Defending the North American economic integration

Valeria Moy and Jorge Suárez Vélez

April 2016

Twenty years after the adoption of the North American Free Trade Agreement (NAFTA), a protectionist rhetoric is arising in the United States. It is not the significant progress achieved in two decades what seems to be threated, but the beginning of a highly promising trajectory which began to develop. Considering Mexico's growth dependency on foreign trade and external demand, it would be not the only, but the biggest loser within the three countries in the region if these trends are entrenched.

From the American perspective, the promise of regional energy self-sufficiency is a geopolitical breakthrough that reduces dependence on oil from the Middle East. In addition to the production of oil in Canada, the United States and Mexico, North America has been renewed as a manufacturing region. Relying on the adoption of new technologies and profound changes in supply chains, the region managed to bring back productive capacity that had migrated to Asia.

The huge American domestic market allows only 14% of its GDP to depend on its exports. However, the importance of Mexico has grown to the world's largest economy. At least six million US jobs depend on exports to Mexico. Additionally, Mexico ranks as the first or second country of origin for imports from 12 states, and the first or second target of exports from 29 states.

However, after the well-coordinated effort between the public and private sectors during the years prior to the US legislative'’s approval of NAFTA -altogether with a coherent narrative in media-— this work was abandoned. Although a close relationship has been developed with different ministries, security agencies and entities of law enforcement, this labor lacks of a strategy for the American public to assimilate its advantages, in terms not only of employment and investment, but also growth in purchase power that came from the trade relationship with Mexico. In this sense, American's purchase power growth is substantial as the price of basic necessities has been significantly reduced through synergies developed in the region.

Regardless of the electoral rhetoric, the alternative for the US will never be to produce many of these goods again. As it faces a global economy prospect that will grow little, the bet to the North American region is crucial as it seeks for engagement in the world market. In this sense, NAFTA changed the way we produce goods in North America. Mexico is the second largest recipient of US exports, and US manufacturing is dependent on Mexican manufacturing: 40% of its imports from Mexico have US content. When compared with China, United States' imports have only 4% of US content.

Nowadays, although little is said about the gains of integration, those living in the region benefit from it daily. Unfortunately, a larger space in media has been assigned for an extensive narrative about drug trafficking, insecurity and problems attributed to illegal migration to the United States.

Although the rise of racist and xenophobic arguments has been patent, there is no empirical evidence to justify the notion of "criminal" trends of Mexican migrants. In fact, the rate of incarceration of migrants has been substantially lower than the rate of adults born in the United States. It cannot be said that Mexican migrants "cost" to the United States: numerous studies show that its net tax contribution is positive, even in high-migration states like Arizona. By measuring it in terms of contribution to government retirement programs such as Social Security, 11 million undocumented Mexicans contribute with 17 billion dollars every year. Without migrants, US government would never be able to receive that amount of money in the form of pensions.

The lack of a concerted strategy to defend the business relationship has been a big mistake in Mexico. The economic profile of the country has changed since total exports represent 32% of the GDP. Thus, 80% of these exports go to the United States. Some regions have evolved in more than one way because of the opportunities that the treaty opened for them. Mexico occupies a prominent place in the production of various goods. Therefore, it would be unthinkable for entire country's regions to return to the years before the treaty. How would the Bajio be without the automotive and aerospace industry? How would the Mexican countryside be without the great market opened by its northern neighbors?

Mexico is the world's leading exporter of avocados, beer, mango, papaya and tomato, and it is on the top production of products such as meat, watermelon and blackberries. In addition, Mexico is now leading industries that would have been hard to imagine 20 years ago. For example, it is the 6th largest parts' supplier to the aerospace industry in the United States, not only in manufacturing them, but also designing and developing them. It is the 8^th producer of automobiles and automotive parts and 4^th exporter of light vehicles. Out of the 100 most important worldwide auto part companies, 89 have production plants in Mexico. Production capacity in the automotive industry grows daily. The integration of productive chains in this industry is amazing: the parts of a car cross the borders of the three NAFTA countries eight times before it is finished.

Mexico is the greatest exporter of flat screens and double door refrigerators. In a general sense, 70% of exports represent Mexican added value, a larger percentage than in China, Korea or Singapore. The numbers are huge: 2.3 billion dollars are exchanged between the US and Mexico per minute. The NAFTA area represents a market of 20.5 billion dollars, while the European Union represents only 16 billion. Also, there are more graduate engineers in Mexico than in Germany, England or France.

Nowadays, the integration of production capacity in North America represents a reality that has been under construction for 20 years. The treaty has been positive for all three countries. However, in 2016 misinformation is its biggest threat. Developing an alternative narrative would be relatively simple and its objective would be to make clear that Mexico is a partner, not a threat. Twenty years of empirical evidence support the benefits of the treaty. Nonetheless, the lack of reaction by both the Mexican government and the industrial sectors that would be most affected, increase daily the political cost for those who could defend it. If candidates that support protectionist rhetoric end up prevailing in the US presidential election in November, Mexico could end up learning an extraordinarily expensive lesson.

VALERIA MOY has a major in economics from ITAM. She has a M.A. in Economics by London School of Economics (LSE). She has worked in the regulatory sector of Mexico in the banking, regulation, and stock market areas. Also, she worked in the private sector as treasurer in Grupo Nacional Provincial. In the academic field, she has been macroeconomics professor since 2001 and has worked in various publications such as Foreign Affairs Latinoamerica. She is currently Director of the think tank “Mexico ¿cómo vamos?”. Follow her on Twitter at @ValeriaMoy.

JORGE SUAREZ-VÉLEZ has a major in economics from ITAM. He is Managing Director of Allen & Company Investment Advisors. He was a founding partner of SP Family Office and CEO of ING Private Wealth Management. In addition, he was Director of Bank Julius Baer for Latin America, President of Banorte Securities and Head of Analysis for Latin America at Nomura Research Institute America. He is currently advisor on financial issues in New York. He is the author of “La próxima gran caída de la economía mundial” and “Ahora o nunca, la gran oportunidad de México para crecer”. Follow him on Twitter at @jorgesuarezv. Moy, Valeria; and Suárez-Vélez, Jorge (2016) “Defending the North American economic integration”, Foreign Affairs Latinoamérica, Web version. Available in Spanish at www.fal.itam.mx