The Mexican Market and Nafta

• Jurisdiction: United States,Federal
• Citation: Vol. 17 No. 03
• Publication year: 1994

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 17, No. 3SPRING 1994

The Mexican Market and NAFTA(fn*)

Rebecca Reynolds Bannister(fn**)

I. Introduction

It is time for all of us to change our assumptions about what is and is not possible as we secure our competitive future into the twenty-first century. We must challenge the naysayers who claim that the only hope for business in the global economy is to erect protection. We must challenge those who doubt the capacity of the North American worker to adjust to the pressures and demands of the global market. And we must challenge the view that we cannot address our environmental needs at the same time that we open markets.

Many in North America must change their views about free trade. Free trade is not a factory closer and plant mover. Free trade is an export and job creator. This is why Presidents Bush and Clinton faced tremendous domestic political criticism to negotiate a North American Free Trade Agreement (NAFTA) and supplemental agreements on labor and the environment with Canada and Mexico. Their vision for NAFTA was to make America more globally competitive. Their vision was to link the United States to its first and third largest trading partners- Canada and Mexico-to form the richest market in the world: 370 million people with a total output of $6.5 trillion. Presidents Bush and Clinton knew that exports are one of the brightest spots in our economy and that a North American trade agreement would lock in export market opportunities.

Exports have accounted for 70% of our U.S. economic growth since 1988. The United States has regained its position as the world's number one exporter, with $448 billion in merchandise exports and $179 billion in services exports. These exports supported 7.5 million jobs in 1991, up 42% from 5.0 million in 1986. These export-related jobs pay 17% more than the average U.S. job ($3500 per year). Well over a quarter of these jobs (28%) stem from exports to our North American neighbors. Booming U.S. exports of goods and services to Mexico already support 700,000 jobs here at home-chiefly in manufacturing. Our exports to Canada support an additional 1.5 million jobs.

II. Trade with Our North American Neighbors Is a Success Story

A. Mexico and Canada Are Major Markets

United States' exports to our North American neighbors are growing 56% faster than our exports to the rest of the world. Combined three-way merchandise trade in 1992 was over $264 billion, and three-way services trade exceeded $42 billion in 1991.

Mexico is our fastest growing export market. United States' exports to Mexico in 1992 were $40.6 billion, up from a paltry $12 billion in 1986 and representing a 22% increase over 1991 (compared to a 5% increase in exports to other countries). Exports to Canada totalled $91 billion in 1992, representing an increase of 6% over 1991.

The result of this surge in exports has been a surge in jobs for Americans-upwards of 700,000 supported by these exports and our trade surplus with Mexico of $5.4 billion in 1992. Mexico has surpassed trading giants like Germany, France, Italy, and Great Britain to be our third-largest market after Canada and Japan. But Mexico surpassed even Japan in 1992 to be our second largest market for manufactured goods. In fact, 85% of the U.S. jobs associated with our exports to Mexico are in manufacturing. Mexico is our third-largest agricultural market (after Japan and Canada).

The U.S. surplus with Mexico in manufactured goods trade totalled $7.5 billion in 1992, representing one of our largest manufactured goods trade surpluses (with total U.S. sales of manufactured goods to Mexico totalling approximately $35 billion).

Virtually every state's exports to both Mexico and Canada have increased in the past five years. Forty-eight states have seen their exports to Mexico increase substantially since 1987. The benefits are not just going to the border states. Even states where anti-NAFTA arguments are often aimed have seen their exports to Mexico and related employment explode. Pennsylvania, New York, Illinois, Ohio, and North Carolina, all states where lobbying against NAFTA was strong, are enjoying incredible gains in their exports to Mexico. Pennsylvania saw a 310% increase from 1987 to 1992; New York, 82%; Ohio, 98%; and Illinois, 385%.

B. Low-Wage Markets Are Still Important

How can this be? How can a relatively low-wage country be so important for U.S. exports and support so many American export workers? Well, Mexicans simply are not too poor to buy U.S. goods.

Mexico prefers U.S. products, buying nearly 70% of its imports from the United States. Mexico's middle-income and higher-income market is estimated to total 20 million people: about the size of Canada's entire consumer market, or several European countries put together. No one would suggest we should ignore these markets.

Mexicans spend more of every dollar earned (15 cents of every dollar per capita) on U.S. goods than our high-income trading partners. Japan and the European Community only spend 2 cents of every dollar per capita on American imports. Last year, Mexican consumers purchased an average of $450 worth of U.S. products. By contrast, the average Japanese spent $385 on U.S. products, despite the fact that Japanese incomes are five or more times as high as the average Mexican income.

Mexico spends a higher percentage of its Gross Domestic Product on U.S. goods than Japan, the newly industrialized countries of Asia (NICs), and Eastern Europe (7.8 times more per dollar than Japan; 1.5 times more than the NICs; 4.7 times more than Japan and the NICs combined; 21.7 times more than Eastern Europe; and 4.9 times more than Japan, the NICs, and Eastern Europe combined).

Exports to Mexico are growing twice as fast as imports. Exports to Mexico have grown at an average annual rate of 23% since 1987, compared to 15% for Japan, 14% for the European Community, 9% for Canada, and 14% for the whole world. Manufactured goods exports rose to $34.5 billion in 1992, representing 85% of the total. Textile and apparel exports have tripled to $1.6 billion, creating a trade surplus in the sector of $81 million, in spite of 10% to 20% Mexican tariffs. Autos and auto parts rose from $1.8 billion in 1986 to $6.8 billion in 1992. Steel companies sell 19% of all of their exports to Mexico.

Capital goods exports rose by 133% during 1987 to 1992, to $13.6 billion. But exports of all other products rose by 203% to $27 billion. Agricultural exports have more than tripled since 1986, and high-value products now account for almost 70% of all U.S. agricultural sales to Mexico, compared to 40% in 1987. Consumer goods exports to Mexico have grown at 31% annually, compared to exports to the European Community at 16% and Japan at 15%, and have tripled since 1986 (rising from $1 billion to $3.4 billion in 1991). United States' services exports are up 137% from 1987 to 1991, reaching $8.3 billion in a very closed market.

The strong growth in exports to Mexico in 1991 significantly increased the number of related jobs to over 700,000, up from 274,000 in 1986. These jobs are largely in the production of manufactured goods, which account for 85% of U.S. exports to Mexico. Estimates are that by 1995, one million U.S. workers will owe their jobs to U.S. exports to Mexico.

Even industries like textiles, footwear, apparel, steel, and auto parts, often characterized as highly sensitive to foreign competition, are doing very well in exporting to Mexico, even with the high Mexican tariffs and other barriers that NAFTA will remove.

C. When We Trade with Mexico, Aren't We Just Selling to Ourselves?

Some people have such a hard time believing that Mexico is so important to the United States that they will say that all these export statistics are lies. They will tell you that all of these impressive exports are really just going into production-sharing operations, maquiladoras for processing goods to be resold to the United States. But they are dead wrong.

While U.S. export data does include exports to maquiladoras, these exports amounted to only about 22% of all U.S. exports to Mexico last year, and this share is declining. The U.S. International Trade Commission (ITC) estimates that exports for consumption in Mexico account for 84% of recent U.S. export growth.

Those who do not want to believe that a Latin American country can be a strategic market for North American goods claim that all we are selling to Mexico is capital goods. They define capital goods as pieces of factories that we ship to Mexico so that they can be erected to produce, with low wages, goods that will be sold back to us and put U.S. workers out of their jobs.

Wrong again. Capital goods exports happen to make the United States the world's largest exporter, and Mexico (along with Europe and Japan) is a major market for them. Capital goods exports to Mexico include things like airplanes, telephone switches, and tractors. Mexico will get these goods somewhere, and without NAFTA it has no incentive to buy them from us.

The fact is, capital goods are not a disproportionate share of U.S. exports to Mexico. They comprise 40% of our exports to the world, but only 33% of our exports to Mexico, and their share is declining. Meanwhile, our consumer goods exports and agricultural exports are rising...