This past July, one month prior to the beginning of the renegotiation of the NAFTA with Canada and Mexico, The United States published a list of the priorities that would guide its negotiators during the process of deliberations. One of the primary goals that the US would seek to achieve at the bargaining table would be the reduction of its trade deficit with Mexico.  Some economists and politicians, however, question whether or not a trade deficit with Mexico is necessarily a bad thing.


According to Investopedia, a “trade deficit is an economic measure of international trade in which a country’s imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets.”  While economists such as Gary Clyde Hufbauer and Zhiyao Yu of the Peterson Institute for International Economics believe that it is things such as a growing US economy that often lead to a larger deficit and is, therefore, “really a good thing,” others believe that a deficit in the commercial balance of trade produces negative results such as the loss of US jobs.

In the aggregate of its global trade in goods and services, during 2016 the United States ran a total trade deficit of approximately US $500 billion with all of its commercial partners combined.  Exports from the US to foreign markets stood at about US $ 2.2 trillion, while imports into the US from its trading partners were approximately valued at US $2.7 trillion. The United States largest commercial trade deficit was with China.  While as of November of 2016, the US trade deficit with Mexico stood at approximately US $58 billion, the US deficit with China was valued at approximately six times larger at over US $319 trillion.


In 1994, the year in which the NAFTA came into effect, the United States ran a relatively small US $1.3 billion trade surplus with Mexico.  The following year the US began to experience annual trade deficits visa vis its southern neighbor. This was not because the US was suddenly inundated with Mexican imports, but was due to the fact that the two countries’ cross-border supply chains began to integrate more fully in order to produce a diversity of products using both Mexican and US inputs for sale in both domestic and international markets.  In no other realm has this Mexican-US integration taken place more comprehensively than in the automotive industry.

Some economists and public figures argue that “without the auto industry the US trade deficit with Mexico would disappear,” and that a small commercial trade surplus would exist.  In fact, this is an assertion that has also recently been made by the current US Commerce Secretary, Wilbur Ross.  For the auto industry, the US imports a high value of components (intermediate goods) that are subsequently incorporated into the final products that are then sold domestically, as well as in foreign export markets.  A full forty percent of goods imported into the US from Mexico contain US content.  It is also noteworthy that auto parts that are used in the manufacture of North American produced vehicles cross the border up to a “total of eight times,” prior to being incorporated into the final product. By contrast, goods from China incorporate four percent of US value into their production.


There are those that contend that a tightening of the NAFTA rules of origin, especially those related to the automotive industry, could help to significantly reduce the US trade deficit with Mexico.   Rules of origin for the automotive industry stipulate to which exact parts they apply.  Tightening these rules by extending them to cover more automotive intermediate products (items that are incorporated into the finished vehicle) would do much to significantly reduce the commercial trade imbalance that currently exists between the two nations.  As a result of tightening the rules of origin in the industry, Mexico would tend to source more auto parts from US suppliers. In addition to cutting the trade deficit, this would result in the creation of more jobs in the US automotive industry

Another change that would have to be made to reduce the trade deficit with Mexico in the automotive industry is through a re-examination of the concept of “substantial transformation.”    Under the rules pertaining to “substantial transformation,” a country can consider a product from outside of North America to be of NAFTA origin if the non-NAFTA item has had significant value-added to it in one of the NAFTA partner countries.  This creates a means by which goods that come from countries outside of North America can be converted in order to receive duty-free treatment.    Changing and tightening the rules as to what constitutes a substantial transformation of non-NAFTA imported items can also serve to reduce the commercial imbalance that exists between the US and Mexico in the automotive sector.


Beyond the NAFTA, what can be done to reduce the United States’ overall trade deficit?  Some economists suggest that imposing duties and tariffs on items from countries with which the US has significant commercial trade imbalances is the answer, while other economists believe that the way to reduce these deficits is to negotiate better access for US products in foreign markets.  This is particularly the case with China. In other words, the creation of barriers to trade is not the answer, but increased global commerce is.

Some contend that a means by which to reduce the US’ commercial imbalance between imports and exports is to promote a weaker dollar.  A weaker national currency would stimulate the overseas consumption of US manufactured and other exports, namely services.   Additionally, the Trump administration has listed negotiating better access to foreign markets for US products as a priority.

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