in Mexico and at affiliates in Mexico
U.S. sales by U.S. Sales by affiliates of U.S. Employment by U.S. Employment by U.S. multinational corporations MNCs in Mexico multinational corporations multinational corporations (billions of dollars) (billions of dollars) in the United States (millions) in Mexico (millions)
12,000 300 30 1.6 1.4 10,000 250 25 1.2 8,000 200 20 1.0 6,000 150 15 0.8 0.6 4,000 100 10 0.4 2,000 50 5 0.2 0 0 0 0 1990 1993 1996 1999 2002 2005 2008 2011 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
SOURCE: U.S. Bureau of Economic Analysis. SOURCE: U.S. Bureau of Economic Analysis. October - November 2016 North America 15
of offshoring by U.S. auto companies, the largest of these is transportation equipment, which includes automobile manufacturing. The Table provides de- tails on the 15 largest industries, ranked by the number of workers employed by U.S. mncs in Mexico in 2011.
What Happens to U.S. Firms’ Domestic Operations When They Invest Abroad? The Case of nafta
Figures 1 to 3 show that investment by U.S. mncs in Mexico has increased since the signing of nafta. But has this expansion come at the expense of investment and employment in the United States? To disentangle the extent sales, capital investment, and exports low us to examine changes within each to which mnc activity at home and in the United States when an individual firm over time, rather than comparing abroad are substitutes or complements, firm expands itsfdi activities. Obviously one firm to another. Firm “fixed effects” we examine detailed microdata on how many other factors such as recessions, hold constant everything that is unique individual firms behave over time. The industry trends, and idiosyncratic firm about a given firm, isolating how its U.S. Bureau of Economic Analysis (bea) decisions will also affect the domestic employment in the United States and collects confidential firm-level data on operations of U.S. firms. For this reason, the other variables we examine change the activities of U.S.-owned multina- we employ panel regression methods when the firm increases its outward tionals, both at home and at their for- that allow us to control for those factors fdi. Thus all the characteristics that eign affiliates. All U.S.-owned firms with and isolate the direct relationship be- define a given firm —such as the -in at least one foreign affiliate that meet a tween foreign expansion and domestic dustry it operates in, its size, its relative minimum threshold by size are required outcomes at U.S. firms. market power, etc.— are controlled for, by law to provide this data to the bea. These methods use data on all U.S. allowing us to focus only on the rela- These data allow us to examine what mncs with foreign affiliates in Mexico. tionship between offshoring and the happens to domestic employment, We include firm fixed effects, which- al domestic activities of U.S. firms. Fotolia/ox17 Fotolia/antoine-photographe Fotolia/ox17
In 2011, affiliates of U.S. firms employed 1.3 million workers in Mexico 16 North America Comercio Exterior 8
We also include year fixed effects, a domestic. This type of pure experi- The first thing to note about these technique that controls for the poten- ment is neither possible nor desirable. results is that they all show a posi- tial impact of recessions and booms Using the fixed effects methodology tive impact on investment and jobs in (controlling for such impacts is particu- is the next best option, however. This the United States. Thus expansion in larly important in light of the severe approach controls for everything that Mexico by a U.S.-based mnc is associ- Mexican currency crisis shortly after is unique about a given firm and looks ated with domestic U.S. expansion by nafta was signed). Just as firm fixed at changes within each firm over time, the same firm. The foreign operations effects hold constant firm character- rather than drawing conclusions based of these firms are net complements to istics, year fixed effects hold constant on observed behaviours across very domestic U.S. operations. These results everything external to the firm that different firms. are consistent with the complementari- was going on in a given year. The only Figure 4 summarizes the relationship ties that we found using all countries way to truly identify a causal effect between U.S. mnc activities at home and in which U.S. firms invest (Moran and between foreign and domestic activity in Mexico. These results draw on firm Oldenski 2014). U.S. firms that have would be to randomly assign some level data from 1990 through 2009, cov- greater sales, hire more workers, spend U.S. firms to become multinationals, ering hundreds of U.S. mncs and their more on r&d, export more goods, and while forcing others to remain purely more than 1,000 affiliates in Mexico. invest more capital in Mexico also have
Figure 3 Table Within-firm trade exports from U.S. multinational Employment at affiliates of U.S. multinational corporations (MNCs) to their affiliates in Mexico corporations in Mexico in 2011, top 15 industries and imports by U.S. multinational corporations Employment Industry from their affiliates in Mexico (billions of dollars) (thousands) 1 Transportation equipment 206.6
60 2 Beverages and tobacco products 164.9
50 3 Chemicals 43.2 40 4 Machinery 31.5 30 5 Professional, scientific, and technical services 24.6 20 6 Semiconductors and other electronic components 22.3 10 7 Plastics and rubber products 22.0 0 8 Accommodation and food services 17.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9 Mining 14.1 Within-firm Within-firm exports from the imports by the 10 Communications equipment 11.4 United States United States 11 Finance, except depository institutions 11.3 SOURCE: U.S. Bureau of Economic Analysis. 12 Agriculture, construction, and mining machinery 10.7 13 Architectural, engineering, and related services 10.7 14 Soap, cleaning compounds, and toilet preparations 9.5 15 Computers and peripheral equipment 9.1
SOURCE: U.S. Bureau of Economic Analysis. October - November 2016 North America 17
greater sales, hire more workers, spend numbers from the left panel of Figure hidden within the aggregate data. But more on r&d, export more goods, 4, this increase would be associated it is clear from these results that any and invest more capital in the United with a 1.3% increase in employment fall in U.S. employment by U.S. mncs States. So the overall message is that per mnc in the United States, or 333 is not due to offshoring to Mexico, as greater investment in Mexico by U.S. U.S. jobs per firm. Accordingly, for the this offshoring exerts a net positive firms benefits both countries. average U.S. firm, adding 131 jobs in force on the domestic operations of To explain the results from Figure Mexico would create 333 new jobs in U.S. firms. 4 more specifically, consider that the United States at that same firm. These findings do not mean that the average U.S. firm in the sample These relationships may be hidden by certain aspects of overseas expan- employs 25,642 workers in the United other simultaneous trends, including sion never diminish similar aspects of States and 1,311 workers in Mexico. economic downturns, U.S. economic home country mnc activity. Quite the Thus a 10% increase in employment growth, or developments within a contrary, the spread of investment and at affiliates of U.S. firms in Mexico given industry. That is, without the r&d, like trade in general, is likely to would correspond to about 131 jobs benefit of econometric analysis such result in reshuffling economic activity in Mexico. Using the employment as ours, these relationships may be within and among the United States, Fotolia/hykoe
The expansion in Mexico of a U.S. multinational is positively related to the expansion of the same firm in the U.S. 18 North America Comercio Exterior 8 Fotolia/Rainer Plendl Fotolia/Rainer
The general result of foreign direct investment after the implementation of nafta has clearly been positive for U.S. firms October - November 2016 North America 19
Mexico, and Canada and within and Windsor, Canada, the exclusive source of paying manufacturing jobs to Mexico.”1 among sectors in each country. The the 5.4 liter, 32-valve high-performance However, the competitive fate of uaw point is that a dispassionate public Triton V-8 engine, and choosing Ford’s workers at Ford’s U.S. assembly facilities policy analyst would have to conclude contract manufacturer, International actually depends on nafta. that the aggregate result from outward Metals de México (immsa) of Monterrey, Other previous studies have found fdi on the part of U.S. firms afternafta Mexico, as the sole supplier of the M450 results that tell a similar story. Mihir is strongly positive. Conversely, the chassis, using inexpensive but reliable A. Desai, C. Fritz Foley, and James R. overall consequence would be less Mexican steel alloy. Hines (2009) use firm-level data from activity at home —not more activity at Ford’s prospects for holding its share 1982 to 2004 to show that growth in home— if overseas operations of U.S. of the truck market in subsequent years employment, compensation, fixed mncs had not been able to take advan- vis-à-vis the Toyota Tacoma and the assets, and property, plant and equip- tage of nafta. Isuzu DMax, not to mention the Chrysler ment at foreign affiliates of U.S. firms is A case study illustrates this point. One Dodge Ram, depend upon this nafta- associated with U.S. domestic growth of the best-selling and most success- integrated supply chain. Recently, the in these same measures. (Similarly, Lee ful trucks in the world has been Ford’s United Auto Workers (uaw) called for Branstetter and Foley [2010] find that F-150 series. Following the completion nafta to be “renegotiated to fix the U.S. firms that invest in China simulta- of nafta, Ford redesigned the F-150 line, many problems with this agreement neously invest more in the U.S. home making the Ford Essex engine plant in and to stop the outsourcing of good- market as well.)
Figure 4 Relationship between foreign expansion in Mexico and domestic activities of U.S. multinational corporations, 1990-2009
A 10% increase in A 10% increase in employment at foreign sales by foreign affiliates leads to: affiliates leads to:
U.S. R&D spending U.S. R&D spending 4.1 16.2
U.S. sales 1.0 U.S. sales 2.3
U.S. employment 1.3 U.S. employment 1.2
Exports from the United States 1.7 Exports from the United States 1.0
Capx in the United States 0.1 Capx in the United States 0.1
0% 1% 2% 3% 4% 5% 0% 5% 10% 15% 20%
Notes: 1. The numbers in this table are regression coefficients that isolate the relationship between each variable listed and either domestic employment or sales, controlling for firm characteristics, industry characteristics, and business cycle macroeconomic conditions as described in the text. All results are statistically significant at the 1% level. 2. Capx refers to capital investment by U.S. multinational corporations. 3. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintain legal confidentiality requirements. 4. Views expressed in this Policy Brief are those of the authors and do not reflect official positions of the Department of Commerce. SOURCE: U.S. Bureau of Economic Analysis. 20 North America Comercio Exterior 8
“How Us Investments in Mexico Have Increased Investments and Jobs at Home,” by Lindsay Oldenski and Ted Moran Copyright © 2014 Peterson Institute for International Economics.
Branstetter, Lee, and C. Fritz Foley, “Facts and Fallacies about U.S. FDI in China (with apol- ogies to Rob Feenstra),” in China’s Growing Role in World Trade, ed. by Robert C. Feenstra and Shang-Jin Wei, Chicago: University of Chicago Press in association with the National Bureau of Economic Research, 2010. Desai, Mihir A., Fritz Foley, and James R. Hines Jr., “Domestic Effects of the Foreign Activities of U.S. Multinationals,” American Economic Journal: Economic Policy, num. 1 Overall the evidence paints a picture ment of tangible and intangible assets (February), 2009, p. 181-203. in which outward investment is an more productive and more profitable. Moran, Theodore H., and Lindsay Oldenski, integral part of mnc strategy to maxi- Fears that expansion abroad may “The U.S. Manufacturing Base: Four mize the competitive position of the lead to contraction at home have been Signs of Strength,” Peterson Institute for whole corporation, a goal for which raised in discussions of trade agreements International Economics Policy Brief 14-18, headquarters raise the needed amount now on the U.S. agenda, particularly Washington, DC, 2014. of capital from sources all around the the Trans-Pacific Partnership tpp( ) and globe. In determining where to deploy the Transatlantic Trade and Investment capital and where to locate production, Partnership (ttip). But the strong comple- relative costs —including relative wages mentary relationship revealed here —and 1 The quotation comes from the UAW web- and benefits (as well as relative skills and in other similarly rigorous studies— site. Ford’s decision to shift from steel to relative productivity) — play a role. But in means that firms, workers, and communi- aluminium for the F-150 will involve a new the end, operations at home and opera- ties will likely be net beneficiaries of such configuration in source of inputs. Available tions abroad complement each other as market-opening and investment-widen- at
The fear that expansion abroad leads to domestic recession has been suggested in debates October - November 2016 North America 21
NORTH AMERICA’S AGENDA FOR 2017 AND BEYOND / Gary Clyde Hufbauer and Earl Anthony Wayne
In shared production ontrary to the assertions of natural assets to generate more pros- North America found a some in the United States perity together for the region. successful formula for of America (U.S.) political North American trade networks and competing in global mar- campaign, under the North continental investment ties generate CAmerican Free Trade Agreement millions of jobs. North America is the kets. The treaties reached (nafta), North America’s economy has region that shows the best economic by the presidents of grown significantly and adapted with performance among advanced econo- Mexico, the United States success to tough competition in global mies. But it needs to create more and and Canada at the recent markets. North America can be even better jobs while delivering higher summit held in Ottawa more competitive in 2017 and beyond, wages. Economic growth is too slow, if the next U.S. President joins the lead- infrastructure badly needs renovation, outline the route to scal- ers of Canada and Mexico in further and productivity growth is far below its ing up the international strengthening the continent’s inte- potential. An ambitious and cooperative competitiveness of the grated production networks and further agenda can boost the three economies. region and improve the unharnessing its significant human and Since the signing of nafta in 1993 the performance of the three trade in goods and services between the economies. In this article Gary Clyde Hufbauer and Earl Anthony three neighbors has expanded four- Wayne are respectively emeritus professor fold. Canada and Mexico are the world’s the prime matters on the at the Peterson Institute for International largest buyers of U.S. products: sales agreed work agenda are Economics and former United States to the two neighbors account for up to explained. ambassador to Mexico. 14 million U.S. jobs, about 9% of U.S. Fotolia/Pictures news Plendl news Fotolia/Pictures 22 North America Comercio Exterior 8
employment. Canada, in some cases, Each of the three governments Reduce the border crossing time and Mexico in others, are the largest must enhance its country’s economic export market for most U.S. states. performance with domestic reforms in Borders inevitably create frictions, but Stunningly, the finished manufactured key areas including education, worker frictions can be reduced by progress products Mexico and Canada sell to the retraining, infrastructure investment, on agreed programs. Separate trusted American market have by far the high- support for innovation, smart regula- traveler programs are now operated est content of U.S.-produced materials tion and tax policy. The United States, by the three countries. The leaders compared to U.S. imports from other for example, needs to work to maintain have agreed to launch a single North countries: an estimated 40% for finished its strengths in advanced industries American portal for applications by the manufactured goods exported from and services; if it coordinates with its end of 2017. Currently, about 5 million Mexico and over 20% from Canada. neighbors, it can also bring the entire North Americans participate in trusted Continental supply chains that link economy of North America to higher traveler programs, but well over 300 Canada, the United States and Mexico levels of performance. million people legally cross the U.S.- mean that much of what is produced Cooperation is well established. This Mexican border each year, and some in each country has content from its was reinforced by the North America 70 million cross the U.S.-Canadian neighbors. For example, a crv suv built Leaders’ Summit held in Ottawa on border annually. Many of these cross- in Jalisco, Mexico, has inputs of 70% June 29, 2016. The document called ings represent the same person taking from the United States and Canada. White House Fact Sheet ticked off com- multiple trips, but with a combined To establish these supply and produc- mitments for 2017 and beyond. Many North American population of almost tion chains, private firms in all three of the items are developed across a 500 million, it’s reasonable that at countries have invested in their neigh- wide range of topics from sensitive in- least 20 million should enjoy a trusted bors: U.S. companies have invested ternational trade issues to educational traveler designation. Making website about 386 billion dollars in Canada and exchanges to support for women en- portals and registration processes easy 108 billion dollars in Mexico. Canadian trepreneurs to collaboration in interna- to navigate and ensuring that fast lanes firms have invested 348 billion dollars tional forums. But a few commitments are always available to trusted travelers in the United States and 12 billion in deserve the spotlight for promoting will facilitate this expansion. The same Mexico. Mexican companies, despite increased economic competitiveness, logic applies to “trusted shippers” who operating in a smaller economy, have if the next U.S. president is willing are willing to take extra steps to assure invested about 19 billion dollars in the to pursue the work of making North governments that their goods are safe United States and Canada and its rate of America even more prosperous. These from contraband. A number of initia- investment has picked up significantly commitments suggest an agenda for tives are under way to speed up ship- in the last several years. 2017 and beyond. ment clearance while assuring security.
Under nafta the regional economy has grown significantly and has successfully adapted to the strong competition of global markets October - November 2016 North America 23
The three North American customs agencies should set a goal of not more than 30 minutes on average for a trav- eler —whether trusted or ordinary— to clear the border. Each crossing location and international airport should post its average wait times electronically and the periodical analysis of this data should be the basis for making improvements. Comparable goals and programs should be established for truck and rail traffic.
Build more border infrastructure
A big step would be to create a virtual trilateral mechanism with a man- date to develop a North American Transportation Plan, and update it as bureaucracies too long to enable Tijuana of nafta/tpp rules of origin on most well as regional plans along the borders to complement San Diego’s own inad- commerce (apart from sensitive areas on a rolling basis. The federal gov- equate airport. Visionaries were talking like automobiles, auto parts, textiles and ernments should partner with state, about this solution as early as the 1980s. apparel) as there would be no motiva- provincial and municipal border authori- tion for “trade deflection”, namely the ties to plan new border infrastructure, Reduce trade obstacles importation of third-country goods into set priorities consistent with trade and the lowest-tariff country followed by travel flows, and tap private as well as Whether or not the Trans-Pacific trans-shipment duty free to its North public funding sources. The Tijuana Partnership (tpp) agreement is ratified in American neighbors. International Airport, since 2015 acces- 2017, the North American leaders should sible to San Diego travelers through a establish the goal of common external Help small business short pedestrian bridge and the use of most-favored-nation (mfn) tariffs for its big parking lot, provides a wonder- 95% or more of 6-digit Harmonized This can be done by enacting higher de ful model of public-private collabora- System (hs) product lines in 10 years. minimis thresholds in Mexico and tion. The only complaint is that it took This would pave the way for a waiver Canada, below which customs declara- Fotolia/Lukassek Fotolia/torsakarin Fotolia/Zerophoto Fotolia/torsakarin Fotolia/Lukassek
North America is the region that exhibits the best economic performance of all advanced economies 24 North America Comercio Exterior 8
other countries should be to accept it. As for the existing massive body of relevant standards and regulations at the respec- tive federal levels, the North American partners should set a bold goal, such as harmonization or mutual recognition of half of them in 10 years.
To build a North American vision on energy and the environment
At their June summit, the leaders agreed on creating a partnership and establish- ing a North American action plan with regard to climate, clean energy and the tions are simplified and imports are provisions for deducting anticipated environment with a series of com- exempt from all taxes and tariffs. At loan losses— to extend export credit mitments for collaboration, including present, the U.S. de minimis threshold is support to smes. setting a target to increase clean power 800 dollars, the Canadian level is 20 to 50% of the electricity generated Canadian dollars, and the Mexican level Strive for regulatory coherence across North America by 2025, to reduce is 50 U.S. dollars. Raising the Canadian methane emissions from the oil and gas and Mexican limits would enhance In addition to energizing trilateral talks sector by 40-45% by 2025, to strengthen express deliveries, support e-commerce, seeking more alignment among the standards for energy efficiency and ve- and spur participation by small and three countries, the three governments hicle emissions, and to expand coopera- medium-sized enterprises (smes), which could agree in principle that, when con- tion to protect wildlife and improve early often export lower-value goods. In the sidering new standards or regulations, warning systems for natural disasters. same spirit, the three governments each North American regulator should The three countries have the opportu- should create user-friendly tri-lingual first examine what their other regional nity to establish a world-class model websites for smes to identify potential partners have done (see U.S. Executive for regional cooperation in these areas, buyers throughout North America. Order 13609 of May 2012). Unless an while promoting energy security and Governments should also encourage existing standard or regulation is mani- sustainability and generating jobs and commercial banks —through generous festly inadequate, the presumption by prosperity. t Fotolia/lklales
The trade of goods and services between the three neighbors has increased four-fold since 1993 with nafta October - November 2016 North America 25
SIZE AND DISTANCE ARE DESTINY / The Future of Economic Relations Between Mexico and the United States1 / Antonio Ortiz-Mena L. N.
The current political dis- Just the facts This is linked to the growing impor- course sometimes overlooks tance of direct foreign investment: the great significance and eography is destiny, and in 1993, just before the coming into complexity of the commercial Mexico’s economic fate is force of the North American Free Trade inextricably tied to that of the Agreement (nafta), it was 4.38 billion exchange between Mexico United States (U.S.). Mexico usd,5 and by 2015, it was 28.38 bil- and the United States. It also Ghas sought to diversify its international lion usd.6 The U.S. remains the largest forgets that our country is economic relations at least since the foreign investor in Mexico. Increasing likely to become one of the Porfiriato, but the power of geography trade and investment have in turn led to six largest economies in the and the market is greater than political increased intra-industry and intra-firm world. This article measures will (see Figure 1). trade. One way to appreciate this is by the economic integration of Economic relations with the U.S. have measuring value-added in trade in a been a perennial factor in Mexico’s for- country and added in the exports of the North America and lays out eign economic policy, but their nature other (see Figure 2). its main challenges. changed in the last quarter century.2 In short, countries in North America
Fotolia/Onionastudio While the bulk of Mexican exports not only trade with each other and invest Antonio Ortiz-Mena L. N. traditionally went to the U.S., foreign in the region but produce jointly. In is a senior advisor at Albright trade is increasingly important to the all likelihood, these trends will con- Stonebridge Group. Mexican economy: the trade openness tinue to intensify in the next decades. coefficient increased from 27% in 19803 PricewaterhouseCoopers (pwc) esti- to 67% in 2015.4 mates that in 2050 Mexico will be the 26 North America Comercio Exterior 8
sixth largest world economy, only behind factors will produce a radically different The challenges China, India, the U.S., Indonesia and economy to the one we know today. Brazil, but with a greater economy than Given the increasing volume of tradi- Economic integration between Mexico those of Japan, Russia, Germany, the tional trade, intra-industry and intra-firm and the U.S. is becoming deeper, so the United Kingdom and France. According trade, the peak in production sharing opportunity cost from barriers to eco- to these estimates Canada will be the and radical technological change un- nomic interaction is growing. Although nineteenth largest economy.7 derway and the outlook for the Mexican Canada’s economy will be smaller than At the same time, the global economy economy in the medium and long term, that of Mexico, from the perspective of is changing radically. According to the U.S.-Mexico economic relationship production sharing and the allocation of McKinsey, there are a group of factors will be increasingly important not only resources (human and energy, among that are changing business models, for the future of Mexico but also for that others), greater economic integration the global economy and everyday life: of the U.S., although this reality does not will bring benefits for both countries and mobile internet; the automation of intel- seem to have sunk in among certain U.S. for all of North America. In this context lectual work; the internet of things; the circles (see Figure 3). it is possible to identify at least five chal- information in the “cloud”; advanced ro- At least six million U.S. jobs are related lenges that will impact the economic botics; autonomous or semi-autonomous to its bilateral trade with Mexico,9 and future of the region: vehicles; genomics; energy storage sys- Mexico is the leading Latin American 1. The Trans-Pacific Partnership tpp( ). tems; additive manufacturing; advanced investor in the U.S.: there are Mexican Will it be ratified? If so, how can it materials; advanced exploration and companies in virtually all U.S. states, best be used? recovery of oil and gas, and renewable which all together generate at least 80 2. The Transatlantic Trade and Invest- energy.8 The interaction of these twelve thousand direct jobs.10 ment Partnership (ttip) between the
Figure 1 Figure 2 Main destinations of Mexico’s exports, 2015 United States value added to imports from selected countries (percentages)
% 45 40 40
35
30 25 25
20
15
10
5 4 2 2 3 0 Japan European Union Brazil China Canada Mexico
SOURCE: Calculated by the author with numbers taken from R. Koopman, W. Powers, Z. Wang and S. J. Wei, “Give Credit where Credit Is Due: Tracing Value Added in Global Production Chains”, National Bureau of Economic NOTE: The font size represents each country’s contribution in U.S. total exports. Research Working Paper (num. w16426), Cambridge, Massachusetts, September 2010 (updated in March SOURCE: Calculated by the author with INEGI data. 2011), p. 38 (rounded off numbers). October - November 2016 North America 27
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 Euro- pean Union. Without close coordina- tion, 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. North America, Mexico must promote The Trans-Pacific Partnership 4. Inadequate infrastructure. Mexico joint actions to ensure the flow of tpp ratification would help reduce cannot take full advantage of nafta goods and services, investment and U.S. protectionist tendencies and nor the big trade agreements in the human capital. This is vital for the “shield” nafta. Its ratification by making if it continues to invest less prosperity and therefore the security the U.S. is of vital importance and in this sector than other countries in of the country. There are no magic the lessons from nafta can help Latin America, China and India.11 recipes for meeting the challenges this purpose and, in the event that it 5. Corruption in Mexico and the tar- of the economic relationship with prospers, help in a thorough use of nished image of Mexico in the u.s.12 the United States and among the the mechanism.13 countries of the region, but Mexican Should the U.S. not ratify the tpp, What to do and how actions at the national, bilateral and Mexico should seek a deepening of regional levels can strengthen its nafta using the elements that the Economy and trade are essential com- economic insertion in North America. agreement itself offers, especially ponents of foreign policy. In its relation- Below are some proposals involving Article 1504 on cooperation in com- ships with the rest of the countries in this complex subject: petition policy and Articles 1907 Fotolia/mipan Fotolia/Mike Mareen Fotolia/Mike Fotolia/mipan
Geography is destiny, and Mexico’s economic fate is inextricably tied to that of the United States 28 North America Comercio Exterior 8
and 2022, which allow strengthening of the short term nor merely through a pub- neling of financial or human resources dispute settlement mechanisms. lic relations campaign. The importance of will be absolutely irrelevant so long as The actions of foreign economic policies its economic links with Mexico is not well there are no tangible results and real could also be strengthened in order to em- understood in the United States. Clear accountability. phasize Mexico’s role as a natural bridge and accessible information in this regard between North America and Latin Ameri- should be provided to the key decision Infrastructure and connectivity ca, particularly through the Pacific Alliance. makers. Improvements in international Research on Mexico in the U.S., both rankings on infrastructure competi- The Transatlantic Trade and in universities and think tanks, needs to tiveness are necessary for Mexico Investment Partnership (ttip) be fostered. Mexico’s profile in theU.S. to attract more investment. The It must be ensured that there is no trade is lower than that of other countries that improvement in physical infrastruc- diversion nor that the production chain are much less relevant to U.S. security ture must be accompanied by the operation is blocked in North America. and prosperity. necessary regulatory framework for Mexico will have to adjust its trade agree- costs and transport times between ment based on the recent Canada-Europe- Corruption Mexico and the U.S. to be the lowest an Union agreement and an eventual ttip. Without changes in international rank- possible. ings on corruption, it will be difficult There have been advances in cross- Protectionism in the U.S. for Mexico to use trust as a compara- border connectivity, like the Joint and the image of Mexico tive advantage in attracting foreign Customs Clearance Program and the Changing the image and reputation of investment. Public statements, media Single Cargo Manifest. Infrastructure
Mexico in the U.S. will not be achieved in campaigns, legal initiatives and chan- has been improved in some crossings Fotolia/Paylessimages
Figure 3 United States main export markets, 2015
NOTE: The font size represents each country’s contribution in U.S. total exports. SOURCE: Calculated by the author with numbers from the United States Department of Commerce. October - November 2016 North America 29
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 policy positions on issues that impact cies across all public organizations between authorities of both countries. bilateral economic relations and has al- and on all the topics”.14 The relationship is multidimensional, lowed the private sectors of Mexico and U.S. policy on North American is- and with segmented actions it will the United States to have a shared vision sues is at times somewhat fragment- not be possible to solve complex and a more strategic dialogue with the ed and reactive. If there is no change obstacles or strategically promote the authorities on both sides of the border. in the U.S. that enables the designa- relationship. A central challenge will tion of a “champion,” Mexico will be to ensure that the hled transcends Decision-making in the U.S. have to redouble its efforts so that the the current administrations in Mexico In 2014, the Council on Foreign Relations common destiny of shared prosperity and the u.s. (cfr) issued a report on the future of for both countries prevails. t The U.S.-Mexico Business Dialogue North America. Among its recommenda- was established in 2013 as an initia- tions it highlighted one: the designation tive of the U.S. Chamber of Commerce of “a senior U.S. official as the North The notes of this article are available in the and Mexico’s Business Coordinating American ‘champion’, who will press for web version, which can be consulted at Council (cce). It aims to establish joint the implementation of consistent poli-
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 30 North America Comercio Exterior 8
THE GOP’S MEXICO DERANGEMENT / Bret Stephens
It suits certain politicians to dozen Mexican states held Elements of that nonsense: present Mexico as a failed elections on Sunday, and— State and a threat. Nothing ho-hum—the center-right Mexico is a failed state. Mexico’s could be further from the National Action Party, or struggles with drug cartels—whose Apan, appears to have won seven of the existence is almost entirely a function of truth. Originally published races. The Journal reports that voters in America’s appetite for dope—are serious 1 in the Wall Street Journal, the world’s 15th-largest economy were and well known. So are its deep-seated this article dismantles turned off by the ruling party’s failure institutional weaknesses, especially the a series of myths about to cut debt and tackle crime, and by a police forces that collude with the cartels Mexico in areas such as boy-wonder president, Enrique Pena and terrorize rural areas. lack of safety, the effects Nieto, whom they now regard as more Then again, Mexico’s 2014 homicide of commercial integration boy than wonder. rate of about 16 murders per 100,000 I mention this to illustrate that Mexico means that it is about as dangerous as and migration. is a functioning democracy whose voters Philadelphia (15.9) and considerably safer tend to favor pro-business conservatives, than Miami (19.2) or Atlanta (20.5). Are not a North American version of Libya, these “failed cities” that you don’t dare Bret Stephens writes “Global exporting jihad and boat people to its visit and that should be walled off from View,” an international news neighbors. Somebody ought to explain the rest of America? column in the Wall Street Journal. this to Republican voters, whose brains, like pickles in brine, have marinated too Mexico is a threat to U.S. security. The long in anti-Mexican nonsense. most serious terrorist attempt to enter Fotolia/Rusty Dodson Fotolia/Rusty October - November 2016 North America 31
the U.S. across a land border occurred Then again, Mexico is the second- Chavez-like strongman that would in December 1999, when Ahmed largest purchaser of U.S. products; the have posed a real threat to U.S. security Ressam tried to smuggle a bomb into Wilson Center’s Christopher Wilson as opposed to the one in Mr. Trump’s the U.S. from… Canada. All 19 of the has estimated that “six million U.S. imagination. 9/11 hijackers entered the U.S. with jobs depend on trade with Mexico.” legal visas on scheduled flights. The That is especially true for border This is a foul electoral season, one bride of the San Bernardino attacker states. “Mexico is the top export conservative voters (or their children) came here the same way. No significant destination for five states: California, will look back on with political regret act of political violence against the U.S. Arizona, New Mexico, Texas and New and personal remorse. Mr. Trump’s has been staged from Mexico since Hampshire, and is the second most “Mexican” slur about federal judge Pancho Villa’s raid on Columbus, N.M., important market for another 17 states Gonzalo Curiel is the most shameful in March 1916. across the country.” word uttered by a major presiden- Could terrorists infiltrate the U.S. tial candidate since Dixiecrat Strom by crossing the border? Sure, if they Illegal immigrants are a drain on Thurmond thundered in 1948 against wanted to risk being asphyxiated in the system. This whopper should be the “Nigra race.” As in 1948, Mr. Trump the back of a crowded migrant truck sold at Burger King, since illegal im- is appealing to constituents who have somewhere in Sinaloa. migrants pay billions in state and local stuffed themselves on a diet of bad As for ordinary criminals, my col- taxes, along with about 15 billion usd statistics and misleading anecdotes— league Jason Riley has noted that the a year to Social Security—the benefits people who fancy themselves victims rate of incarceration in California for of which they are unlikely ever to get but behave like bigots. Republican foreign-born residents is less than half back. Entire U.S. industries, agriculture leaders who think they can co-opt or the U.S.-born rate. Violent crime in the above all, depend on illegal migrants, tame Mr. Trump will instead find them- U.S. fell dramatically during the same without whom fruits and vegetables selves stained by him. two decades, 1990-2010, of an “inva- would simply rot in the field. Meanwhile, let’s state clearly what sion” of illegal immigrants. If there is a drain, it’s Mexicans going shouldn’t need saying but does: home—roughly one million returnees Americans are blessed to have Mexico Mexico steals U.S. jobs. Donald Trump between 2009 and 2014, according as our neighbor and Hispanics as our recently resurrected this chestnut by to the Pew Research Center, outpac- citizens. On this point, disagreement is inveighing against Nabisco and Ford ing the number of Mexicans moving indecency. t for shifting production to Mexico north by about 140,000. That owes from high-cost Illinois and Michigan. something to growth and stability in Never mind that one reason Ford the Mexican economy, which is largely made the move was to take advantage a function of the North American Free of Mexico’s free-trade agreements Trade Agreement. 1 June 6, 2016. with the European Union and other This makes Mr. Trump’s opposi- countries, meaning that opposition to tion to nafta all the more misjudged. Reprinted by permission of The Wall Street free trade is the very thing that drives Without it, Mexico could easily have Journal, Copyright ©2016 Dow Jones & business abroad. become Venezuela, run by a Hugo Company, Inc. All Rights Reserved Worldwide. NUEVA ÉPOCA NÚMERO 8 OCTUBRE-DICIEMBRE 2016 ISSN: 2395-8324 $ 45.00 MÉXICO
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