Since the US elected Donald Trump to be the next President, the political rhetoric has suggested that the relationship between the US and Mexico is on the rocks. Speculation has led business executives and politicians to believe the US will back out of NAFTA or start a trade war with Mexico. But, the far more likely scenario is that the strong ties that bind the two economies together will remain in place bolstered by the interconnectivity of businesses on both sides of the border. The US and Mexico are economic allies, and if history and economics are any indication, they will remain so for many years to come.
The US-Mexico Economic Alliance
With the advent of NAFTA, the US and Mexico are economic allies in a regional sense. Rather than compete with one another, the two countries partner to compete with other regional markets in the world. And in the past two decades, trade between them has risen approximately 500%. Through highly integrated production chains, the regional alliance now produces a third of the world’s total GDP.
- The US is Mexico’s leading trading partner far and away.
- Mexico is the second-largest US export market.
- Mexico is third-largest market in total US trade.
- Foreign Direct Investment from the US to Mexico increased over 200% between 1994 and 2011.
The Strength of the Partnership
Such interconnectivity is much stronger and durable than the average pundit gives credit for. Economic forces seem to recognize what many in the limelight do not: that the US and Mexico are economic allies. They experience essentially the same growth and recession cycle together and generally profit equally from the reshoring trend that has recently seen outsourced Chinese jobs come back to North America. Typically, the manufacturing jobs come to Mexico while the engineering jobs come to the US. And those manufacturing jobs in Mexico rely on US-made parts for approximately 40% of total manufacturing inputs.
- Mexican companies heavily invest in or directly own some of the most well-known brands in the US.
- More than six million US jobs depend on US-Mexico trade.
- Nearly half of all US states each sell goods to Mexico in excess of $1 billion USD annually.
- Automobiles manufactured in North America have their parts cross the border numerous times during production, reflecting a high level of vertical specialization and partnership.
- Oil prices are lowered by increased oil trade within North America.
- Since 2008, the US and Mexican automotive sectors have simultaneously recovered over 70% and 50% respectively.
As has been noted previously, Trump’s election will likely have minimal impact on the fact that the US and Mexico are economic allies. With a long history of highly integrated trade and partnership, the prospect that NAFTA and the thousands of cross-border business interactions will be done away with in one stroke of a pen seems more and more impossible. Slight changes may well be negotiated in the agreements between the two partners. Both countries may use this election as an opportunity for mutually beneficial modifications, but the two countries will remain interconnected and allied.
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