Continuing my series in which we examine the results of trade between the U.S. and its major trading partners, and having just finished an evaluation of Canada (see the previous post), we now turn our attention to the flip side of the NAFTA (North American Free Trade Agreement) coin: Mexico. Here’s a graphical presentation of our balance of trade with Mexico, broken down into several major categories:
The title of this post says it all about U.S. trade with Mexico and our overall economic relationship – it’s a huge drag on the American economy. Because Mexico is 66% more densely population than the U.S., the theory I presented in Five Short Blasts predicts that we would have a trade deficit in manufactured goods, and that’s exactly what we find. Our overall trade deficit with Mexico in 2008 was $64 billion, which doesn’t even include illegal drugs. And the trade deficit in manufactured goods was $36 billion, which translates to a per capita trade deficit in manufactured goods of $327 – far worse than our per capita trade deficit in manufactured goods with China.
For a nation of their population density – relatively moderate in comparison to nations like Japan, Korea, China and Germany, this trade deficit is even worse than my theory should predict. Clearly, the deficit is aggravated by chronic low wages (probably intentionally suppressed by corporations in concert with a corrupt government) and an absence of labor and environmental standards.
President Obama has spoken of the need to re-write NAFTA to incorporate labor and environmental standards. Such talk makes the best friend we have in the world – Canada – nervous, but it shouldn’t. If anything, their labor and environmental standards actually exceed ours. The president is clearly directing such talk toward Mexico, where our trade results prove that corrective action is long overdue. As I recommended in Five Short Blasts, it should begin with a relatively small tariff on manufactured goods to compensate for Mexico’s higher population density. But, in this case, a second tariff is in order too – a tariff designed to motivate the enactment of labor and environmental standards, that would remain in place until they are implemented.
Aside from being a significant source of imported oil, there is little good that can be said about America’s trade relationship with Mexico. Throw in Mexico’s drug trafficking and illegal immigration and, overall, America would be far better off if the Gulf of Mexico extended all the way to the Pacific Ocean. In previous articles, we’ve seen cases where free trade can be very beneficial, but Mexico isn’t one of them. We don’t have to look far for opportunities to fix our trade policy and begin restoring some balance.