NAFTA at 20 Years US Mexico Chamber of Commerce November 7, 2013 Animesh Ghoshal DePaul 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 Inflation58.9% Foreign Reserves, in months of imports0.58 Debt service, as percentage of exports31% Trade, as percentage of GDP25.6 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,

US Imports from Canada, China, Mexico

Quality of Trade: US “Vertical Integration” with Major Trading Partners Exports ($b) Imports ($b) Total Trade ($b) Percentage of US Content in Imports Canada % China % Mexico % Japan % EU %

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

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

Growth in Bilateral Investment: US FDI in Mexico

Growth in Bilateral Investment: Mexican FDI in US

FDI Flows in Mexico,

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

In some industries, Mexican exports displaced by China

In others, no evidence of displacement

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

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 percent a year

“Labor Arbitrage” and Manufacturing Costs Manufacturing Outsourcing Cost Index (Percentage of US Cost) (forecast) Mexico China India788283

Production Advantages, China vs. Mexico Advantages of Producing in ChinaAdvantages of Producing in Mexico Lower labor costs (but rising rapidly)Closer to US—lower transportation cost Larger domestic marketEasier communication and supervision Better infrastructureShorter 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, , Annual Average (Source: OECD)

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

Economic Situation in Mexico, 1982 and Inflation58.9%3.4% Foreign reserves, in months of imports Debt service as % of exports 31%6% Trade as % of GDP25.6%64.7% GDP, constant 2000 US $$374 billion$722 billion

Macroeconomic Conditions in 2012, US and Mexico USMexico GDP Growth2.2%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%