Between North and South: Reorienting Mexico’s trade posture

Héber M. Delgado-Medrano, MPA


In recent years, perhaps for the first time in its history, Mexico saw itself and its northern neighbors in a weaker economic position than its South American counterparts. As the US sank deeper and deeper into a recession, Mexico was brought along for the ride, which culminated in a spectacular contraction of almost 7% of Mexico’s GDP in 2009. As a result, many Mexican intellectuals and policymakers have begun to ask themselves whether Mexico’s prospects in North America are still better than elsewhere. Some go so far as to suggest that Mexico should simply reorient its economy entirely towards the South. And yet others exhort Mexico not to turn its back on the NAFTA project just yet, claiming that further benefits from North American integration are still to come and that further unification with the North is the answer, not less.

Based on these arguments, Mexico faces a stark choice: look either towards the North or the South, but not both. But the sensible course of action, I believe, lies somewhere in between. Mexico can neither ignore the benefits of its privileged—though admittedly oftentimes troubled—relationship with the US, nor can it overlook the opportunities waiting for Mexico in South America, which are real and in many ways are already materializing. Instead of burning bridges to build others or cementing old relationships while disregarding new opportunities, Mexico should establish an explicit policy that seeks to convert it into a critical link connecting the diverse economies of all of the Americas.

In the past 15 years, mostly as a result of the implementation of NAFTA, Mexico has reached an extraordinary degree of economic integration with the US and—to a lesser degree—with Canada. Today, 80.5% of Mexico’s exports end up in the US, while the most dynamic and critical sectors in the Mexican economy—export-oriented manufactures and tourism—are highly dependent on foreign direct investment (FDI) and consumption from the US. NAFTA in many ways remains incomplete and many gaps remain to be filled, but as we saw just a few weeks ago when presidents Obama and Calderon (partially) settled a long-held dispute regarding the access of Mexican trucks into the US, there is still enough goodwill between both nations to continue along the slow but constant path towards further economic integration.

This is evident in both countries today. Visitors to Mexico City are amazed—perhaps disappointed—by the seemingly endless supply of Starbucks they encounter along Paseo de la Reforma. Northern cities like Chihuahua that have been invaded by American chains and are now crisscrossed by American-style superhighways are looking more and more like El Paso, Texas or Phoenix, Arizona. Wal-Mart, too, today is ubiquitous throughout Mexico, as one of the largest businesses and employers in the country. In the US, you also see a stronger, albeit more subtle, Mexican presence: has anyone else noticed that Mexican glass-bottled Coca-Cola is now offered in many convenience stores across the US?

But the weaknesses of this economic marriage (made nowhere near heaven) were crudely exposed during the last recession: when the US faltered, the effects were greatly amplified in Mexico. Mexico was by far the hardest hit Latin American country during the 2009 recession. Given that states like Brazil, Chile, and Colombia fared much better, it begs the question: is Mexico now facing the consequences of putting all its eggs in one basket? Should Mexico therefore rethink its commercial orientation?

North Americanistas like NYU professor and former Mexican secretary of foreign affairs Jorge Castañeda begin by highlighting the incontrovertible benefits that have accrued to Mexico as a result of NAFTA and point out Mexico’s solid economic recovery as the US lifts itself out of the recession: 5.5% growth in 2010 and projected 4.0-5.0% growth for 2011. Further, Castañeda and others who share his view claim that in order to prosper Mexico needs to tighten the gap between itself and its North American neighbors by pushing for deeper economic, political and social integration with the North. From this point of view what Mexico needs to do is not turn its back on the US but to pursue a tighter relationship with the North that eliminates the loopholes and imperfections still plaguing NAFTA. Castañeda thus calls for a liberalization of the labor markets between the three countries, further and more serious cooperation on security issues, and even a North American economic union in the long run.

The Latin Americanistas on the other hand, which to my knowledge are not unified under the aegis of any particular individual, begin by questioning whether the United States will ever once again become the economic dynamo it was during the 20th century and whether Mexico has greater prospects for growth by integrating with the rapidly-growing economies of South America. They remind us that Brazil, Argentina, and Colombia have large consumer markets with increasing purchasing power and that Mexico is already well-positioned to enter and even dominate many industries within these markets. Mexican firms in telecommunications, mining, services, food processing and distribution, cement, and other key sectors are oftentimes larger and more productive than their Latin American counterparts. Already, Mexican business magnate Carlos Slim has extended his tentacles to every corner of Latin America with his telecom giant Telmex (known as Claro in some countries), which is now the leading player in countries as wide-ranging as the Dominican Republic, Colombia, and Chile. Other companies like Cemex, Bimbo (the largest bakery in the world), and even FEMSAS’s Oxxo convenience stores are also rapidly growing in South America. Moreover, many economic analysts are asking themselves why Mexico can’t export to Brazil and other countries the high-tech goods and consumer durables it exports to the US that are not produced elsewhere in Latin America: smartphones, plasma televisions, refrigerators, etc. Finally, economic integration between Mexico and the rest of Latin America is already on the table: just last week, Peruvian president Alan García announced in Bogotá that Mexico, Colombia, Peru, and Chile are planning to form an economic bloc to strengthen integration between the four countries and promote a common cross-continental trade agenda.

Certainly both of these views have their advantages, but they each flatly ignore the drawbacks of their own recommendations. Further economic, political, and social integration with North America will be anything but easy. Immigration policy in the US is becoming tighter, not laxer, and the political climate in the US may resist further liberalization in the labor markets for some time. Similarly, simply mentioning the prospect of a North American economic union in the US elicits passionate and—more often than not—negative responses, particularly as the world continues to witness how the European Union struggles to keep Greece and Portugal afloat. And perhaps more importantly, we cannot ignore the fact that Mexico needs to hedge its risks. Having a globalization and trade strategy that is contingent on the economic fates of only two countries is simply irresponsible.

On the other hand, despite appearances Latin America is not all fun and games. The spectacular growth of countries like Peru, Brazil and Argentina in the past few years has relied to a large extent on their exports of raw materials and commodities to China and other countries around the world. It is unlikely that these high rates of growth will continue forever, particularly if further economic reforms are not pursued in these countries. It is therefore not clear whether these economies will continue to mature at the same high rate or whether and how fast they will grow into the large and wealthy consumer markets they are expected to become. More importantly, South American economies are becoming increasingly competitive as well and they may be able to service their own markets before Mexico or other large players in the region may arrive to satisfy the needs of local consumers.

The prudent course of action is therefore not one that chooses one region over the other, but rather one that (1) explicitly recognizes the risks of concentrating all of Mexico’s commerce in one region, and (2) seeks to establish and strengthen its ties with both North and South America by (3) promoting further integration with the North and (4) fostering trade with the Caribbean and Central and South America. Specifically, as Mexico continues to promote its integrationist agenda with North America—particularly with regards to labor migration, security issues, and correcting the deficiencies of NAFTA—it should assist competitive Mexican businesses in accessing southern markets by negotiating lower barriers to trade and more actively promoting their entry into those markets. Additionally, Mexico should establish policies that continue to attract FDI from the US and Canada, but also from strong South American economies like Brazil and Chile and even Colombia and Peru. Finally, Mexico should create incentives for foreign investors to export from Mexico to Latin American countries in addition to exporting to the US and Canada.

All of these things are easier said than done, but they are feasible and in some respect already happening. The Mexican government now needs to define a unified North-plus-South trade policy explicitly and work with the private sector in defining goals and strategies to support them on ventures between Mexico and its neighbors on both poles of the hemisphere. If it plays its cards right, rather than having to gamble on one camp or the other and risk losing it all, Mexico could become the pivotal player that holds together the economies of the Americas, North as well as South.