NAFTA at 20 YearsUS Mexico Chamber of CommerceNovember 7, 2013Animesh GhoshalDePaul University

North America as a Competitor on the Global Stage

• Mexico in 1982• Integration of US and Mexican Economies• Concerns about China• Other issues (demography, employment, border

crossing, security, education)• Changes in Mexico

Economic Situation in Mexico, 1982

Inflation 58.9%

Foreign Reserves, in months of imports 0.58

Debt service, as percentage of exports 31%

Trade, as percentage of GDP 25.6

GDP, constant 2000 US dollars $374 billion

Currency change against US dollar -67%

Integration of US and Mexican Economies

• Trade: Amount and Quality• Investment• Tourism•Population Movement

Integration of US and Mexican Economies: GDP Growth Rates

Growth of Trade, 1985-2012

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

0

50000

100000

150000

200000

250000

300000

US importsUS exports

US Imports from Canada, China, Mexico

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

CanadaChinaMexico

Quality of Trade: US “Vertical Integration” with Major Trading Partners

Exports($b)

Imports($b)

Total Trade($b)

Percentage of US Content in Imports

Canada 292 324 616 25%China 110 425 535 4%Mexico 216 277 493 40%Japan 70 146 216 2%

EU-27 265 380 645 2%

Intra-Industry Trade: Biggest US imports and exports with Mexico, 2012 (billions of dollars)

US Exports to Mexico US Imports from Mexico

Total 216.3 Total 277.7

334 Computer and elecronic products 37.9 336 Transportation equipment 71.6336 Transportation equipment 27.9 334 Computer and elecronic products 54.5325 Chemicals 23.6 211 Oil and gas 37.3324 Petroleum and coal products 20.8 335 Electrical equipment 20.4333 Machinery, except electrical 18.9 333 Machinery, except electrical 14.9331 Primary metal manufactures 10.7 331 Primary metal manufactures 13.9335 Electrical equipment 10.6 111 Agricultural products 7.8311 Food manufactures 9.8 339 Misc. manufactured products 7.2326 Plastic and rubber products 8.4 332 Fabricated metal products 6.8111 Agricultural products 8.3 311 Food manufactures 5.7

Intra-Industry Trade: Biggest US imports and exports with China, 2012 (billions of dollars)

Growth in Bilateral Investment: US FDI in Mexico

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

US FDI stock in Mexico

US FDI stock in Mexico

Growth in Bilateral Investment: Mexican FDI in US

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

2000

4000

6000

8000

10000

12000

14000

16000

Mexican FDI stock in US

Mexican FDI stock in US

FDI Flows in Mexico, 1992-2011

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

30000

35000

OECDUS

Overall FDI Inflows into Mexico

• Dependence on US has actually decreased since advent of NAFTA

• FDI inflows in 2011:• Total, from OECD: $19.6 billion• US: $10.6 b• Spain: $3.3 b• Netherlands: $1.5 b• Switzerland: $1.2 b

Mexican Concerns about Competition from China

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

ChinaMexico

In some industries, Mexican exports displaced by China

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Apparel and Household Goods-Cotton

MexicoChina

Market Share

In others, no evidence of displacement

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Complete and Assembled Trucks, Buses, and Special-Purpose Vehicles

MexicoChina

Market Share

In Some Industries, China’s Share Growing, but Mexico’s Share Growing Too

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Other Industrial Machinery

Market Share

Mexican Concerns about Competition from China (cont)• China joined WTO in 2001• Faced reduced trade barriers (MFN)• Very low labor costs• In 2003, hourly labor cost in China $0.62, in Mexico $5.06

• Many maquiladoras shut down or moved to China, but…

• Labor costs in China have risen rapidly

In 2008, hourly labor cost in China $1.36 in Mexico $6.12 Since 2008, wages in China have increased 10-20 percent a year

“Labor Arbitrage” and Manufacturing CostsManufacturing Outsourcing Cost Index(Percentage of US Cost)

2005 2010 2015 (forecast)

Mexico 89 83 86

China 79 90 98

India 78 82 83

Production Advantages, China vs. Mexico

Advantages of Producing in China Advantages of Producing in Mexico

Lower labor costs (but rising rapidly) Closer to US—lower transportation cost

Larger domestic market Easier communication and supervision

Better infrastructure Shorter time to market in US

Stronger supply chain (some products) Greater flexibility for production changes

Managed (perhaps undervalued) currency

Better protection of intellectual property

State assistance (sometimes) More transparent regulation

Role of Distance: Travel Time to Northern US

Role of Distance: Travel Time to Major World Ports

Other Issues

• Tourism

• Demography

• Education: major factor in long term growth

Tourism and Population Movement

• Tourism: • Mexico #1 destination for US residents in 2011• Mexico 20.1m, Canada 11.6m, UK 2.4m

• Mexico #2 source of tourists to US in 2011• Canada 21.3m, Mexico 13.5m, UK 2.4m

• Population Movement and Social Networks• US: 12 m residents born in Mexico, 32 m of Mexican origin• Mexico: I m American residents (20% of total)

US: Ageing Population:Demographic Challenge

Mexico: Younger Population“Demographic Window”

Education: Average Years of Schooling for Population over 15

Productivity Trends: Changes in Gaps with US, 1980-2011, Annual Average (Source: OECD)

China

India

Indon

esia

Thailan

d

Repub

lic of

Korea

Malays

ia

Singap

ore Chile

Hong K

ong,

China

Dominic

an R

epub

licJa

pan

Panam

a

Urugua

y

Argenti

naCub

a

Costa

Rica

Mexico

Brazil

Colombia

Venez

uela

(Bol. R

ep. o

f)

El Salv

ador

Peru

Philipp

ines

Guatem

ala

Hondu

ras

Ecuad

or

Paragu

ay

Bolivia

(Plurina

tiona

l Stat

e of)

Nicarag

ua-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

Latin AmericaAsia

Mexico’s Economy Has Some Problems• Extremely high dependence on US, with 80% of exports

going to one country

• Trade agreements with many countries, but rules of origin make export diversification difficult

• Lack of competition in many industries

• Concerns about violence

But Mexico today very different from Mexico of the past• Composition of Exports

• Macroeconomic Conditions

• Inflation

• Exchange Rate

• Debt Service

• Interest Rate

Composition of Mexico’s Exports, 1982 and 2010

1982 20100

50

100

150

200

250

300

ManufacturingAgricultureOil

Economic Situation in Mexico, 1982 and 2011

1982 2011

Inflation 58.9% 3.4%

Foreign reserves, in months of imports

0.58 4.38

Debt service as % of exports

31% 6%

Trade as % of GDP 25.6% 64.7%

GDP, constant 2000 US $ $374 billion $722 billion

Macroeconomic Conditions in 2012, US and Mexico

US Mexico

GDP Growth 2.2% 4.0%

Inflation (CPI) 2.1% 4.1%

Current Account Balance (% of GDP)

-3.0% -0.6%

Budget Balance (% of GDP) -7.0% -2.4%

Interest Rate (10 year Govt.Bonds) 1.82% 7.75%

Currency Change Against Euro -5.5% -1.7%