U.S.-Mexico Trade: The Numbers and the Real Issues

By Robert A. Blecker*

30986371735_f660fc42e9_k

Two maquiladoras in Tijuana, Mexico. The low percentage of Mexican value-added in Mexico’s exports is a key reason why the country has not gotten nearly as much employment growth as it hoped for when it joined NAFTA. / Anthony Albright / Flickr / Creative Commons

Officials in the Trump administration are proposing a new way of measuring the U.S.-Mexican trade deficit that, by making the deficit look larger than it currently appears, will likely be spun to support efforts to impose high tariffs or dismantle NAFTA.  According to press reports, the President’s senior advisors, including the head of his new trade council, Peter Navarro, are proposing to include only “domestic exports” (exports of U.S.-produced goods) in calculating bilateral trade balances with Mexico and other countries.  This would exclude “re-exports” – goods that are imported into the United States from other countries (such as Canada or China) and transshipped into Mexico – which are currently counted in total U.S. exports.

  • In spite of its political motivation, the proposed new accounting would render a more accurate measure of U.S. exports. In fact, it would make the U.S. deficit with Mexico look closer to what Mexico reports as its surplus with the U.S.  For 2016, the U.S. reports a deficit of $63.2 billion with Mexico, while Mexico reports almost twice as big a surplus of $123.1 billion with the U.S.  If the U.S. excluded re-exports, its trade deficit with Mexico for 2016 would be $115.4 billion, which is much closer to the Mexican number.

Nonetheless, this recalculation fails to correct for another bias, which makes the U.S. deficit with Mexico look artificially large.  Imports are measured by the total value of the goods when they enter the country, from the immediate country of origin.  But in today’s global supply chains only part of the value-added in imported goods comes from any one country.  A television, for example, can be assembled in Mexico with components imported from Korea and other East Asian nations.  As a result, the reported U.S. imports from Mexico (especially of manufactured goods) greatly exaggerate the Mexican content of those goods.  Although data limitations do not permit an exact calculation of the Mexican content of U.S. imports from Mexico, it is likely relatively low.  (My own estimates suggest it is on the order of about 30-40 percent for manufactured goods).  Indeed, the low percentage of Mexican value-added in Mexico’s exports is a key reason why the country has not gotten nearly as much employment growth as it hoped for when it joined NAFTA.

The Trump Administration’s aggressive rhetoric and action on other issues related to Mexico, including immigration and the wall, suggest a political motivation for the proposal to adopt a new measure of exports, regardless of its merits.  But the real problem is not the “correct” number for the U.S.-Mexican trade deficit; it is why NAFTA has not lived up to its promise of supporting high-value added exports and high-wage job creation in both countries.  This promise was based on the idea that the United States would export capital and intermediate goods to Mexico for assembly into consumer goods, which would then be exported back to the United States.  But especially since China joined the WTO in 2001, Mexico has increasingly become a platform for assembling mostly Asian inputs into goods for export to the United States (and secondarily Canada).  Even if “re-exports” are excluded, Mexico remains the second largest export market for the United States (after Canada) – and U.S. exports to Mexico are 65 percent greater than U.S. exports to China.  Focusing too much on measuring the U.S.-Mexico trade imbalance only distracts attention from the need to reform NAFTA so as to encourage more of the “links” in global supply chains to be produced in North America generally.  If the Trump administration is serious about making the U.S. more competitive vis-à-vis China, it should think about viewing Mexico as a partner instead of as an enemy.  In the larger context of Trump’s many objectionable policies on migration and in other areas, a long-overdue correction of U.S. export statistics is not worth getting upset over.  The real issue is whether Trump’s trade policies – with Mexico and beyond – will bring the promised gains to U.S. workers, or will further enrich corporate billionaires and Wall Street tycoons.

February 23, 2017

* Robert A. Blecker is a Professor of Economics at American University.

Does Trade Incentivize Educational Achievement?

By Raymundo Miguel Campos Vázquez, Luis-Felipe López-Calva, and Nora Lustig*

Female student walking by building

A student walks around Preparatoria Vasconcelos Tecate. / Gabriel Flores Romero / Flickr / Creative Commons

Mexico’s experience with free trade has challenged one of the tenets of faith economists know well from reading early in their careers David Ricardo’s Principles of Political Economy and Taxation: that “the pursuit of individual advantage is admirably connected with the universal good of the whole” and that “[trade] distributes labor most effectively and most economically.”  Under this principle, “wine shall be made in France and Portugal; corn shall be grown in America and Poland; and hardware and other goods shall be manufactured in England.”  Mexico reminds us that while these benefits exist in the abstract, there are trade-offs to be faced—that there are, potentially, social and individual costs induced by trade liberalization.

In a recently published paper entitled “Endogenous Skill Acquisition and Export Manufacturing in Mexico,” MIT economics professor David Atkin shows the ways in which individual people experience trade and how it affects their decision-making – sometimes in ways that may not necessarily be socially desirable.  It analyzes a time period (1986-2000) during which Mexico underwent major economic transformations, including a rapid process of trade liberalization after 1989 and the introduction of the North American Free Trade Agreement (NAFTA) in 1994.  Analyzing data for more than 2,300 municipalities in the country, the paper tells us that young Mexicans at the time faced a very basic decision: to stay in school and continue studying or to drop out and look for a job (among the many being created in the export-oriented manufacturing sector), most of which did not require more than a high school education.  Atkin found that, on average, for every 25 new jobs created in the manufacturing sector, one student would drop out after 9th grade.  (The World Development Report 2008 on Agriculture for Development had raised the question about “missing” individuals in this age group, but in relation to migration.)

  • While trade brought positive effects including a higher demand for low skilled workers and an eventual increase in their wages – consistent with David Ricardo’s basic notion – Atkin concluded that in Mexico it had the socially undesirable effect of preventing, or slowing down, the accumulation of human capital. The reduction in human capital investment is a trade-off which can have negative effects on the economy as a whole.
  • Factors other than free trade might explain this effect. First, young students may drop out if the returns to schooling are not high enough to compensate for the additional investment.  Second, a lack of access to credit and insurance for relatively poorer households might make it impossible for aspiring students to finance their investment and obtain higher returns by continuing to tertiary education or to cope with shocks and avoid abandoning school.  Finally, the result could be driven by a lack of availability of information about actual returns to investment in education, which could lead to myopic decision-making.

The movement of capital toward locations with lower labor costs is an expected, and intended, result of an agreement such as NAFTA, pursuing higher export competitiveness at the regional level.  David Ricardo would have said that TVs and automobiles shall be made in Mexico, while software shall be made in Silicon Valley.  What completes the story, however, is that because of distortions like the ones mentioned above – low educational quality, under-developed credit markets, or weak information that skews decision-making – free trade might lead to socially undesirable consequences.  And it did in the case of Mexico, as Atkin convincingly shows in his paper.  It seems that when Ricardo gets to the tropics, the world gets more complex.

November 7, 2016

* Raymundo Miguel Campos Vázquez teaches at the Centro de Estudios Económicos at el Colegio de México, and is currently conducting research at the University of California, Berkeley.  Luis-Felipe López-Calva is Lead Economist and Co-Director of the World Development Report 2017 on Governance and the Law.  Nora Lustig is Professor of Latin American Economics at Tulane University.

Mexico and NAFTA: Lessons Learned?

By Robert A. Blecker*

Photo credit: Alex Rubystone / Foter / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Photo credit: Alex Rubystone / Foter / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Twenty years after the North American Free Trade Agreement (NAFTA) went into effect, it is clear that the promises made by Mexican President Carlos Salinas and U.S. President Bill Clinton – that the accord would make Mexico “a first-world country” and halt the migration of Mexican workers to the United States – have not been fulfilled.  In Salinas’s famous words, Mexico would “export goods, not people.”  But the number of undocumented Mexican immigrants in the United States rose by a conservatively estimated 3 to 4 million during the first two decades of NAFTA, and millions more were apprehended at the border and deported.  The reasons why immigration flows accelerated post-NAFTA are not hard to discern.

  • NAFTA fostered integration of Mexican industries into global supply chains targeted at the U.S. market, accelerating Mexico’s transformation into a major exporter of manufactured goods.  Nearly one million manufacturing jobs were created there in the first seven years of NAFTA (1994-2000).  But this job growth was offset by similar job losses in agriculture, and manufacturing employment has fallen by about a half million since 2001.  The net increase in manufacturing employment from 1993 to 2013 was only about 400,000, less than half of the annual growth in the Mexican labor force.
  • Real hourly earnings in Mexican manufacturing were no higher in 2013 than in 1994, and Mexico’s per capita income has stagnated relative to that of the United States.  In 2012, typical Mexican manufacturing workers received only 16 percent as much per hour as their U.S. counterparts, down from 18 percent in 1994.  Even adjusted for the lower cost of living, workers without a college degree in Mexico still earn only about one-quarter to one-third of what they can earn by moving to the United States.

The benefits of NAFTA for Mexico have been attenuated by several factors.  First, Mexican export industries still largely follow the maquiladora model of doing assembly work using imported inputs, so their value-added is only a fraction of the gross value of their exports and they have few “backward linkages” to the domestic economy.  Second, the Mexican government has frequently allowed the peso to become overvalued, making Mexico less competitive and driving multinational firms to locate in other countries.  Third, the tremendous penetration of Chinese imports into all of North America (Canada, Mexico and U.S.), especially since China joined the World Trade Organization in 2001, has displaced significant amounts of actual or potential Mexican exports.  A revaluation of China’s currency, rising Chinese wages and increasing global transportation costs have recently led to some “reshoring” of manufacturing to Mexico, but employment in Mexican export industries has grown only modestly as a result.

The increased integration of North American industries through NAFTA has proved to be a mixed blessing for Mexico.  U.S. booms have helped Mexico grow, but only for temporary periods, and being dependent on the U.S. market has held Mexico back since the U.S. financial crisis of 2008-2009 and the ensuing “Great Recession” and sluggish recovery.  Of course, NAFTA is but one of Mexico’s constraints.  The country’s restrictive monetary and fiscal policies, frequent currency overvaluation, monopolization of key domestic markets and inadequate investments in physical and human capital have also held it back.  The Mexican economy still suffers from a profound dualism, in which only about one-fifth of all non-agricultural, private-sector workers are employed in large, highly productive firms, while the vast majority are employed in small- or medium-sized enterprises with low, stagnant or even falling productivity.  Mexico’s experience under NAFTA certainly argues against portrayals of international trade agreements, such as the proposed Trans-Pacific Partnership, as panaceas for the economic ills of Mexico or any other country.  Whatever one thinks of the “reform” agenda of President Enrique Peña Nieto – which is focused on areas such as energy, education, and telecommunications – these reforms are unlikely to help Mexico break out of its slow growth trap if the foundations of the country’s trade and macroeconomic policies remain untouched.

*Dr. Blecker is a professor of economics at American University.