In 2013, the United States exported merchandise to Mexico valued at $226.2 billion, nearly the same amount as U.S. exports to China, Germany, the United Kingdom and Russia combined. This surprises many since Mexico, the second largest U.S. export market, has an economy less than one-tenth the size of the United States’ and its population of 123 million is the world’s 11th largest. But the benefits don’t end there.

On average, each Mexican consumed $1,840 of U.S. goods. In comparison, on average, each Chinese and German citizen spent $90 and $586, respectively, on American goods in 2013.

Due to increasingly greater economic integration, partly the result of the North American Free Trade Agreement (NAFTA) implemented more than 20 years ago, Mexico and the United States have become partners, enhancing each other’s level of global competitiveness. According to Carla Hills, former U.S. trade Representative, about half of our trade with Mexico takes place between related companies. In turn, we simply don’t just make goods for each other, we make goods together for world markets. Consequently several U.S. and Mexican industries have come to rely on each other, contributing to a rich North American supply chain.

Forty percent of the content of U.S. imports from Mexico was originally made in the United States.

Mexico is the United States’ third largest supplier. And interestingly, “a full 40 percent of the content of U.S. imports from Mexico was originally made in the United States, and it is likely that the domestic content in Mexican imports from the United States is also very high,” according to the Woodrow Wilson International Center for Scholars in Washington, D.C. In comparison, 4, 3, and 2 percent of U.S. imports from China, Brazil and India, respectively, are comprised of U.S. original content, the Center notes.

“The integration of the United States and Mexican economies has transformed the nature of the bilateral relationship from one of competition to partnership. U.S. jobs, competitiveness and economic growth all have benefited from the nation’s relationship with Mexico,” the Woodrow Wilson International Center says.

In The Spotlight

The U.S.-Mexican trade relationship has an extensive and rich background. Beginning in World War II, Mexican workers were invited to the United States to harvest crops under the Bracero program. And as early as 1965, U.S. manufacturers had established relatively easy access to inexpensive Mexican labor under various programs that enabled U.S. firms to co-produce in Mexico, and then ship goods back to the United States incurring very low duties. Although NAFTA provided significant benefits when it took effect on January 1, 1994, American companies already had become very familiar with the Mexican landscape.

Much of Mexico's ability to attract investment lies in its relationship with the United States. Privileged access under NAFTA and its proximity has given Mexico an edge in the production of automotive, heavy manufacturing and other industries where low transport costs and just-in-time logistics are crucial to competitiveness.

During the 2000 to 2005 period, China began to encroach upon Mexico’s share of the U.S. market. Since then, however, Mexico has been able to maintain its market share, says Ralph Watkins, former trade analysts at the U.S. International Trade Commission and CEO of Americas Trade Analysis, LLC based in El Paso, TX.

Compared to China, Watkins reports, key elements contributing to Mexico’s level of competitiveness involve the proximity of Mexican assembly plants to American facilities located on the U.S. side of the border. This contributes to lower transportation costs, less time from manufacture to market, easier communication and supervision of production, and greater flexibility for changes in production.

Importantly, Watkins says additional factors also give Mexico a leg up over China. These include more transparent government regulations and better intellectual property protection. Overall, Watkins says Mexico has an advantage over China when U.S. companies require just-in-time delivery, customized production and frequent design changes.

Mexico’s ability to gain greater control over illegal drugs and violence, and seek justice for the recent murder of 43 college students will impact both inbound investment and tourism.

Mexico is becoming a beneficiary of U.S. backshoring, which involves American companies relocating previously offshored production back to the United States from China and other developing countries due to rising costs abroad. This is anticipated to further boost U.S.-Mexican trade in the years ahead.

The IMF indicated that Mexico’s GDP growth reached 1.1 percent in 2013, and is anticipated to register 2.4 in 2014, 3.5 percent in 2015 and 3.8 percent in 2016. These estimates are higher than those projected for Latin America as a whole, but not as high as the rates projected by the IMF for Emerging market and developing economies moving forward.

Analysts indicate that, in some cases, foreign direct investment destined for Mexico has been curtailed due to fear of Mexico’s ongoing drug war. Mexico’s ability to gain greater control of events in this illegal and violent sector, and investigate and seek justice for the recent murder of 43 college students certainly will impact both inbound investment and tourism for years to come.

In an attempt to improve economic performance and level of global competitiveness, Mexican President Enrique Peña Nieto has embarked on an ambitious reform agenda that includes many sectors, including energy, education, telecommunications, financial services, labor, and fiscal issues. In the long term, the level of success achieved by these reforms will not only impact Mexico, but North America as well.

This article appeared in International Insights, a Fifth Third Bank publication.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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