Mexico and the U.S.: Good Fences Won't Make Good Neighbors

It's no secret that China's economy is booming, and that the large, quickly-industrializing country is becoming a serious contender as a new global power. China's sheer population numbers, as well as its technological innovations, make it the obvious focus of the U.S. public and private sector alike. In fact, China's appearance in the news is almost tiresome, with the prominent fear-mongering becoming almost commonplace.

However true and valid these claims may be, they do tend to draw attention away from other areas of the world experiencing rapid growth. When we think of countries that are developing new capabilities and have rapidly expanding economies, we often think of China, India, South Korea, and the like. Interestingly, such impressions can turn attention away from other emerging significant players. As a recent piece in The Economist pointed out, "America needs to look again at its increasingly important neighbour:" Mexico.

Within the past few days, The Economist released a cluster of articles (here, here, and here) in a clear push to bring attention to this rapidly-growing nation. At the risk of generalizing too liberally, the impression of Mexico among Americans is less than optimal. There seems to be an unspoken consensus that our southern neighbor is, more or less, just a collection of smoke-filled cities racked by drug wars and poverty. When it comes to Mexico, the reactionary thoughts are border security and smuggling crackdowns; especially within the Republican Party, the only policy that even relates to Mexico involves keeping them out. In 2009, in the midst of an American recession, the swine flu epidemic, and continuous bloodshed from organized crime, the Pentagon predicted that if things kept on this way, Mexico would become a "failed state." At the time, the news came as no surprise.

With the quickened pace of progress today, however, Americans need to continually update their perceptions and stereotypes. As we have seen time and again, globalization, technology, and international trade can turn everything around for a country in a matter of just a few years. Since this grim projection three years ago, Mexico has started to turn things around, positioning itself to become one of the top 10 economies in the world by the end of the decade. At the moment, it is already ranked slightly ahead of South Korea in terms of GDP. Latin America's second-largest economy occupies a strong place in its region, yet it will continue to remain in the shadow of South American powerhouse, Brazil. Right? Wrong. Surprisingly, according to The Economist's statistics, Mexico's growth outpaced Brazil's last year, and it is projected to grow twice as fast this year (4%). Though there is nothing to indicate it will "pass" Brazil in the near future, Mexico is certainly working hard to change its current position in the world.

A brief overview of the growing private sector, foreign direct investment, and industry in this country depicts a Mexico yet unknown to many Americans. Though the U.S. doesn't exactly have an economic giant lying dormant just beneath its southern border, there is every indication that this country will become even more important for American markets. To begin, the Mexican auto industry seems to provide some of the most shocking facts. Though largely constituted by foreign companies, this sector of production has seen enormous growth recently. In Cuernavaca, there is a Japanese-run Nissan factory "the size of a village," which will soon be churning out thousands of New York taxicabs. "About 80% of the parts in each car are made in Mexico," and the factories largely rely on local suppliers, which helps provide protection from fluctuating foreign currencies. Audi is also constructing a $1.3 million plant in Puebla, and Mazda and Honda are getting on the bandwagon as well. Amazingly, Mexico will be the fourth-largest auto producer in the world. Oil has also been a huge commodity in the Mexican economy, although the national monopoly is becoming a huge problem.

Mexico's pro-free trade attitude, sparked by NAFTA in 1994, has been very beneficial for the national economy. Today, Mexico boasts free trade deals with 44 different countries, and trade accounts for a larger part of its GDP than any other country. This aspect, however, has proven to be a double-edged sword. Its economic success is thus quite vulnerable to the ills or well-being of its trade partners. In 2007-2008, "thanks to its wide-open economy and high exposure to the United States it suffered the steepest recession on the American mainland: in 2009 its economy shrank by 6%." Additionally, China's entry into the WTO ten years ago undercut some of Mexico's export industries. Still, however, free trade has allowed the country to become one of the most important exporters to the U.S. By 2018, experts predict that the U.S. will get more of its imports from its southern neighbor than from anywhere else (provided Mexico continues its progress). Also, China's extremely competitive production is beginning to lose its edge, which is allowing Mexico to reap more and more of the benefit. As Chinese currency appreciates, wages and prices increase. In a free market, this makes Mexican labor and goods comparatively more attractive to the international community.

Also, to destroy a common conception, net immigration across the border is zero. More and more people are going back into Mexico, and the economic outlook there continues to brighten. In light of this, immigration reform shouldn't mean higher walls or longer border waits. Rather, the facts indicate the necessity of a full overhaul of the system and of the general mentality behind it.

One of the biggest "buts" about all of this, however, is the fact that Mexico still has significant problems with cronyism, violence, and the remnants of instability. Unfortunately, much of these projections seem to be based on the hope that these problems will begin to disappear, and that newly-elected President Enrique Peña Nieto will achieve his goal of administrative transparency and 6% growth. Although the murder rate is down in this country, and many of the most dangerous cities are becoming substantially safer, there are still some factors that could encumber further growth. First, the telecommunication situation is lacking in Mexico, so communication is made a bit slower and more difficult. Also, there is a significant problem with unions and monopolization. In order to really boot his country into gear and reach the 6% growth rate, President Nieto will have to break the back of the concentrated monopolies in several industries. Rich tycoons--specifically in the energy sector--are quite comfortable controlling their sectors of the economy. Though these measures will not be popular among the heads of these companies, promotion of competition is the only way that Mexico can rid itself of the problems of monopoly. Additionally, the nationalized oil company, Pemex, has been nearly sucked dry of its finances by the former Mexican governments. Lastly, due to past volatility in its economy, the banking and credit situation is less than optimal. Banks tend to charge 25% interest rates, and demand huge amounts in collateral. Clearly, this situation and lack of confidence will, as the article noted, tie the hands of Mexican businesses and discourage future ventures.

Still, the situation in Mexico is significantly better than many Americans believe or even would admit. With Chinese prices rising, Mexico has an amazing opportunity to sell its goods to its Northern neighbor, and thus strengthen the mutually-beneficial relationship. Its sheer proximity to the U.S. puts it at a great advantage, because goods on trucks can arrive in a matter of hours. In contrast, Chinese goods have to travel across an entire ocean, and one statistic equated a day in transit with a 0.6% - 2.3% tariff. Moreover, the number of skilled workers in Mexico is rising, and it apparently turns out more engineers than Germany (in terms of sheer numbers).

So, what would be the consequences of a stronger, more competitive neighbor? For one, trade would be greatly facilitated, and the quality of goods traveling across the border would be higher. Perhaps there would also be a stronger trade agreement, which would make the North American continent an even more powerful economic force. Although the U.S. will remain a highly attractive business environment, Mexico's cheaper labor and free trade policy will undoubtedly bring in more foreign ventures. Whatever happens, the U.S. will certainly have to change its policies and attitude toward Mexico. If the country continues to grow--which will be Americans' better interest--the U.S. can't continue to turn its back and try to keep illegal immigrants from hopping borders. If it has a significant economic power cropping up right next door, immigration, border, and trade reform will all be in order. This will likely be an extremely touchy issue, with crime still occurring and drugs, guns, and people constantly being smuggled, but there must be a restructuring of the system. Only through this will both nations elevate each others' economic markets, and perhaps work to solve one of the biggest problems within North America.

In the next week or so, President Obama will meet with President Nieta to discuss future opportunities and potential cooperation between the two countries. This will certainly be something to watch, because it will be the first of hopefully many steps toward a repositioning of this vital trade relationship.