The U.S. & Mexico: interdependence growing – history and culture influence development; emerging ties broken; strengthening relations; migration and environment will affect future relations; includes related articles on maquiladoras

The U.S. & Mexico: interdependence growing – history and culture influence development; emerging ties broken; strengthening relations; migration and environment will affect future relations; includes related articles on maquiladoras and Mexican dependence on oil revenues – U.S. Dept. of Agriculture, Economic Research Service report

Ann Hillberg Seitzinger

In many respects the U.S. and Mexico have little in common besides their border. Per capita gross domestic product (GDP) in the U.S. is 10 times Mexico’s. Anglo-Saxon traditions played a predominant role in shaping U.S. institutions, while Mexico is a mixture of native and Spanish cultures. The differences combined with simple geography have bound Mexico and the U.S. in a relationship of economic interdependence that has not always been harmonious. Today the differences are also creating opportunities for greater economic integration and interdependence.

In a five-part series, Agricultural Outlook examines U.S.-Mexico relations. Part I provides a general overview of the history and the current state of economic relations. Parts II through V take a closer look at agricultural relations between the two countries, emphasizing trade, labor and investment, environmental issues, and the pending North American Free Trade Agreement.

History & Culture

Influence Development

Even before England and Spain colonized North America, characteristics of the native populations set the future U.S. and Mexico on different historical paths. The nomadic tribes encountered by English settlers were ultimately displaced, allowing English culture to be transplanted to its North American colonies relatively intact. By contrast, the relatively settled native civilizations conquered by the Spanish in the region that became Mexico made for a difficult but inevitable mixing of cultures.

Differences between the English and Spanish cultures further separated the course of development. England was accustomed to rule by a limited monarchy with an active parliament, and separation of church and state affairs. Spain was ruled by an absolute monarchy with strong church ties. England led the industrial revolution, while in Spain the industrial revolution matured slowly and the economic structure remained largely feudal into the 20th century.

The new U.S. republic set out on a course of political stability and relatively widely distributed economic wealth. Mexico, on the other hand, was left in complete disarray after revolution set it free from Spain in 1821. A vicious cycle of political instability and economic weakness plagued the country, making it ripe for exploitation.

Emerging Ties Broken

Even though the independent Mexico opened its territory for settlement to a much greater extent than Spain had allowed, sentiments of manifest destiny in the U.S. led to conflict. The U.S. encouraged secession by Texas from Mexico as a prelude to anexation in 1845, and in 1846 declared war against a much weaker Mexico. The treaty that ended the war gave the U.S. half of Mexico’s territory, including California on the eve of the gold rush.

When Porfirio Diaz took power in 1876, Mexico embarked on a period of political stability and economic growth that lasted until 1910. Diaz eased restrictions on land ownership and subsoil resource use in order to attract foreign investment. Geography dictated that U.S. investors would respond the most readily. But Diaz’ dictatorship was also extremely repressive and failed to distribute the benefits of economic growth widely. This was a major factor contributing to a second Mexican revolution beginning in 1910.

After initial improvement with increased economic ties, U.S.- Mexico Mexico relations began to deteriorate again, as a series of Mexican presidents pushed for varying degrees of political and economic reform in a nationalistic environmental which threatened U.S. investments. The U.S. responded with periodic diplomatic and military intervention in attempts to influence Mexican politics until Franklin Roosevelt introduced his Good Neighbor Policy. Signalling a new era of U.S.-Mexican relations was a negotiated settlement in 1938 for compensation of U.S. oil companies adversely affected by nationalization of the Mexican oil industry.

Strengthening Relations

World War II brought increased U.S.-Mexican cooperation, as Mexico supported the U.S. war effort by supplying U.S. factories with raw materials and labor. Relations continued relatively smoothly through the 1960’s even though Mexico distanced itself from Cold War politics.

Mexico’s economic policies encouraged U.S. investment to support stable Mexican industrialization. The Mexican government’s goal was to free Mexico from reliance on producing a few raw materials for export whole importing virtually all other goods. Public investment in communications and transportation, as well as targeted subsidies and trade protection, encouraged substitution of domestically produced goods for imported products.

In the early 1970’s, however, increasing government intervention in Mexico’s private sector and growing protectionism soured the business climate for foreign investors. An economic crisis was averted by oil and natural gas discoveries in the latter half of the decade.

The resulting optimism for Mexico’s future generated large-scale development projects financed through foreign borrowing. At the same time, the U.S. found its fortunes also heavily tied to oil, but with a different result. The combination of economic growth in Mexico and foreign oil dependency of the U.S. gave Mexico a new measure of independence.

Mexico’s new-found confidence collapsed in the early 1980’s. Lower world oil prices and high interest rates revealed the excesses of previous decades’ deficit financing and foreign borrowing. The International Monetary Fund negotiated a multibillion-dollar rescue package to address Mexico’s growing debt problem.

But even as Mexico’s vulnerability to macroeconomic developments in the U.S. became evident, an increased reliance of the U.S. on Mexico was also apparent. As a result of Mexico’s economic crisis, merchandise imports from the U.S. declined by $8.7 billion, or 48 percent, between 1981 and 1983. The drop in Mexican imports has been estimated as equivalent to a loss of 220,000 U.S. jobs, concentrated in the manufacturing sector.

Recent dramatic changes in Mexican policy have refueled economic recovery and poised the country for further integration with the U.S. The Mexican government has committed the economy to market-orieted reforms, including reductions in trade barriers, sale of public enterprises, and deregulation.

Success is evidenced by rising output and investment, and declining inflation. In addition, the ratios of debt and the government deficit to Mexico’s gross domestic product fell. Mexico’s new openness has led it into negotiations with the U.S. and Canada for a North American Free Trade Agreement (NAFTA).

Asymmetry Remains,

Ties Strenghthen

In the past, the asymmetric relationship arising from divergent histories has most often been reflected in patterns of U.S.-Mexican trade and investment. More recently, differences involving environmental protection and migration are also emerging.

The asymmetric in trade between the U.S. and Mexico is most apparent in the patterns of exports and imports. Even though Mexico is the third-most-important export market and the fourth-most-important source of imports to he U.S., only 5 percent of U.S. exports flow to Mexico and only 4 percent of U.S. imports originate in Mexico. On the other hand, 78 percent of Mexican exports are destined for the U.S., and 74 percent of Mexican imports originate in the U.S.

Two-way trade between the U.S. and Mexico is dominated by machinery and transport equipment. In addition, petroleum and petroleum products flow Mexico to the U.S., while chemicals and plastic are exported to Mexico to the U.S. Food-stuffs make up approximately 10 percent of each country’s trade with the other.

Changes in the composition of U.S.-Mexican trade signal increasing integration with the U.S. economy. Declines in Mexican imports of consumption goods and capital have been accompanied by a rise in imports of intermediate or component goods – to 72 percent of total Mexican imports. Correspondingly, Mexican exports of manufactured goods have risen to 48 percent of total exports, while the proportions of agricultural and oil exports have fallen.

Behind these statistics lies a shift toward “production sharing” between the U.S. and Mexico. With production sharing, component parts produced in the U.S. are exported to Mexico, where they are further processed and often re-exported to the U.S. – hence the increase in Mexican imports of intermediate goods and in Mexican exports of manufactured goods.

The arrangement makes more efficient use of Mexican labor and U.S. capital and production processes. In the automobile industry, for example, production sharing has led to assembly of engines in Mexico employing U.S. components and technology. The engines are then exported back to the U.S. for final assembly into automobiles.

Mexico also depends on the U.S. for more than two-thirds of its direct foreign investment. U.S. direct investment in Mexico doubled between 1987 and 1990, but still accounts for only 2 percent of total U.S. foreign investment.

U.S. investment is heavily concentrated in manufacturing, and closely associated with the production sharing process. As far back as 1979, more than half of U.S. manufacturing imports from Mexico were intracompany or related-party sales, and this proportion is growing.

U.S. investment is also aimed at taking advantage of expansion in Latin American markets resulting from economic and population growth. The U.S. economy becomes more closely integrated with Mexico’s as U.S. capital invested in Mexico facilitates the combination of U.S. technology and components with Mexican labor to supply both the U.S. and Latin American markets.

Migration & Environment

Will Affect Future Relations

U.S.-Mexican relations in the 1990’s will be defined in part by the way in which the two countries deal with migration and environmental issues. Mexicans emigrate to the U.S. primarily for economic reasons, but benefits accrue in both economies.

Mexicans employed in the U.S. relieve unemployment pressures within Mexico, as well as strengthening Mexico’s balance of payments by sending wages home. While of far less significance to the U.S. economy, migrating workers from Mexico provide labor to firms that would not otherwise attract workers at the given wage.

Recent estimates of legal immigration from Mexico to the U.S. range between 50,000 and 75,000 persons each year. The flow of undocumented Mexicans remaining in the U.S. each year is estimated at 50,000-160,000 persons. The undocumented workers are most often males, and 80 percent are less than 30 years of age. Their employment is scattered across each sector of the economy – agriculture (17 percent), manufacturing (35 percent), construction (11 percent), and services (37 percent) – although their total numbers amount to less than 3 percent of the U.S. labor force.

Until 1986, the degree of Mexico’s labor market interdependence with the U.S. fluctuated with U.S. domestic economic conditions, but generally grew. This growth was fostered by population and economic pressures in Mexico and the tacit consent of the U.S., which declared employment as illegal for undocumented workers but not for their employers.

Responding to labor union pressure, the U.S. has since passed legislation making it illegal to employ undocumented workers, but the impact of the legislation is not yet clear. However, the existence of a 2,000-mile common border and Mexican objections to the new U.S. legislation suggest a need for greater cooperation to address the migration issue.

Mexico’s less stringent environmental regulations and inadequate resources for enforcement have led to water quality problems with cross-border implications. Examples include the salinity of the Colorado River and inadequate treatment of wastewater before release into the Rio Grande and the Tia Juana River. Serious air pollution problems exist in the population centers at San Diego, California-Tijuana, and at El Paso, Texas-Ciudad Juarez. Improper disposal of hazardous wastes by both U.S. and Mexican entities on the Mexican side of the border is causing further damage.

One example of institutional cooperation on surface water quality is the International Boundary and Water Commission, which has operated on both sides of the border with U.S. and Mexican personnel since 1932. However, conflicting regulations in the four border states and Mexico have hampered efforts to settle on appropriate cooperative action on groundwater contamination and hazardous waste disposal. At the same time, environmental problems at the U.S.-Mexico border are making it clear that interdependence between the countries specially significant in this area.

The U.S. & Mexico – Key Statistics Show the Differences

U.S. Mexico

Population (millions) 248.2 84.5

Per capita GDP (US$) 20,756 2,375

Population in agriculture (percent) 2.5 27.6

Average age of population (years) 32.0 22.0

Education (years of schooling) 11.0 7.5

Arable land (million acres) 464.1 57.3

Maquiladoras – Production Sharing

At the Border

Maquiladoras are assembly plants specializing in production for export. Most are located in a special trade zone along the U.S.-Mexican border, where they are able to take advantage of special provisions in the U.S. tariff schedule and in Mexican industrial policy.

Component parts are shipped from the U.S. to Mexico for assembly, with the express intention of taking advantage of cheaper Mexican labor. When re-exported to the U.S., only the value added to the goods is subject to tariffs. For its part, Mexico allows the maquiladoras to import plant equipment duty-free and exempts them from domestic content rules and limitations on foreign ownership.

In exchange for Mexican concessions, the plants were required to locate at the border until 1972. Ninety percent still remain in this location. Since the establishment of maquiladoras in 1965, the number of plants has increased from 12 to 1,441 in 1988, when employment reached 390,000 and value added equaled $2.3 billion

During the same year, the maquiladoras provided 25 percent of Mexico’s manufactured exports on a value-added basis. Machinery and equipment account for 87 percent of Mexico’s value-added production, with parts for televisions and electrical and electronic equipment, office machines, and transportation equipment the primary outputs.

Studies of the maquiladoras have found that they incorporate more U.S. components than similar assembly plants located elsewhere. And by some estimates, an increased demand for U.S. components, together with the demand for servicing the imports and exports, has created more U.S. jobs than would have existed in the absence of the maquiladoras

For Mexico, the maquiladoras have undoubtedly provided jobs and foreign exchange. However, they have not lived up to expectations that the maquiladoras border region would become more firmly integrated with the Mexican economy, with greater social and economic benefits distributed among Mexican citizens.

Reducing Mexican

Dependence on Oil Revenues

Prior to the late 1960’s, Mexico was a net exporter of oil. During the late 1960’s and early 1970’s, however, the country’s demand outstripped supplies, and Mexico reverted to a net oil importer. Then, discoveries of vast oil resources in southern Mexico’s Tabasco-Campeche Basin in the late 1970’s returned Mexico to its earlier position as a net exporter of oil.

Crude oil exports increased more than 300 percent as production rose by 98 percent between 1977 and 1980. Dramatic increases in oil prices during this period sent export revenues skyrocketing. From $1 billion in 1977, Mexico’s petroleum export revenues rose to $10.4 billion in 1980.

However, the oil discoveries also led to concerns that Mexico might become too dependent on oil exports or on a single market for its export revenues. Of chief concern was its reliance on the U.S. as a major source of demand for Mexican oil.

As a result, PEMEX, the government entity which holds a monopoly over Mexico’s petroleum resources, was directed to curb production and exports beginning in 1980. Daily crude oil production was limited to 2.5-2.7 million barrels, and exports to approximately 50 percent of production. PEMEX could not sell more than half of Mexico’s oil exports to any individual country, nor could PEMEX supply more than 20 percent of a country’s oil imports. In addition, foreign exchange earnings from oil exports were limited to 50 percent of Mexico’s total foreign exchange earnings.

Mexico was successful in two of its goals. Production has been curtailed, and Mexico has successfully met the 50-percent limit on the share of total oil exports sold to a single market. Sales to the U.S. dropped from an average of over 80 percent in the late 1970’s to approximately 50 percent of total Mexican oil exports by 1981. Mexico has broadened its market, increasing shipments to Europe and Japan.

Achieving the goal of reduced reliance on oil exports for foreign exchange took longer. In 1981, oil trade accounted for 75 percent of Mexico’s total export revenues. Not until 1986 did this figure did below the 50-percent target.

COPYRIGHT 1991 U.S. Department of Agriculture

COPYRIGHT 2004 Gale Group