The Hidden Costs of a Possible US-Mexico Trade War Knowledge@Wharton
go to original August 6, 2016

Republican presidential candidate Donald Trump said in a recent speech that as president, he would encourage some manufacturers to leave the United States so he could charge them a tariff when their goods entered the country. (Mediaite/ROX)

In the race for the White House, both Republican Donald Trump and Democrat Hillary Clinton have incorporated skepticism about free-trade pacts into their presidential campaign platforms. While Trump has attracted more attention than Clinton by arguing that the U.S. should seriously consider pulling out of the three-nation North American Free Trade Agreement and the 164-nation World Trade Organization, both candidates have criticized the impact of NAFTA on U.S. jobs growth, and opposed U.S. membership in the Trans-Pacific Partnership (TPP) on the grounds that the 12-nation free-trade bloc, yet to be enacted, would have a harmful impact on U.S. economic growth and job creation.

In the case of the United States and Mexico, what are the hidden risks and costs of making such a radical change in U.S. trade policy? The patterns of U.S.-Mexico economic and social interdependence are often overshadowed by dramatic rhetoric about job losses in the United States. Nevertheless, last year Mexico was the United States’ third largest goods trading partner with $531 billion in two-way goods trade during 2015, surpassed in volume only by Canada and China. Since NAFTA’s enactment in 1994, trade and investment between the U.S. and Mexico have mushroomed at a spectacular rate. U.S. exports to Mexico have risen from $41.58 billion in 1993, the last year before NAFTA, to $235.7 billion in 2015 — an almost six-fold increase. Over the same period, U.S. imports from that country have risen from $39.91 billion in 1993, to $296 billion in 2015, an increase of more than seven-fold. Since NAFTA was enacted, Mexico’s exports to the U.S. and Canada have grown more than five-fold from $53 billion to $319 billion in 2015.

The stock of U.S. Foreign Direct Investment in Mexico has also increased, from a cumulative total of $17 billion in 1994 to $101.5 billion in 2013, an almost six-fold increase, because of the NAFTA-related liberalization of Mexico’s restrictions on foreign investment in the late 1980s and the early 1990s. Over the same period, the cumulative stock of Mexican FDI in the United States increased eight-fold, from a mere $2.069 billion in 1994 to $17.6 billion in 2013.

On the other hand, the growing interdependence of the U.S. and Mexican economies makes both countries more vulnerable to the impact of anti-trade (“protectionist”) measures imposed from either side of the U.S.-Mexico border. On balance, Mexico would be more susceptible than the U.S. to damage from any sustained trade war between the U.S. and Mexico, notes Daniel Villegas, an economist at UNAM, the Mexican national university. Villegas says, “Trump has threatened that the United States could leave or renegotiate [its membership in] NAFTA because he considers that agreement unfair for his country, and he believes that only Mexico and Canada have benefitted from that agreement.” However, he adds, “one of the main goals of [NAFTA] is to create a free flow of goods” between the three countries, so that “consumers benefit by getting the best products at competitive prices” in all three countries. Nevertheless, he adds, “The agreement has been more important for Mexico [than for the U.S.], because more than 95% of Mexico’s exports to NAFTA countries have been [shipped to] the United States,” rather than to Canada, notes Villegas.

For Mexico, whose governments were long noted for their protectionist trade politics, membership in NAFTA and multiple other free trade agreements has become a cornerstone of its national economic policy. According to ProMexico, the country’s investment promotion agency, Mexico has a network of 10 free-trade agreements with 45 different foreign countries; 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries; 9 trade agreements within the Latin American Integration Association (ALADI). Not to mention, Mexico has signed on to the Trans-Pacific Partnership Agreement, and is an active member of the WTO, and the OECD. So while Mexico is banking more than ever on free-trade, the U.S. may be turning in the opposite direction.

Read the rest at Knowledge@Wharton

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Related: Ex-Mexican President Vicente Fox to Trump: We Can Find New Friends (CNN)

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