The Forecast for US-Mexico Trade: Continued Growth and Development
- The trade relationship between the U.S. and Mexico is one of the world’s largest bilateral trade partnerships.
- Trade between the two countries amounted to more than U.S.D 532 billion in 2015. Mexico is the U.S.’s second-largest export market, behind Canada, and its third-largest trading partner, trailing Canada and China.
- Trade with the U.S. is also economically vital for Mexico; its economic performance tends to closely track that of the U.S. About 80 percent of Mexican exports are to the U.S., and the U.S. is also the largest source of foreign direct investment (FDI) in Mexico. While Mexican FDI in the U.S. is much lower, it is nonetheless significant.
The 2,000-mile shared border naturally creates the possibility for close trade relations between the two countries. That was endorsed and formalized with the introduction of the North American Free Trade Agreement (NAFTA) in 1994, and the Agreement has clearly had its intended effect of spurring economic development by promoting bi-lateral trade between the two countries. NAFTA required Mexico to eliminate tariffs on trade in goods and remove FDI restrictions. Though NAFTA’s effects on U.S. workers are the subject of much disagreement among economists, the agreement’s positive impact on trade is inarguable. Since the Agreement went into effect, two-way trade has increased almost seven-fold, from USD 80 billion to USD 532 billion. Also, according to the World Bank, GDP per capita has increased 248 percent since 1995 in Mexico and 194 percent in the U.S. over the same time frame.
Today, Mexico’s exports to the U.S. primarily include automobiles and automotive parts, electrical machinery and petroleum products. In the other direction, Mexico’s imports from the U.S. mainly include machinery, automotive parts and fuels. The automotive sector is perhaps the most evolved with highly integrated supply chains that rely on manufacturing units on both sides of the border for parts and vehicle assembly. Also, imports of fresh fruits and vegetables to the U.S. from Mexico are small in dollar terms but significant given their visibility to consumers.
Prompted by NAFTA, policy in Mexico has evolved to promote deeper relationships with the U.S. In particular, the structural reforms approved by President Enrique Peña Nieto’s administration, and especially the energy reforms, are intended to stimulate FDI in major industry sectors. The reforms herald a radical transformation of the energy industry, allowing private participation in an industry that had been controlled by the government for more than 70 years. With the new changes, domestic and foreign companies will be able to not only participate in energy exploration and production projects but also build natural gas pipelines connecting the two countries. As a result, Mexico’s pipeline network is expected to double by 2018, allowing manufacturing and power generation firms to import cheaper gas produced in the U.S., which will reduce costs significantly and boost bilateral ties.
Meanwhile, the approved telecommunications reform will offer new opportunities for cross-border collaboration and investment. The reform’s objectives are to decrease market concentration in Mexico, lower costs and enhance competition in the telecom sector. Positive results started to emerge soon after the change was approved, with the entrance of new international players. This has reduced telecommunications costs in Mexico and created the possibility in the future of new services that connect all of North America more broadly and effectively.
While it’s hard to predict how the political winds will influence the course of global trade and economic development, it’s also hard to imagine that sophisticated and integrated global supply chains will be dismantled."
Blowing in the wind
There is no question that globalization and trade agreements have figured prominently in the upcoming elections in both the U.S. and Mexico. There is also no question that while the overall long-term impacts stemming from globalization are broadly positive, local, short-term impacts vary considerably. And the growing recognition of these disparate impacts is prompting a perhaps much-needed and important debate among policy-makers on how to best ameliorate some of the locally negative impacts while continuing to grow local and national economies via, in part, increased trade and investment across borders.
While it’s hard to predict how the political winds will influence the course of global trade and economic development, it’s also hard to imagine that sophisticated and integrated global supply chains will be dismantled. Numerous industry sectors have reconfigured their operating models in response to free trade agreements along with advances in communications and the global transport system. And these developments have provided a pathway to improved living standards in many countries.
In Mexico, all political parties understand the economic relevance of the trade relationship with the U.S. and the benefits it offers through job creation and investment. Nonetheless, left-wing political parties present a risk to some aspects of the integration prospects. The left has systematically opposed the energy reform, and if a leftist candidate wins the 2018 presidential race, the opening of the energy sector to private participation could face some challenges, affecting the prospects for a faster and deeper integration with the U.S.
Navigating the turbulence
For companies that are benefitting from increased cross-border trade between Mexico and the U.S., and look for these benefits to grow, the outlook is generally positive. However, a continued upward trajectory is by no means assured, and the risk landscape is potentially littered with some minefields.
Having the appropriate and timely risk management and insurance partner is critical for cross-border trade. A partner with the capability to understand current regulations and forecast changes that may impact operations, as well as political and security risks of operating in different territories.
With its Global Programs hub based in Mexico, XL Catlin provides companies and investors looking to pursue growth in Mexico and Latin America with global capabilities and local expertise. Our international Specialty products, including Political Risk and Trade Credit insurance and Cargo and Transport coverages, as well as our expertise on Captives provide partners with the financial strength, capacity and commitment to strengthen their resiliency and support their success.