Meet China's real challenger, Mexico (No, I'm not kidding)

Sept 27, 2012
International Political Economy Zone


Military man-turned-president Porfirio Diaz is usually attributed with saying, "Poor Mexico--so near the United States, so far from heaven." It is true that more than a fair share of Mexico's law and order woes stem from being a gateway to the world's largest consumer market for drugs in the United States--ask Hillary Clinton. Yet, while lurid tales of drug-related violence at the US-Mexico border unfortunately feed stereotypes about the country, Mexico has actually been quite progressive in the economic realm and is even approaching North American standard-bearer Canada in many respects. Debt crises no more; it's time is now.

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Anyway, I was reminded to post about Mexico's burgeoning economy by two separate articles reiterating the idea that, while China's colossal trade surplus with the United States attracts the largest share of public attention worldwide, Mexico is actually gaining ground on the PRC and may realistically surpass the latter as the United States' second largest trading partner after Canada in the near future. And, thankfully, you don't have presidential candidates and others trying to outdo themselves in the "Mexico-bashing" sweepstakes alike they do over China:

Trade between the United States and Mexico is surging, up 17 percent in 2011 to a record $461 billion, as Mexico vies with China to become America’s second-largest trading partner after Canada. China and the United States did $502 billion in trade last year...“We are obsessed with China when we ought to seriously focus, for our own benefit, on our neighbor Mexico,” said Robert Pastor, a professor of international relations at American University and author of “The North American Idea.”
 

A Fed governor comes to the natural conclusion that his country is today's basket case in comparison to the progressive nation that is Mexico:

“Not only is Mexico doing better, macroeconomically speaking, than the false stereotypes would have us think, Mexico is actually doing better than the United States,” said Richard Fisher, president of the Federal Reserve Bank of Dallas, who applauds Mexico for controlling inflation, balancing budgets and managing debt. Fisher grew up in Mexico City in the 1950s and remembers a Mexico that “was our soft underbelly, a country of tremendous poverty and horribly bad governments.” Now Fisher and his peers praise Mexico for pouring billions of pesos into infrastructure, including ports, railroads, refineries and highways.
 

While NAFTA remains controversial stateside, such is not the case in Mexico where the trade benefits are more than obvious to many:

And there is little wonder why. Mexican exports to the United States have soared from $42 billion in 1993 to $263 billion in 2011, according to the Commerce Department. Almost 80 percent of Mexico’s exports go to the U.S. market, led by crude oil, fruits, vegetables, televisions, cellphones, computers and passenger vehicles.

“Before NAFTA, we had a slight trade deficit with the United States,” said Daniel Chiquiar, a Bank of Mexico statistician. “Now we have a huge trade surplus.” U.S. exports have also multiplied, especially as the consumption tastes of the growing Mexican middle class increasingly resemble those of U.S. shoppers.
 

Unlike China, Mexico cannot be accused of pursuing mercantilist policies so readily. Its exports are growing on the back of becoming a regional production hub, all the while being backed up by prudent economic management. As the FT notes, China's share of manufactured imports in the US is falling, while that of Mexico is rising. All the while, it is becoming less dependent on the US market:

During the first half of this year, Mexico accounted for 14.2 per cent of manufactured imports into the US, the world’s largest importer. In 2005, Mexico’s share was just 11 per cent. Surprisingly, China, which gained huge chunks of the US import market for many years, has started to lose ground. From a high of 29.3 per cent of the total at the end of 2009, it has now shrunk to 26.4 per cent
 

While winning a bigger slice of the US market, Mexico has diversified its customers. A decade ago, about 90 per cent of the country’s exports went to the US. Last year, that figure fell to less than 80 per cent. Suddenly, it seems, Mexico has become the preferred centre of manufacturing for multinational companies looking to supply the Americas and, increasingly, beyond. Today, Mexico exports more manufactured products than the rest of Latin America put together.
 

Mexico has also become quite outward oriented, signing a bevy of FTAs and in the meantime increasing its ratio of trade to GDP:
 

Its free trade agreements with 44 countries – more than twice as many as China and four times more than Brazil – have given companies based in Mexico the ability to source parts and inputs from a wide range of nations, often without paying duty.

Partly as a result, the sum of Mexico’s imports and exports as a percentage of its gross domestic product, a strong indicator of openness, rose to 58.6 per cent in 2010. In the case of China, it was 47.9 per cent, and just 18.5 per cent in the case of Brazil. HSBC in Mexico City estimated recently that the figure for Mexico could increase to as much as 69 per cent this year.

 

Elsewhere the FT also mentions young Mexico's demographic advantage over China, its obvious locational advantage, and its narrowing wage differential as labour costs naturally rise in the PRC. While Mexico may probably never overhaul China worldwide in the trade sweepstakes, as a preferred manufacturing base for products destined for the Americas it may soon become the obvious choice. That Mexican consumers are also eager buyers of American-made products certainly helps defray trade tensions.