Mexico’s Diversified Economy

mxdiv-economyFor some years now I have been reading and hearing commentary about how NAFTA has been bad for Mexico and the United States. This notion comes from citizens of both countries, with US citizens criticizing NAFTA for job losses and depressed wages and Mexican citizen criticizing it for the destruction of agriculture as a way of life and oppressive working conditions in maquiladoras. As some of you may know, I became an entrepreneur largely because of NAFTA. I wrote a white paper on NAFTA and as a result I embarked on my business endeavors.

As with any controversial topic, arguing the merits of the issue often degenerates into subjective topics that are difficult to scientifically articulate, or quantify such as quality of life and cultural destruction. It will never be possible to conclusively debate quality of life issues because of their subjective nature. We should be able to quantify the results of NAFTA over the last twenty-one years and ten months. There are many metrics we can use to look at the success or lack thereof off but unfortunately these always devolve into questions of “can the data be trusted” or “look at the source of the data”. Unfortunately, when the results do not fit the narrative the argument becomes an argument of faulty data or mistrust in the source of the data. I have heard arguments like the data sets from the United Nations (UN) cannot be trusted because they are a “liberal” organization. In other words, when the narrative does not fit – attack the source data.

Even US-based data is subject to debate because of the “politics” behind it, regardless of the political party in power at the time. In essence, I cannot conclusively prove what my eyes see to most of you because regardless of the numbers I show, if it doesn’t fit the agenda, or the world view then the data must be wrong.

But, I’ll still try anyway.

NAFTA hasn’t been perfect, but in my eyes and through my experiences, it has been a life-savor for Mexico and it has been good for the United States, economically and for labor as well. Many of you reading this will likely disagree and although I’ll be using a data set that some will argue is “too liberal,” United Nations and the World Trade Organization, it nonetheless demonstrates what my experiences and my eyes have seen.

My argument that NAFTA has been good for Mexico is based on what is happening in Venezuela today and the worldwide economic issues facing the rest of the countries. It would be nice if wages in Mexico had increased more than they have and the quality of life was greater than it is but the alternative, absent NAFTA, would have been detrimental to both Mexico and the United States.

We live in a diversified economy where each country depends on another for its own economic prosperity. The times for closed economies is long past and there is no going back. Each country is dependent on another for its citizens’ own economic prosperity.

Donald Trump has argued that NAFTA is detrimental to the United States. Depending on your point of view about macro-economics or politics you may, or may not agree with him. However, anyone who honestly looks at the geography and the history of both Mexico and the United States will surely accept and understand that a prosperous Mexico is good for the United States. A failed Mexico would be detrimental to the welfare of the United States. If I can also get you to accept that the world economy requires dependence on other countries than we can argue the point of whether NAFTA is good for both countries.

Worldwide economics are complex and addressing all issues in one post is impossible. However, if we accept that a stable Mexican economy benefits the United States then we should analyze Mexico’s trade with the United States focusing on its diversity.

Economic diversity is important because if the trade is not diversified then eventually it becomes obsolete and the economy, Mexico’s in this case, dries up resulting in a chaotic country. For example, if Mexico kept oil as its sole export to the United States then when the oil dried up the economy of Mexico would die along with it. With no economic basis, Mexico could become a failed state and the result would be a destabilized southern border for the United States.

So let’s look at how the Mexican economy has diversified in ten year increments starting in 1964 and on through 2014. I selected 1964 as a starting point because NAFTA came into effect in 1994 and thus we can analyze the before and after economic diversification in ten year increments.

Anytime Mexico is mentioned in regards to world economies, historically the notion is that Mexico is an oil exporter and that it relies on tourism and remittance from its citizens living in the United States. Illegal drugs are also mentioned. In regards to oil, Mexico’s oil industry has a long history but a short productivity window for Mexico’s economy through exports. In 1937, Lazaro Cardenas nationalized the oil industry in Mexico. It remains largely closed today, although Enrique Peña Nieto is attempting to open it up to international investment.

Although Mexican oil exports rose slightly from 1938 onwards, it wasn’t until the early 1980’s that Mexico drastically increased its oil exports. By 2005, its oil exports were at their height but drastically began to decrease after that. In 2006, Mexico was the seventh-largest oil producing country in the world. Mexican oil exports continue to decline as the Cantarell Field continues to dry up.

Had Mexico continued to depend on oil and other non-industrial exports for its economic exports it would be facing a continued deterioration of its economy, much like Venezuela today.

In 1964, Mexico’s three largest exports to the United States were coffee (14%), sugar (11%) and shellfish (8.8%). Oil accounted for 2.2% of US imports from Mexico. High-tech manufactured products from Mexico to the US accounted for an insignificant amount. In 1964, Mexico exported only $607 million in products to the United States. By 1974 Mexican exports to the US rose to a staggering $3.41 billion with artwork accounting for 7.8% of Mexican exports to the US. Chinese labor killed the artwork exports shortly thereafter. The 1974 exports included silver and sugar at 4.9% each and coffee at 3.3%. However, the manufacturing industry began to flourish in Mexico and thus, automotive products (6.8%) and telecommunications (4.3%) began to make on impact on Mexican exports to the US.

In 1984, oil exports to the United States rose to 38% of Mexican exports to the US. The total Mexican exports to the US in 1984 were $16.7 billion. Fuel oils accounted for 4.9% and the automotive sector increased to 6.8% of the Mexican exports to the US. By 1994, Mexican exports to the US again significantly increased, this time to $46 billion. Oil exports to the US dropped to 9.5% and the automotive sector jumped to 18.2%. Color TVs accounted for 4.5% of exports.

In 2004, Mexican exports to the US again rose, this time to $144 billion. Computers now accounted for 2.7% and color televisions at 4.6%. Again the automotive sector led the way at 11.30%. Oil accounted for 12% of Mexican exports to the US. By 2014, oil exports to the US from Mexico was down to 8.10% while the automotive sector jumped to 25%. Color TVs were at 4.5% and computers increased to 4.5% as well. But the total Mexican exports to the United States increased to $292 billion.

Today, Mexico’s total worldwide export market is valued at over $400 billion making it the twelfth largest export economy in the world. The United States is the largest export destination accounting for almost half of the exports. However, Mexico boasts one of the largest portfolios of free trade agreements with other countries.

As you can clearly see, as oil exports diminished other commodities took up the slack. Had the Mexican economy not diversified, its continued reliance on oil would have been detrimental to Mexico as it has been to Venezuela. More importantly, Mexico diversified away from natural resources, a finite commodity to manufacturing which allows it to diversify and grow. Today, Venezuela’s export worldwide export market is only $63 billion with oil ($47 billion) accounting for almost all of it. NAFTA played a significant role in the diversification of the Mexican economy.

A diversified economy is important because it allows external monies to stimulate the economy. A closed economy only recycles the existing monies in an endless vicious circle that is incapable of growing an economy. It is important to note that Mexico has the most free trade agreements of any country in the world. Although the US market remains a significant portion of the export economy, Mexico is not reliant on the US market alone. As a matter of fact, it is the free trade agreements that Mexico has in place that have benefited US manufacturers in competitiveness with other exporting countries.

Of course, there is the proverbial other side of the coin. What has the US exported to Mexico? In a follow up post, I’ll share those details with you. The world export market place is extremely complex and what I shared with you today is only a micro part of the macro world trade. Yet, you can clearly see that the United States benefits from a robust Mexican economy by the simple fact that the Venezuela failure is what the US might facing today, if it weren’t for NAFTA.

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