U.S. Mexico Economic Relations: An Overview
From an economic standpoint, the U.S. and Mexico have a longstanding, interdependent relationship. In fact, economic relations between the two countries are complex, made up of a web of tariffs, regulations, and familial and cultural influences. The two countries have been trading with each other for centuries, and the volume of trade continues to grow every year. Supported by partner agreements like NAFTA and the USMCA, economic and trade relations between the U.S. and Mexico have provided significant benefits for both countries.
Summary of U.S. Mexico Economic Relations
In many ways, economic relations between the United States and Mexico are based on the premise of mutual benefit. Since the North American Free Trade Agreement (NAFTA) went into effect in 1994, trade between the two countries has more than tripled. In 2019, Mexico became the top trading partner for the United States, topping $614 billion in total trade. Currently, after Canada, Mexico ranks second for U.S. exports and second, after China, for U.S. imports. This volume of trade is perhaps a natural consequence of the close proximity of the two countries, as well as the extensive familial and cultural ties they share.
Still, the Mexican economy and GDP are significantly smaller than the U.S., and there continues to be a persistent income disparity between the two countries. So while Mexico’s economy relies heavily on the U.S. as an export market – approximately 80% of Mexico’s exports go to the U.S. – there has always been tension in the economic relations between the two countries, particularly around the issue of immigration.
The Importance of Free Trade
It is hard to overstate the important role that trade plays in U.S.-Mexico economic relations. Supported by NAFTA and, since 2020, the U.S.-Mexico-Canada trade agreement (USMCA), trade between the two countries has contributed to significant growth in a number of key industries. For example, the top U.S. merchandise imports from Mexico in 2019 included transportation equipment ($128 billion), computer and electronic products ($65 billion), electrical equipment and appliances ($31 billion), and machinery ($21 billion). For the U.S., these imported goods support the American businesses as they fulfill consumers’ ever-increasing demands for vehicles, tech devices, and more. In many ways, this demand is reflected in the top U.S. exports to Mexico in 2019, which also emphasizes computer and electronic products ($43 billion) and transportation equipment ($33 billion). Other key U.S. exports to Mexico include petroleum and coal ($28 billion), chemicals ($23 billion), and machinery products ($21 billion).
The Importance of Manufacturing
It is perhaps no surprise that the top import and export categories between the U.S. and Mexico overlap. Another of the key benefits of NAFTA and the USMCA is the growth of cooperative manufacturing and supply chains. Some experts have credited NAFTA’s supply chain provisions with helping the U.S. auto industry, among others, become more globally competitive. This is because of the degree of specialization that has occurred in manufacturing and assembly plants on both sides of the border, allowing U.S. businesses to take advantage of economies of scale. In fact, a significant portion of merchandise trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create consumer goods. This is true in U.S. industries from the automotive and machinery sectors to computers and electronics, all of which rely on Mexican manufacturers to produce goods.
Export Processing Zones in Mexico
Foreign-owned assembly plants, which originated under Mexico’s maquiladora program in the 1960s, account for a substantial share of Mexico’s trade with the United States. These export-oriented assembly plants, a majority of which have U.S. parent companies, are closely linked to U.S.-Mexico trade in various labor-intensive industries such as auto parts and electronic goods. While NAFTA has certainly played a hand in supporting the growth of these zones, which in turn support the overall health of U.S.-Mexico trade, perhaps the strongest factor driving the growth of export processing and manufacturing in Mexico has been a strong U.S. economy and, at the same time, relatively low wages in Mexico. For decades, U.S. businesses have taken advantage of the relatively cheap labor in Mexico to increase profits and sell goods at more competitive prices. However, this practice has long been a source of tension between the two countries, as critics see U.S. domestic jobs decline in favor of hiring in Mexico instead.
Worker Remittances and Foreign Income
Whether formally or informally, one of the highest sources of foreign currency in Mexico is workers in the United States sending money back to their relatives in Mexico. Mexico received more worker remittances than any other country in Latin America. Most of the money sent to Mexico goes to areas with high poverty levels, and is used by people in Mexico to pay for basic needs like rent, food, and medicine. Along with direct foreign investment and tourism, worker remittances account for a significant portion of the Mexican economy. For example, in 2019 worker remittances totaled $36 billion, a 7% increase over 2016’s total. This significant sum underscores the strong cultural and familial connections between the U.S. and Mexico, as well as the dependency of both countries for each other’s economic well-being.
Ongoing Border Tensions
Although sharing a border has facilitated the development of trade between the U.S. and Mexico, it has also created difficulties around the issues of immigration, transportation, and public safety. The flow of illicit goods and people has long been a target of criticism for U.S. politicians who see Mexico as a threat to U.S. supremacy. But given how heavily the U.S. relies on Mexico for economic stability and growth, these views are remarkably short-sighted. Still, efforts between the U.S. and Mexico to collaborate effectively on the worst of these issues are ongoing. Along with addressing the illicit trade and immigration, there is a keen interest to work productively to improve infrastructure, labor conditions, and regulatory oversight in Mexico and particularly among export processing zones. The services trade, in particular, would likely benefit from improved systems for sending workers across the border in both directions to staff factories and perform jobs that local residents are unwilling or unable to do.
The U.S.-Mexico economic relationship is complex and ever-changing. However, it is clear that the two countries remain interdependent, despite their differences. As the world economy continues to globalize, it is likely that this trend will only continue.
U.S. Mexico Bilateral Trade Disputes
The United States and Mexico have engaged in a number of bilateral trade disputes over the years. Although many of these have since been resolved, these disputes have the potential to significantly affect the economies of both countries. Examples of trade disputes include steel and aluminum tariffs, trade in sugar, country of origin labeling, dolphin-safe tuna labeling, and NAFTA trucking provisions. In this article, we examine these disputes in more detail and their possible impacts on businesses and consumers.
Section 232 and U.S. Tariffs on Steel and Aluminum Imports
In March of 2018, the United States imposed tariffs of 25% on imported steel and 15% on imported aluminum under Section 232 of the Trade Expansion Act of 1962. The stated justification for these tariffs was national security, as the Trump administration claimed that increased domestic production of these metals was necessary to reduce dependence on foreign suppliers. However, many observers criticized these tariffs as being more about protectionism than national security. These tariffs had a significant impact on Mexico, as the country is one of the largest suppliers of steel and aluminum to the United States. In response to the tariffs, Mexico imposed its own tariffs on a number of U.S. products, including pork, apples, potatoes, and cheeses.
The United States and Mexico reached an agreement in May of 2019 to lift the tariffs on steel and aluminum in exchange for Mexico agreeing to take steps to combat illegal immigration from Central America. This agreement was seen as a victory for both countries, as it avoided a potential trade war and allowed each country to focus on other areas of disagreement.
The United States and Mexico have a long history of disputes over the sugar trade. The most recent dispute began in 2014, when the United States accused Mexico of unfairly subsidizing its sugar exports. As a result of these subsidies, the United States claimed that Mexican sugar was being sold below cost in the American market. In response to these claims, the United States imposed tariffs of up to 80% on Mexican sugar imports.
These tariffs had a significant impact on the Mexican economy, as the country is one of the world’s largest producers and exporters of sugar. The United States and Mexico reached an agreement in December of 2014 to suspend the tariffs on sugar in exchange for Mexico agreeing to limit its sugar exports to the United States.
Country of Origin Labeling
The United States and Mexico have also been engaged in a dispute over country of origin labeling (COOL) for beef and pork products. COOL is a labeling requirement that requires retailers to inform consumers about the country of origin of certain food products. The United States first implemented COOL for beef and pork products in 2008, and Mexico challenged the legality of these requirements at the World Trade Organization (WTO).
The WTO ruled in favor of Mexico, stating that the United States’ COOL requirements were a violation of international trade rules. As a result of this ruling, the United States was required to repeal its COOL requirements for beef and pork products. However, the United States appealed this ruling, and the WTO ruled in favor of the United States in 2015.
This dispute is still ongoing, as Mexico has filed a new complaint with the WTO claiming that the United States’ COOL requirements for beef and pork products are still a violation of international trade rules.
Dolphin-Safe Tuna Labeling
The United States and Mexico have also been engaged in a dispute over dolphin-safe tuna labeling. Dolphin-safe tuna is tuna that has been caught in a way that does not harm dolphins. The United States requires that all tuna products imported into the country be labeled as dolphin-safe, regardless of whether they are actually dolphin-safe. Mexico challenged this requirement at the WTO, and the WTO ruled in favor of Mexico.
As a result of this ruling, the United States was required to change its labeling requirements for tuna products imported from Mexico. In 2017, a WTO arbitrator determined that Mexico was entitled to levy trade restrictions on imports from the United States worth $163.2 million per year. Then, in 2019, the WTO reported that the United States was complying in bringing its dolphin-safe requirements for tuna into WTO compliance. In sum, it took more than a decade to resolve this matter.
NAFTA Trucking Provisions
The United States and Mexico have also been engaged in a dispute over the trucking provisions of the North American Free Trade Agreement (NAFTA). The trucking provisions of NAFTA allow Mexican trucks to operate in the United States, provided that they meet certain safety requirements.
In 2015, the United States imposed new safety requirements on Mexican trucks that were not required by NAFTA. As a result of these new requirements, Mexico claimed that the United States was effectively banning Mexican trucks from operating in the United States.
Mexico brought this claim to the WTO, and the WTO ruled in favor of Mexico. As a result of this ruling, the United States was required to change its trucking regulations to bring them into compliance with WTO rules.
In 2015, the Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA) announced that Mexican motor carriers would be allowed to conduct long-haul, cross-border trucking services in the United States. Although the International Brotherhood of Teamsters immediately filed a lawsuit seeking to halt FMCSA’s move, in 2017 the U.S. Ninth Circuit Court of Appeals dismissed the lawsuit, stating that FMCSA has the law-given discretion to grant operating authority to Mexican carriers.
The Impact of Bilateral Trade Disputes
The United States and Mexico have a long history of bilateral trade disputes. These disputes have ranged from tariffs on sugar and steel to country of origin labeling for beef and pork products. Over the years, these disputes have affected consumers, businesses, and even the trucking industry. In most cases, the cost of certain goods increased significantly enough to cause economic hardship and a loss of profits, putting pressure on the governments of both countries to seek resolution.
While the United States and Mexico have been able to resolve some of their bilateral trade disputes, others continue to linger on. It is clear to many that the two countries need to find a way to work together more closely to resolve their differences and avoid future trade disputes. Otherwise, the economic relationship between the two countries—not to mention business owners and consumers—will continue to suffer the consequences rather than prosper from the centuries-long U.S.-Mexico relationship.