Mexico: A Millstone Around the Neck of the U.S. Economy

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:

trade-with-mexico

sources:  http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c2010.html

http://www.census.gov/foreign-trade/statistics/product/enduse/exports/c2010.html

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.

Advertisements

5 Responses to Mexico: A Millstone Around the Neck of the U.S. Economy

  1. Robert says:

    Pete,

    I can’t help but feel a little anger with all of the outsourcing that has occurred because of NAFTA. I work for Daimler and just recently the company has decided to close a truck manufacturing plant in Canada, Idle a plant in Mt. Holly, NC and layoff a huge number of workers in Cleveland, NC not to mention the closing of Freightliner’s original truck plant in Portland, Oregon. Who knows, my job could be next. It would be one thing if these corporations moved jobs to Mexico to produce products for Mexico but when they move jobs to Mexico to produce products to sell in the USA or Canada, then I must question the moral integrity of the CEO’s and the people who run these companies. What ever happened to morality anyway?

    • Pete Murphy says:

      When you speak of morality, are you really talking about loyalty to their country and fellow citizens? Such loyalty has vanished from virtually all corporations. There really is no such thing as “American” corporations any more. All have become global corporations and their only loyalty, if there is any, is to shareholders. (Or, as we’ve seen recently, some are loyal only to themselves and will happily trash a corporation if it results in a huge golden parachute.) They justify their decisions with the logic that it would be disloyal to shareholders not to take advantage of low wages and low labor standards and environmental standards in other countries in order to cut costs, gain share in foreign markets and thus increase profits.

      Our government leaders need to recognize that global corporations do not have our nation’s best interests at heart. To believe that our best interests are served by giving them free rein to maximize profits is naive. Capitalism is fine, but it needs to be our servant, not our master. Global corporations should be free to pursue profits, but within certain boundaries. In the first half of the 20th century, we found it necessary to establish boundaries regarding the treatment of workers. In the latter half of the century, we found it necessary to establish boundaries to protect the environment. Now, two more boundaries are needed: 1) a trade deficit simply can’t be tolerated, and 2) population growth can’t be used as a tool for increasing sales volumes and profits. If these two boundaries would be established (as I’ve proposed with my two constitutional amendments), it would make an incredible difference in our economy and quality of life.

  2. Robert says:

    I failed to mention they built a brand new truck plant in Saltillo, Mexico which will produce up to 30,000 trucks a year.

  3. Clyde Bollinger says:

    As Robert says, it is one thing for a corporation to make product where it is needed. We’ve seen the value in that, but when they locate a factory in Mexico or Canada and ship the finished goods here for purchase, it is bad news.
    What puzzles me more than any thing else in this whole trade and jobs relationship is the apparent lack of recognition that population density plays among the economists and politicians. If they even mention population, it is in the context that more is better, since they assume that more people means more potential sales volume. It becomes another version of the old adege “we’re selling at a loss, but just look at the volume we’re doing”.

    • Pete Murphy says:

      You’re exactly right, Clyde. The thought that something that may be good for the macroeconomy could actually be bad for individual citizens has never crossed the minds of our leaders and economists. It’s probably too abstract a concept for them to handle.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: