sign in sign up
<<
Home , Latin America

U.S., Deepen Economic Ties By Jesus Cañas, Roberto Coronado and Robert W. Gilmer

Globalization has become a economies, a conclusion in widely used term to describe sync with the worldwide trend the forces knitting economies Chart 1 toward increasing . closer together. For the United Mexico’s Economic Growth Shifts to the North States and Mexico, it’s just a U.S.–Mexico new word for an old phenom- Mexico opened its econ- enon. The two economies— omy to trade in two important Growth rates, one highly advanced, the other by state, 1970–85 steps: joining the General still developing—have for 0.7 to 1.3 Agreement on Tariffs and 1.3 to 1.8 decades been on a path 1.8 to 2.4 Trade in 1985 and signing toward ever greater integration. 2.4 to 3.4 NAFTA in 1994. Reducing The U.S. is Mexico’s top 3.4 to 16.6 trade barriers represented an trading partner by far. About epochal change in Mexican 88 percent of Mexico’s exports policy, and it has brought a go to the U.S., and 56 percent sustained increase in the of its imports come from U.S. inflow of foreign direct invest- sources. At the same time, 14 ment, made the more percent of U.S. exports go to competitive and insulated it Growth rates, Mexico and 11 percent of by state, 1985–2001 against external shocks. imports come across the Rio –7.3 to –0.4 How have two decades of Grande. Perhaps more impor- –0.4 to 0.7 market opening impacted 0.7 to 1.2 tant, U.S.–Mexico trade has 1.2 to 1.6 Mexicans’ pay? Daniel Chiquiar, grown exponentially since the 1.6 to 3.4 a researcher from Banco de signing of the North México, considered the role of Agreement (NAFTA), trade in changing the distribu- growing from $89.5 billion in tion of wages in Mexico. 1993 to $275.3 billion in 2004, Several economic geogra- a threefold increase. phy models have noted that are the biggest Mexico’s trade liberalization investors in Mexico, further SOURCE: Daniel Chiquiar, "Globalization, Regional Wage Differentials and the had dramatic impacts that dif- Stolper–Samuelson Theorem: Evidence from Mexico," Federal Reserve of Dallas evidence of NAFTA pulling the conference, Nov. 18, 2005. fered greatly by , espe- two together. Since cially in manufacturing. The 1994, the U.S. has accounted traditional factory for 62 percent of all foreign belt, located in the middle of direct investment in Mexico. The facts of U.S.–Mexico economic the country, was optimal for a closed econo- The two economies are also linked by interaction are clear, but new questions con- my. After 1985, central Mexico lost at least the flow of Mexican immigrants to the U.S. tinue to arise. How is China affecting trade some of its advantage. Led by and the they send back home to between the countries? What has been the expansion, manufacturing employment and their families. The approximately 10 million impact of NAFTA on Mexico’s economic wages grew sharply in the states close to the Mexican nationals who reside in the U.S. growth, specifically on regional wages? Is the U.S., and these gains came at the expense of sent back an estimated $20 billion in 2005, maquiladora industry tied to the U.S. busi- the center of the country (Chart 1). an amount equivalent to 3 percent of ness cycle? Are remittances reducing poverty Chiquiar entered the debate by dividing Mexico’s GDP. levels in Mexico? What skills does the typical Mexico into five and classifying The U.S. and Mexican economies have Mexican immigrant bring to the U.S.? them according to the strength of their ties become increasingly synchronized. The In November 2005, researchers from the to globalization through trade, migration coincident indexes for economic activity for U.S. and Mexico gathered in Houston to and foreign direct investment. He treats both countries show that the degree of syn- these issues at a Dallas Fed confer- globalization as a regionally heterogeneous chronization since 1993 is about a third ence, “The U.S. and Mexico: Are We Still shock to Mexico’s economy, with a slowly higher than it was in 1980–93. The two Connected?” The presentations pointed to operating adjustment mechanism. Thus, economies now march almost in lockstep.1 even greater interdependence for the two globalization’s effects may be felt first and

FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2006 11 SouthwestEconomy economies of ’s border percent to 73 percent over the same period. states, where the maquiladora industry is Royo said that EU integration and Mexico’s concentrated, are more affected by U.S. NAFTA experience have been similar in that business-cycle fluctuations than the rest of all three countries have been able to com- The U.S. has long been the the country. pete more effectively in international markets The U.S. has long been the chief trad- and confront serious economic crises at chief trading partner for ing partner for America, and the rise home. Although both treaties began as eco- of China as an industrial power has posed a nomic unions, the EU is different because it , and the rise new and significant threat to this relation- is based in a political union built around the ship. U.S. imports from China grew 12 per- principles of solidarity, which informs its dis- of China as an industrial cent from 2000 to 2003, while U.S. imports tributive policies. from Latin America grew 2.7 percent, Both Spain and Portugal were tradition- power has posed a new including 2.2 percent from Mexico. ally emigrant countries, but European citi- José Ernesto López Córdova, an econo- zenship and free movement among member and significant threat to mist at the Inter-American Development countries has ended some of the past dis- Bank, conducted a study of several scenar- crimination against immigrants and reversed this relationship. ios for the sensitivity of Latin American historical patterns. Indeed, these two coun- exports to competition from China in the tries have recently become net recipients of U.S. market, particularly the likely response immigrants, perhaps offering lessons for to changes in the prices of Chinese exports. Mexico. López Córdova estimated that a 1 per- cent decline in prices for Chinese exports to Immigration and Remittances most strongly in regions with closer ties to the U.S. would increase U.S. imports by 3.7 For most Mexicans who emigrate to the the international economy. percent, while Latin American exports to U.S., the attraction lies in the higher wages Chiquiar showed that in regions with the U.S. would drop 0.1 percent. The Latin north of the border. A significant number of significant trade ties, wage inequality American losses are concentrated in manu- expatriate workers earn enough to send declined. Other regions, less tied to trade, facturing, especially leather, textiles and money to family in Mexico, providing a saw inequality rise for reasons possibly apparel. major source of income for many villages. unrelated to trade. Chiquiar concluded that A scenario with a 20 percent revalua- The money has been flowing for decades, further diminishing wage inequality will tion of China’s currency results in Chinese but the opening of Mexico’s economy over require the rest of the country to strengthen exports to the U.S. falling 22.1 percent, or the past dozen or so years has expanded its linkages to the global economy. $43 billion, although overall U.S. imports the ways citizens working in the U.S. can Forming the backbone of U.S.–Mexico fall only 1.7 percent, or $24 billion. An send money home.3 trade are programs of temporary imports to increase of 0.5 percent in Latin American Workers’ remittances now occupy sec- be re-exported, which bring parts into exports to the U.S. partly fills the gap. South ond place as a source of foreign exchange Mexico and return assembled products to America gains the most, with leather, tex- in Mexico, behind and ahead the U.S.2 Industrial goods make up 82 per- tiles and apparel again the sectors most of tourism and foreign direct investment. cent of Mexico’s exports to the U.S. and 91 sensitive to price changes. The remittances have risen from $84 million percent of imports from the U.S. According López Córdova noted that China has in 1960 ($531 million in 2004 ) to to Enrique Dussel-Peters, economics profes- been able to compete in the U.S. despite $16.6 billion in 2004, with an increase to sor at Universidad Autónoma de México, high tariff barriers and textile quotas, largely $20 billion estimated for 2005. Two advan- about half of U.S.–Mexico trade is consid- due to strong productivity gains. These pro- tages of remittances, when compared with ered intra-industry trade, again mostly due ductivity gains explain perhaps half of Latin other inflows, are that they have been stable to temporary imports. Mexico’s intra-industry America’s U.S. export losses and reinforce and countercyclical.4 trade with the U.S. achieved its highest level the need for regional fiscal, labor, energy Few studies analyze the impact of in 2000 and has declined since then, while and other reforms. remittances on developing economies, and intra-industry trade with countries such as Sebastián Royo, associate professor of even fewer look specifically at the impact on China is substantially lower. government at Suffolk University– poverty levels. Gerardo Esquivel, a These interconnections suggest the and director of Suffolk University’s researcher at Colegio de México, began with maquiladoras are closely tied to the U.S. campus, further discussed the need to a look at the extent of poverty in Mexico. industrial sector. Gustavo Félix Verduzco, reform political and economic institutions to He used three poverty definitions: food professor at Universidad Autónoma de take advantage of free trade agreements. He poverty, capabilities poverty and assets Coahuila, investigated the degree of synchro- compared the integration of Spain and poverty, meant to be roughly equivalent to nization between the U.S. business cycle and Portugal into the European Union (EU) with extreme poverty, poverty and moderate the maquiladoras, finding that the Mexican Mexico’s integration into the rest of North poverty. (1) A household is considered to plants’ production and employment are sen- America under NAFTA. be food-based poor if its net per capita sitive to relative wages between the U.S. and Spain went from 78 percent of the EU’s income is less than the amount of money Mexico and fluctuations in the U.S. economy. average per capita GDP in 1990 to 98 per- necessary to cover basic food expenses. Félix Verduzco also concluded that the cent in 2004, while Portugal went from 56 This category included 20 percent of

SouthwestEconomy 12 FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2006 distribution is remarkably more uniform order, those with nine to 12 years of educa- Chart 2 once remittances are taken into considera- tion, those with zero years of education and Remittances Affect Income tion (Chart 2). For example, over 45 percent those with 13 to 16 years of education Distribution for Mexican of all households that receive remittances (Chart 3). would fall in the bottom 10 percent of the It is not clear how to explain this non- Households income distribution if the remittances were linear pattern because wage differentials Percent removed. However, only 12 percent of these between the U.S. and Mexico are larger for 50 households still belong to the lowest decile the least educated and decline with the level 45 if remittances are included in their income. of education. Cuecuecha cited the following Esquivel analyzed the impact of remit- hypotheses from current research literature. 40 tances on poverty levels through a propen- Declining migration costs for those with 35 sity score approach that matches house- more education—possibly related to greater Total income holds receiving remittances with other English proficiency among the more educat- 30 Income excluding remittances households that have similar characteristics. ed—could explain the larger migration of 25 His findings suggest that receiving remit- individuals with medium levels of education. tances—regardless of the amount—reduces Limits on access to credit may explain why 20 the household’s probability of being in the groups with low education cannot afford 15 poverty by 10 to 14 percent, depending on to migrate. Cuecuecha noted that individuals the poverty measure used. in Mexico do not have access to unemploy- 10 Studies differ on whether migrants to ment insurance, which implies that in cases 5 the U.S. are drawn from the bottom or top of unemployment, they must rely on the of Mexico’s educational distribution. The or their families. Because 0 1 2 3 4 5 6 7 8 9 10 uncertainty stems from a lack of data repre- poverty is related negatively to education, Deciles sentative of the entire Mexican population individuals who have low levels of educa- SOURCE: Gerardo Esquivel, "Remittances and Poverty in Mexico: A Propensity Score Matching Approach," and inadequate techniques to combine U.S. tion have too much to lose if they migrate Federal Reserve Bank of Dallas conference, Nov. 18, and Mexican statistics. because the U.S. will not provide unemploy- 2005. Alfredo Cuecuecha, a professor at ment insurance either, and their social net- Instituto Tecnológico Autónomo de México, work has stayed in Mexico. studied Mexican immigrants’ educational Mexico’s population in 2002. (2) A house- characteristics by using sophisticated meth- Closely Knit Economies hold is in capabilities poverty if its members ods to compare U.S. and Mexican census The integration of the U.S. and Mexican cannot afford to cover their basic expenses data and adjust for the U.S. undercount of economies is well-established—but it is of food, health and education. This applies Mexican immigrants. He concluded that for changing in an era of increasing globaliza- to 26.5 percent of the population. (3) A 2000 the three groups with the highest tion. Evidence of deepening ties can be household is in assets-based poverty if its migration probability were, in descending (Continued on back page) members cannot cover expenses of food, health, education, clothing, home and pub- lic transportation. About half of Mexico’s population fits into this category. Chart 3 Esquivel then considered the impact Probability of Migration for Mexico’s income of remittances on poverty in Mexico.5 In Mexican Males 2002, about 6 percent of Mexican house- Probability (percent) distribution is holds received money in remittances—3 12 percent of urban households and 10 per- remarkably cent of rural families. Most households 10 receiving remittances are in central and more uniform once southern Mexico. They are not concentrat- 8 ed in the poorest states—such as , remittances are taken Guerrero, Oaxaca, and — 6 because the costs of getting into the U.S. into consideration. make it difficult for someone with 4 extremely limited funds to migrate.

Instead, the remittances go to better-off 2 states such as Michoacan, Durango, 0 1–4 5–8 9–12 13–16 16+ Guanajuato and Zacatecas. These four Years of education NOTE: Sample consists of Mexican males 25 to 58 years states are home to more than one-third of old in the labor force. All Mexicans in the U.S. sample all Mexican households receiving remit- entered after their 17th birthday. SOURCE: 2000 U.S. census; 2000 Mexican census; tances. author's calculations. Esquivel found that Mexico’s income

FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2006 13 SouthwestEconomy U.S., Mexico Deepen Economic Ties (Continued from page 13) found in the extent and importance of trade, closely tied to globalization, trade has the continued growth of remittances, the increased the demand for unskilled labor importance of the maquiladora sector in syn- and raised unskilled wages relative to chronizing the two economies and the need skilled. In addition, remittances have pulled to make our economies more competitive a significant number of Mexican households through sectoral and institutional reforms. out of the bottom 10 percent of the income Mexico’s macroeconomic picture has distribution and significantly reduced the improved greatly over the past decade, but probability that they remain in even moder- SouthwestEconomy is published there is room for continued gains from ate poverty. six times annually by the Federal Reserve Bank of reforms. According to most estimates, Dallas. The views expressed are those of the authors Cañas and Coronado are assistant economists at the Mexico’s current 3 to 4 percent GDP growth and should not be attributed to the Federal Reserve El Paso Branch of the Federal Reserve Bank of Dallas. Bank of Dallas or the Federal Reserve System. is bumping against the ceiling of its poten- Gilmer is a vice president at the Federal Reserve Bank Articles may be reprinted on the condition that tial rate. To improve the potential rate to 6 of Dallas. the source is credited and a copy is provided to the percent or higher, changes are needed in Research Department of the Federal Reserve Bank of Mexico’s basic institutional fabric. More Notes Dallas. specifically, Mexico desperately needs tax, Conference presentations can be found on the Dallas Fed Southwest Economy is available free of charge web site at www.dallasfed.org/news/research/2005/ by writing the Public Affairs Department, Federal 6 energy and labor reforms. 05us-mexico.html. Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX The closeness of the U.S. and Mexican 1 From 1980 to 1993, the correlation coefficient between the 75265-5906; by fax at 214-922-5268; or by tele- economies raises interesting issues, which coincident indexes of economic activity in the U.S. and phone at 214-922-5254. This publication is available researchers are exploring in new and Mexico was 0.73. This same measure increased to 0.96 on the Dallas Fed web site, www.dallasfed.org. insightful ways. For example, Chinese trade between 1993 and 2004. 2 “U.S.–Mexico Trade: Are We Still Connected?” by Jesus with the U.S. has been based on significant Cañas and Roberto Coronado, Federal Reserve Bank of Executive Vice President and Director of Research cost advantages, and it has displaced Latin Dallas Business Frontier, Issue 3, 2004. Harvey Rosenblum American and Mexican products from the 3 “Workers’ Remittances to Mexico,” by Roberto Coronado, U.S. market. Although a more expensive Federal Reserve Bank of Dallas Business Frontier, Issue 1, Director of Research Publications W. Michael Cox Chinese currency would help Latin America, 2004. 4 “Workers’ Remittances: An Important and Stable Source of it may only be a short-run solution. More External Development Finance,” by Dilip Ratha, in Global Executive Editor than half of China’s gains over Latin Development Finance, Washington, D.C.: The , Mine Yücel America are based on more rapidly rising 2003. Chinese productivity. The international pro- 5 “Remittances and Poverty in Mexico: A Propensity Score Editor Richard Alm ductivity race reinforces the need for region- Matching Approach,” by Gerardo Esquivel and Alejandra Huerta-Pineda, Colegio de México, Working , 2005. al reforms. 6 “Trade, Manufacturing Put Mexico Back on Track in 2004,” Associate Editors Both trade and remittances have by Jesus Cañas, Roberto Coronado and Robert W. Gilmer, Jennifer Afflerbach worked to help households near the bottom Federal Reserve Bank of Dallas Houston Business, March Kay Champagne of the income ladder in Mexico. In regions 2005. Graphic Designer Gene Autry

Federal Reserve Bank of Dallas PRSRT STD P.O. Box 655906 U.S. POSTAGE Dallas, TX 75265-5906 PAID DALLAS, TEXAS ADDRESS SERVICE REQUESTED PERMIT NO. 151