The Emerging Integration of the California-Mexico Economies
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The Emerging Integration of the California-Mexico Economies ••• Howard J. Shatz Luis Felipe López-Calva 2004 Library of Congress Cataloging-in-Publication Data Shatz, Howard J. The emerging integration of the California-Mexico economies / Howard J. Shatz, Luis Felipe Lopez-Calva. p. cm. Includes bibliographical references. ISBN: 1-58213-087-6 1. California—Foreign economic relations—Mexico. 2. Mexico—Foreign economic relations—California. 3. North America—Economic integration. I. Lopez-Calva, Luis Felipe. II. Title. HF1475.C2S53 2004 337.794072—dc22 2004012989 Copyright © 2004 by Public Policy Institute of California All rights reserved San Francisco, CA Short sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source and the above copyright notice is included. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office. Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or Board of Directors of the Public Policy Institute of California. Foreword Ten years have passed since the launching of the North American Free Trade Agreement (NAFTA). In that decade, and building on a substantial momentum from the 1980s, California and Mexico have enjoyed a significant increase in the integration of their two economies. Increased trade across the border was exactly what was expected after the historic approval of NAFTA. However, some aspects of the trade expansion present challenges for California’s public policy decisionmakers and will continue to do so for decades to come. In this report, Howard Shatz and Luis Felipe López-Calva document a growth of exports to Mexico from California in the range of 13 percent annually between 1988 and 2002. Imports to California from Mexico occurred on about the same scale. This trade growth is both positive for California’s economy and troubling at the same time. First, three-quarters of the trade flow to Mexico has destinations in communities along the border with California. This growth has and will continue to put extraordinary demands on the environment, infrastructure, and delivery of public services in border communities. Both the speed with which trade has increased at the border and the sheer scale of urban growth that will emerge in the coming decades present public policy challenges beyond business-as-usual. Immigration policy, water supply, air pollution, cross-border highways, air traffic, and port facilities are just some of the areas that will require judicious public policy planning—all complicated by the legal and cultural differences of two countries and multiple states. In the 1980s, some scholars imagined a U.S.-Mexico growth pattern that would see a linear city and urban complex from Tijuana on the Pacific to Brownsville on the Gulf of Mexico. That vision is well under way on the California-Mexico section of the border, yet little has been done or planned to accommodate the growth from either a state or national perspective. iii The second challenge presented by increased integration of the two economies is the nature of the trade. Shatz and López-Calva conclude that the bulk of the economic exchange is production-sharing—parts are made in California, assembled in Mexico, and shipped back to California to be consumed in the United Sates as final products. This has added to jobs along both sides of the border, but it is also the very kind of outsourcing that is now the subject of a national economic debate. Manufacturing jobs in California will increasingly drift to Mexico or eventually to countries around the Pacific Rim. In a global economy, there is little that California public policy can do to reverse this trend. Nevertheless, a conscious effort to work with Mexico and the northern states of Baja, Chihuahua, Nuevo León, Sonora, and Tamaulipas on mutual problems and policy will go a long way toward taking advantage of integration on both sides of the border. This report by Shatz and López-Calva has documented the breadth and depth of the economic integration that has already taken place, and it provides the factual background necessary for working closely on common problems across an international border. David W. Lyon President and CEO Public Policy Institute of California iv Summary California and Mexico have a complex relationship along many dimensions. Although economically quite different—California has a gross state product of $39,285 per person, whereas Mexico has a gross domestic product of $6,275 per person—the two regions share a common history, border, and culture, and their relationship includes migration and economic exchange. One great hope of Mexican policymakers, and many U.S. policymakers as well, is that Mexico can establish a growth path that will lead it to become more similar in income, economic structure, institutions, and quality of life to the advanced industrial countries, a process known as convergence. In the post–World War II era, developing countries that are converging with advanced countries are doing so in part through economic integration. Based on this pattern of economic development, cross-border policy in Mexico and the United States can be characterized as integrating economically to bring about Mexico’s convergence with advanced economies. A subtext of this policy is that Mexican growth will slow or stop the flow of illegal immigrants moving to the United States. California, with its large population of Mexican origin, its web of trade and investment relationships with Mexico, and its potential as a major consumer market for Mexican goods, plays an important role in this economic integration. In the realm of economic integration, three areas merit particular attention: trade and goods movement, foreign direct investment (FDI) and joint production, and the economy of the border region. All are deeply influenced by the geography of California and Mexico. California and Mexico share only a very short border, about 145 miles, compared to 1,950 miles for the total U.S.-Mexico border (Figure S.1). In addition, California is relatively far from the center of Mexico and most Mexican border states. As a result, a large portion of the joint economic activity between California and Mexico focuses on the California-Mexico border area. v California Mexico SOURCE: ESRI (2003). Figure S.1—California, Mexico, and the Continental United States California-Mexico Trade Throughout the 1990s, trade between California and Mexico rose steadily. Some of it was pass-through trade: Goods were produced elsewhere in the United States and shipped to Mexico through California’s ports or land border crossings, or goods were shipped from Mexico through California’s ports or land border crossings and then sent to points east and north in the United States. Much of the increase, however, can be traced back to California producers in the case of exports and California buyers in the case of imports. Goods exports to Mexico originating in California grew an average of 12.8 percent annually between 1988 and 2002, a quicker pace than vi the growth of exports to the rest of the world originating in California, exports to Mexico originating in the rest of the United States, and exports to the rest of the world originating in the rest of the United States. During that time, Mexico changed from the third-largest destination for California exports to the largest, in 1999. In 2002, Mexico received 17.4 percent of all California exports, almost $16.1 billion. The majority of California’s exports to Mexico constitute just two broad commodity classes—machinery, and electrical machinery and equipment. However, California exports to Mexico are more diverse across product classes than California exports to the rest of the world. In addition, they embody less skill than do California exports to the rest of the world, implying that trade with Mexico has provided greater opportunity to production workers, as opposed to executives, administrative assistants, and marketers, than has trade with the rest of the world. Between 2000 and 2002, more than 200,000 California workers each year produced exports to Mexico—17 percent of all export-related jobs in the state and about 1.3 percent of all California jobs. The number of jobs producing exports for Mexico rose by about 76,000 between 1996 and 2002. Although export levels are high, their destinations are concentrated. More than three-quarters of all California-origin exports are shipped to border states, with the vast majority going to Baja California. Just as exports from California to Mexico have grown dramatically, so have imports from Mexico to California. More precisely, the level of imports transported by land for which the person or business responsible for paying duties is a Californian has grown. Imports from Mexico by California-based importers more than doubled between 1995 and 2002, from $9.1 billion to $20.3 billion. The proportional growth was slightly larger than that of imports from Mexico to the rest of the United States. Imports can have a number of benefits for an economy, but they can also force workers out of jobs or cause decreased wages or work hours. Between 1994 and the end of 2002, 5,700 California workers were certified as having been affected by imports from Mexico or from Mexico and Canada, with the actual source unidentified. This number constituted 3.5 percent of all such workers in the United States. This is vii probably an underestimate, because unlike the export-related job figures cited above, it does not include linkages throughout the rest of the economy, nor does it include workers who were eligible for assistance programs but either did not apply or did not know to apply.