Growing Together: Economic Ties between the United States and Mexico



Christopher Wilson | Wilson Center, Mexico Institute

The impact of trade and globalization on the average American was a core issue in the 2016 U.S. presidential elections. President Trump won the election in part because he promised to address the sense of economic

insecurity many Americans feel. Along the way, Mexico came to symbolize much of the U.S. encounter with globalization. Given that Mexico is the United States’ second largest export market, third largest overall trading partner, and the top country of origin for immigrants living in the country, this is understandable. Nonetheless, with central elements of the U.S. economic relationship such as NAFTA currently the topic of intense debate and possibly up for renegotiation, it is more important than ever that policy makers and the public have a clear and up-to-date understanding of the U.S.-Mexico economic relationship.

Seeing those processes unfold, in the fall of 2016 the Mexico Institute launched this project, Growing Together: Economic Ties Between the United States and Mexico, which explores the bilateral economic relationship in detail to under- stand its nature and its impact on the United States. We commissioned original research on the employment impact of bilateral trade on the U.S. economy, performed original analysis using government and academic datasets, and undertook an extensive review of existing research relevant to the U.S.-Mexico economic relationship. The results of the study were first published in a series of electronic working papers and social media infographics during 2016, and are now published in revised form and with additional analysis in this report.

Our study concludes that the economic relationship with Mexico, though not without its challenges, provides concrete benefits, strengthening the competi- tiveness of American firms, creating jobs in the United States, and generating savings for the average American family. There is nonetheless significant space for improvement, which could come through a renegotiation of NAFTA, the strengthening of many of the other existing bilateral mechanisms for economic coordination—many of which fall under the U.S.-Mexico High Level Economic Dialogue—or through domestic programs in both Mexico and the United States, to ensure the citizens of both countries are fully prepared to successfully compete in the global economy. There is ample space for improvement, but there is also real risk as the two countries revisit and potentially revise some of the foundations of the bilateral economic relationship. It is precisely the fact that the current cooperative relationship provides significant benefits for so many Mexicans and Americans that makes a major revision of the relationship risky. Care must be taken to preserve existing benefits as efforts are made to expand them. Key to understanding these opportunities and risks is a clear understanding of the unique economic relationship the United States and Mexico have developed over the past several decades.

The United States and Mexico no longer simply sell finished products to one another. Instead, they build things together, using a regional system of manu- facturing production comprised of supply chains that crisscross the U.S.-Mexico border. This allows the two countries to effectively combine their individual comparative advantages into a highly competitive regional system, improving North America’s ability to compete on the global stage. In 2014, the most recent year for which this data is available, Mexican industries consumed $136 billion dollars in U.S. intermediate goods, and U.S. industries consumed $132 billion dollars’ worth of Mexican inputs. This is direct evidence of joint production taking place between the United States and Mexico on a massive scale.

Nearly five million U.S. jobs depend on trade with Mexico. Our economic model shows that if trade between the United States and Mexico were halted, 4.9 million Americans would be out of work. This is a net figure and includes jobs directly and indirectly tied to trade, meaning it takes into account three different ways that U.S. employment would be impacted if bilateral trade were to stop. First, it takes into account jobs currently supported by the production of goods for export that would be lost if we stopped trading with Mexico. Second, the model considers that some jobs would return to the United States to produce goods we currently import. Third, it accounts for jobs currently supported by the income individuals and companies save by having access to lower cost imports. Some of the net job gains associated with bilateral trade are in manufacturing, but the vast majority are actually in service sectors, including everything from finance to healthcare and retail. This is because the job gains associated with exports are more or less cancelled out by those lost through import competition (1 cancels out 2 in the list above), leaving the major win really coming from the third mechanism, the availability of more competitively priced inputs for U.S. business and better priced products for consumers. For example, if an American family saves $100 by buying a washing machine built in Mexico and uses that money to go to the movies, U.S.-Mexico trade is helping support the jobs of the ticket seller, movie theater manager, and maybe even Brad Pitt. The economic model we used, which is a version of the Purdue University GTAP model modi- fied and run by The Trade Partnership, cannot tell us the exact breakdown of such specific types of jobs supported by bilateral trade, but it can examine those types of impacts at the aggregate level across the U.S. economy.

Without doubt, the United States is in the process of an economic transformation, and middle class workers in the United States have endured a tough period over the last couple of decades. Real median household income, though up sharply over the last year, is still below its pre-recession high in 2007 and below the previous peak in 1999. Manufacturing workers have been particularly hard hit, with employment in the sector down 29 percent since 2000. Service sector employment, on the other hand, is up, which suggests the United States is going through a structural shift, largely driven by productivity improvements in manufacturing that allow more goods to be produced by fewer workers. Trade, though a much smaller driver than technology, pushes in the same direction, accelerating this structural shift toward higher-skilled service jobs. Researchers from Ball State University recently found that 87 percent of manufacturing job losses in the period from 2000 to 2010 were caused by productivity increases, while 13 percent were linked to trade. These transformations are positive for the overall economy, but clearly tough on those workers that have the skills to fill the jobs of yesterday rather than the jobs of tomorrow.

The United States has for many years administered Trade Adjustment Assistance in order to assist workers whose jobs and industries have faced increased import competition, but it is a small program with limited success. Given the size of the challenge to train and retrain the U.S. workforce so that it is prepared for the jobs of the 21st Century, a much broader, whole of government strategy is urgently needed. It is no longer sufficient to provide assistance to workers who have lost their jobs due to imports from other countries. Instead we need to face the fact that the structural shift in the U.S. economy requires an economic adjustment program, a more holistic take on smoothing the negative effects on American workers that takes into account the multiple dimensions of the transformation.

Mexican foreign direct investment in the United States has nearly doubled since 2007, and businesses supported by Mexican investment in the United States directly employ more than 123,000 workers. These investments impact all fifty states and include a diverse group of industries, from construction and mining to television and financial services. Grupo Bimbo, for example, which is the world’s largest baking company and is Mexican-owned, operates over 70 bakeries and employs 27,000 people in the United States, managing well-known brands like Sara Lee and Entenmann’s. Even the U.S. auto industry, which has been the subject of much attention for recent announcements of major investments

in Mexico, receives significant Mexican investment. Nemak, which supplies one-quarter of all light vehicles in the world with aluminum engine components, and Rassini, a top global producer of brakes and suspensions, run factories in Kentucky, Michigan, Ohio and Tennessee.

To be sure, there are times when firms close their factories in the United States and move to Mexico. However, there is strong evidence that investment by U.S. firms in Mexico is more often associated with job growth in their U.S. operations than with job losses. Theodore Moran and Lindsay Oldenski have analyzed U.S.-Mexico trade and investment data from 1990 to 2009, and find that on average a ten percent increase in employment at U.S. companies’ operations in Mexico leads to a 1.3 percent increase in the size of their workforce in the United States, a 1.7 percent increase in exports from the United States, and a 4.1 percent increase in U.S. research and design spending. There is also evidence that the jobs created in the U.S. due to this phenomenon require higher skill levels, reinforcing the need for worker training and re-training to benefit from this transition and qualify for these higher-paying positions.

At the core, the question is whether the United States and Mexico are better conceived as competitors or partners. Without doubt, there are some elements of the relationship that are zero-sum, but our profound ties, ranging from cross-border supply chains to migration to cooperation to prevent terrorist attacks, mean that at the deepest level the United States and Mexico truly are partners. Millions of American workers already benefit from the relationship. With the right approach by decision-makers on both sides of the border, those benefits can be expanded and extended to millions more. The United States and Mexico depend on each other more than ever for our economic well-being and competitiveness. We will sink or swim together in the global economy.

Growing Together- Economic Ties Between the United States and Mexico

To view the full report, click here.