Professor Alejandro Diaz-Bautista Analyzing the Economic Integration of Mexico and California

Analyzing the Economic Integration of Mexico Analyzing the Economic Integration of Mexico and California 2013and California 2013

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of International Economics at Colefand Distinguished ResearcherNational Council of Science and Technology

[email protected]

Presentation for the California State Controller’s Council of Economic Advisors Meeting. Los Angeles, California, Monday, June 24 at 9:00 a.m.

U.S.-Mexico Relations, a Shift U.S.-Mexico Relations, a Shift from Security to Economyfrom Security to Economy

U.S.-Mexican relations are strategically U.S.-Mexican relations are strategically important to both countries, and Mexico's important to both countries, and Mexico's period of transition has created opportunities period of transition has created opportunities for each to reshape the partnership. And for each to reshape the partnership. And although U.S. media attention has focused although U.S. media attention has focused primarily on bilateral security issues, namely primarily on bilateral security issues, namely cooperation in Mexico's drug war, the Pena cooperation in Mexico's drug war, the Pena Nieto administration is working with Nieto administration is working with Washington to re-orient the cross-border Washington to re-orient the cross-border conversation to one centered primarily on conversation to one centered primarily on mutual economic possibility.mutual economic possibility.


Labor and education overhauls passed through Labor and education overhauls passed through the legislative branch relatively easily, and the legislative branch relatively easily, and banking reforms intended to broadly increase banking reforms intended to broadly increase access to credit are set to be proposed once the access to credit are set to be proposed once the mexican legislature reconvenes in September. mexican legislature reconvenes in September. The administration still has an aggressive to-do The administration still has an aggressive to-do list remaining, with planned overhauls ranging list remaining, with planned overhauls ranging from the telecommunications and energy from the telecommunications and energy sectors to issues such as taxation. The majority sectors to issues such as taxation. The majority of the reforms has been structural in nature and of the reforms has been structural in nature and driven by economic issues.driven by economic issues.


Domestic political factors will determine Domestic political factors will determine the success of the pending overhauls. But the success of the pending overhauls. But the labor reform could improve bilateral the labor reform could improve bilateral commerce and investment with California commerce and investment with California and all the United States, as would a and all the United States, as would a successful liberalization of the country's successful liberalization of the country's energy sector in the coming years.energy sector in the coming years.


Economics is at the center of the relation Economics is at the center of the relation between both countries in 2013.between both countries in 2013.

The United States is Mexico’s largest trading The United States is Mexico’s largest trading partner, and the two countries engaged in partner, and the two countries engaged in nearly 500 billion dollars worth of trade in nearly 500 billion dollars worth of trade in 2012. Much of that trade is in what are 2012. Much of that trade is in what are known as intermediate inputs, referring to known as intermediate inputs, referring to semi-finished U.S. goods that are finalized semi-finished U.S. goods that are finalized with Mexican resources, a process seen as with Mexican resources, a process seen as increasing the competitiveness of both increasing the competitiveness of both countries.countries.

United States - Mexico Border States

Description:

• 10 border states.

• Nearly 2,000-mile (3,169 km or 1,969 miles) of international border.

• Population: more than 83 million.

The United States- Mexico border regionThe United States- Mexico border region

The ten Border States represent the largest binational regional economy in The ten Border States represent the largest binational regional economy in the world, with over 83 million people and a combined economy ranked the world, with over 83 million people and a combined economy ranked estimated at number four in the world in economic terms.estimated at number four in the world in economic terms.

This region has 51 border crossings, 32 bridges and seven federal railway This region has 51 border crossings, 32 bridges and seven federal railway routes, placing it as the busiest border in the world, with over 350 million routes, placing it as the busiest border in the world, with over 350 million people cross the border each year.people cross the border each year.

The economic slowdown and unemployment are among the issues that The economic slowdown and unemployment are among the issues that currently affect the people on both sides of the border. currently affect the people on both sides of the border.

The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4 The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4 percent; New Mexico, 6.7 percent, and California, 12 percent (the highest), percent; New Mexico, 6.7 percent, and California, 12 percent (the highest), according to the figures from July 2011, compared to an unemployment according to the figures from July 2011, compared to an unemployment rate of 9.1 percent in the United States during July 2011.rate of 9.1 percent in the United States during July 2011.

In July 2011, the northern border states of Mexico were also showing high In July 2011, the northern border states of Mexico were also showing high unemployment rates. The state of Baja California had an unemployment unemployment rates. The state of Baja California had an unemployment rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent; rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent; Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81 Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81 percent (the highest).percent (the highest).

The United States Mexico The United States Mexico Border Unemployment (2012)Border Unemployment (2012)

Official figures from the National Institute of Statistics and Official figures from the National Institute of Statistics and Geography (INEGI) show that during the second quarter of 2012, Geography (INEGI) show that during the second quarter of 2012, the northern border states in Mexico continue to show high the northern border states in Mexico continue to show high unemployment rates. Chihuahua had a 7% unemployment rate, unemployment rates. Chihuahua had a 7% unemployment rate, Tamaulipas with 6%; Sonora with 5.4%, Coahuila with 5.5%, Tamaulipas with 6%; Sonora with 5.4%, Coahuila with 5.5%, Nuevo Leon with 6.4% , and Baja California with a 6.1% Nuevo Leon with 6.4% , and Baja California with a 6.1% unemployment rate. On average, the unemployment rate of the unemployment rate. On average, the unemployment rate of the northern border states of Mexico is estimated close to 6.06% northern border states of Mexico is estimated close to 6.06% during the second quarter of 2012.during the second quarter of 2012.

Furthermore, at the end of July 2012, the southern U.S. border Furthermore, at the end of July 2012, the southern U.S. border states also suffered with high unemployment rates: California with states also suffered with high unemployment rates: California with 10.7%, Arizona with 8.3%, 6.6% for New Mexico, and Texas with 10.7%, Arizona with 8.3%, 6.6% for New Mexico, and Texas with an unemployment rate of 7.2 percent. On average, the an unemployment rate of 7.2 percent. On average, the unemployment rate of the southern border states of the United unemployment rate of the southern border states of the United States is estimated at 6.06% during the month of July 2012.States is estimated at 6.06% during the month of July 2012.

The United States Mexico The United States Mexico Border Unemployment (2013)Border Unemployment (2013)

Official figures from the National Institute of Statistics and Official figures from the National Institute of Statistics and Geography (INEGI) show that during April 2013, Baja California’s Geography (INEGI) show that during April 2013, Baja California’s unemployment rate reached a level of 4.47%.unemployment rate reached a level of 4.47%.

Mexico’s unemployment rate during April 2013 was estimated at Mexico’s unemployment rate during April 2013 was estimated at 5.14%.5.14%.

During April 2013, California’s unemployment rate was 9.0%, During April 2013, California’s unemployment rate was 9.0%, according to the bureau of labor statistics. California ranked with according to the bureau of labor statistics. California ranked with the 4the 4thth highest unemployment at the state level, just behind highest unemployment at the state level, just behind Nevada, Illinois and Mississippi. The national unemployment rate Nevada, Illinois and Mississippi. The national unemployment rate was 7.5 percent.was 7.5 percent.

The April 2013 California unemployment rate of 9 percent The April 2013 California unemployment rate of 9 percent represents an important drop from the 10.7 percent rate during represents an important drop from the 10.7 percent rate during April of 2012. April of 2012.

GDP % Growth rates Baja California and California, Mexico and the United States

Economic Integration

* Sources: INEGI, Oxford Economic Forecasting, Bureau of Economic Analysis.

The United States Mexico The United States Mexico BorderBorder

People cross the United States People cross the United States Mexico border every day to do Mexico border every day to do business, go shopping, visit family business, go shopping, visit family members, or simply to enjoy each members, or simply to enjoy each other’s tourism. other’s tourism.

This results in around 350 million This results in around 350 million crossings and almost $400 billion in crossings and almost $400 billion in trade each year, making it the most trade each year, making it the most important border region in the world.important border region in the world.

California Mexico TradeCalifornia Mexico Trade

Mexico continues to be California's number one Mexico continues to be California's number one export market. California exports to Mexico $26.3 export market. California exports to Mexico $26.3 billion in 2012. Mexico purchases over 16 percent billion in 2012. Mexico purchases over 16 percent of all California exports.of all California exports.

California's exports to Mexico are driven by California's exports to Mexico are driven by computers and transportation equipment, which computers and transportation equipment, which account for 34.1 percent of all California exports account for 34.1 percent of all California exports to Mexico.to Mexico.

Total exports of California by trading partner(Millions of dollars)

The graphs shows the close economic relationship between California and Mexico. Considering all the trade between Mexico and California in 2011, Baja California reached 50.6% of total exports by the states of Mexico. Mexico is California’s number one export market. The state of Baja California is California’s 4 th export market.

Source: Bureau of Transportation and Statistics.

Distribution of total California exports by States of Mexico in

2011(percentages)

Source: Bureau of Transportation and Statistics and INEGI (enero a octubre.).

California Mexico TradeCalifornia Mexico Trade

Baja California and California Economic IntegrationBaja California and California Economic Integration

Economic Integration can also be seen at the regional level. Economic Integration can also be seen at the regional level. During 2010, the official data shows that the number of During 2010, the official data shows that the number of

northbound crossers from Baja California to California northbound crossers from Baja California to California reached 61,105,484 people, the majority of whom, crossed reached 61,105,484 people, the majority of whom, crossed in personal vehicles. Baja California residents constitute an in personal vehicles. Baja California residents constitute an important component in the economy of communities and important component in the economy of communities and counties on the U.S. side of the border, like San Diego counties on the U.S. side of the border, like San Diego County. County.

These visitors from Baja California enter the U.S. regularly These visitors from Baja California enter the U.S. regularly for shopping, tourism, work, and socialization with family for shopping, tourism, work, and socialization with family and friends. It’s a well known fact that cross border visitors and friends. It’s a well known fact that cross border visitors from Mexico have a significant economic impact on U.S. from Mexico have a significant economic impact on U.S. communities and counties. communities and counties.

Economic Impacts and Expenditures

Shopping is the primary reason to cross into the U.S. for Baja California residents. Depending on the study, 42 to 68% of border crossers identify shopping as the primary reason for the visit into Southern California. Other reasons are social in nature, like visiting family and friends, or are work related.

During 2010, around 74 percent of crossers entered California in their private vehicles, since a car allows them freedom of movement between different shopping locations in the U.S. as well as enough room to handle the volume of their purchases.

The estimated average daily expenditures reported by Baja California visitors into San Diego County and California in various studies ranges from US $140 per trip to $300 per trip. The current estimation uses an average amount of expenditures per trip of $240 per trip as the base case scenario.

Annual Retail Sales in California by Baja California Border Crossers (Economic Growth Scenario)

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1000000000

2000000000

3000000000

4000000000

5000000000

6000000000

7000000000

8000000000

9000000000

2010 2011 2012 2013 2014

year

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Low Spend. Case

High Spend. Case

Base Spend. Case

El Buen Fin Program

BEZ

California Economic Impacts

The California and Baja California border region remains an example of social and economic integration in North America, where cross-border shopping is only one aspect of that economic reality in the border region.

Mexican citizens cross frequently into the U.S. to shop, work, dine, vacation, and visit friends and family. What they spend on those visits results in a key contribution to local border economies in California.

The results reveal annual retail sales by Baja California Cross Border Visitors in the range of 5.9 to 6.8 billion dollars along the U.S.-Mexico border, depending on the complete implementation of the Border Economic Zone (BEZ) in Baja California and the “El Buen Fin Program”.

The base case scenario shows that Baja California consumer and economic drain into the U.S. market is estimated at around 5.9 billion dollars in 2012 and 6.2 billion dollars in 2014, with the implementation of the Border Economic Zone (BEZ).

Top 10 States Exporting to Top 10 States Exporting to Mexico, 2009 to 2011.Mexico, 2009 to 2011.

U.S. Mexico Trade in 2012U.S. Mexico Trade in 2012 Total bilateral trade between the U.S. and Mexico has returned to the Total bilateral trade between the U.S. and Mexico has returned to the

levels before the economic downturn and crisis.levels before the economic downturn and crisis. In 2011, Mexico and the United States had almost 461 billion dollars In 2011, Mexico and the United States had almost 461 billion dollars

in trade in goods, which represents more than 1,250 million dollars in trade in goods, which represents more than 1,250 million dollars or 1.25 billion in trade crossing the border in both directions every or 1.25 billion in trade crossing the border in both directions every day.day.

The economic relationship also adds 39 billion dollars in service The economic relationship also adds 39 billion dollars in service trade.trade.

Mexico continues to export more of their products and services to Mexico continues to export more of their products and services to the United States than any other country in the world. The United the United States than any other country in the world. The United States remains the main destination of Mexican goods and services. States remains the main destination of Mexican goods and services.

The trade relationship between Mexico and the United States not The trade relationship between Mexico and the United States not only is 'back' but it is getting stronger between Mexico and the only is 'back' but it is getting stronger between Mexico and the United States in 2012-2013.United States in 2012-2013.

California – Baja California California – Baja California Important Projects Important Projects

The bi-national terminal project is expected to be built immediately The bi-national terminal project is expected to be built immediately across from the US/Mexican border fence, on US land, so that across from the US/Mexican border fence, on US land, so that Tijuana International Airport will serve as relief airport for the highly Tijuana International Airport will serve as relief airport for the highly congested San Diego Airport. The project will also include parking, congested San Diego Airport. The project will also include parking, check-in counters, customs offices and is to link via a bridge check-in counters, customs offices and is to link via a bridge crossing the border into Tijuana airport.crossing the border into Tijuana airport.

The development of a privately owned cross-border facility - The development of a privately owned cross-border facility - intended to be used by ticketed airline passengers paying a toll to intended to be used by ticketed airline passengers paying a toll to cross directly between San Diego and Tijuana via a 525-foot cross directly between San Diego and Tijuana via a 525-foot pedestrian bridge linking the Airport to a large terminal in Otay pedestrian bridge linking the Airport to a large terminal in Otay Mesa - involves on the U.S. side construction of the terminal in Otay Mesa - involves on the U.S. side construction of the terminal in Otay Mesa and the bi-national bridge, and on the Mexican side adapting Mesa and the bi-national bridge, and on the Mexican side adapting Tijuana Airport's facilities so that they will connect to the bridge (the Tijuana Airport's facilities so that they will connect to the bridge (the process of which has already begun). process of which has already begun).

The project is hoped to be completed by June 2014.The project is hoped to be completed by June 2014.


The increasing demand in California for electricity from renewable energy is creating The increasing demand in California for electricity from renewable energy is creating

opportunities for developers to build projects along the Baja peninsula in Mexico and opportunities for developers to build projects along the Baja peninsula in Mexico and then export the electricity across the border into California. then export the electricity across the border into California.

A number of projects are already under development with several developers having A number of projects are already under development with several developers having begun to secure rights in the La Rumorosa region and acquire the requisite permits begun to secure rights in the La Rumorosa region and acquire the requisite permits to generate and export power.to generate and export power.

California has one of the most ambitious renewable portfolio standards, or RPS California has one of the most ambitious renewable portfolio standards, or RPS program, in the nation. program, in the nation.

Electric utilities in California are required to increase procurement from eligible Electric utilities in California are required to increase procurement from eligible renewable energy resources by at least 1% of their retail sales annually, until they renewable energy resources by at least 1% of their retail sales annually, until they reach 20% by 2010 and 33% by 2020. reach 20% by 2010 and 33% by 2020.

Although there are numerous projects being developed in state, these targets will Although there are numerous projects being developed in state, these targets will still be difficult to meet and, consequently, there are opportunities for out-of-state still be difficult to meet and, consequently, there are opportunities for out-of-state resources to assist California in reaching these targets.resources to assist California in reaching these targets.


The proposal for San Diego and Tijuana to jointly The proposal for San Diego and Tijuana to jointly

host the Summer Olympics in 2024 is still alive. host the Summer Olympics in 2024 is still alive.

There is a promising path forward if both cities There is a promising path forward if both cities work together. The two cities could then seek to work together. The two cities could then seek to move forward as co-hosts.move forward as co-hosts.

San Diego has proved that it can produce top-San Diego has proved that it can produce top-notch mega-events. And Mexico, has hosted the notch mega-events. And Mexico, has hosted the Olympics before. Olympics before.

The expected boost to the regional economy The expected boost to the regional economy would be in the billions of dollars. would be in the billions of dollars.

Analyzing the Economic Integration of Mexico Analyzing the Economic Integration of Mexico and California 2013and California 2013

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of International Economics at Colefand Distinguished ResearcherNational Council of Science and Technology

[email protected]

Presentation for the California State Controller’s Council of Economic Advisors Meeting. Los Angeles, California, Monday, June 24 at 9:00 a.m.

Business

Professor Alejandro Diaz-Bautista Analyzing the Economic Integration of Mexico and California