29 April 2019

President Trump has repeatedly threatened to close the border between the United States and Mexico, alleging that unrestrained illegal immigration from Mexico and Central America pose a threat to US security. The daily cross-border trade between the two countries is estimated at US$1.7 billion.  Any stopping or even hindering of this would have major consequences for both economies. The financial impact on Mexico would be devastating and comparatively much more significant than the impact on the US economy.

In 2015, Mexican exports to the United States totaled US$295 billion. That year, the US goods trade deficit with Mexico was $US58 billion. In January 2019, Mexico reported a record-high trade surplus of $1.8 billion in December 2018, due mainly to a 9% increase in exports to the United States.

The most important US imports from Mexico in 2015 were: Vehicles US$74 billion (passenger cars, vehicle parts); Electrical Machinery US$63 billion (flat screen TVs, electrical generators, monitors); Machinery US$49 billion; Crude Oil US$14 billion; Medical Instruments US$12 billion; Fresh Vegetables US$4.8 billion; Fresh Fruits US$4.3 billion; Alcoholic Beverages US$2.7 billion: Rubber US$2.4 billion; Snack Foods US$1.7 billion; and, Processed Fruits and Vegetables US$1.4 billion.

As a result of the implementation of the North American Free Trade Agreement in 1994 (NAFTA), now replaced by the US-Mexico-Canada Agreement (USMCA), complex integrated supply chains have developed between Mexico and the United States, particularly in the auto industry. Mexico is the largest source of foreign components for US auto manufacturers. With the industry operating with low inventories on just-in-time delivery schedules, timely and reliable supply is critical to production and sales goals. Components may even traverse the border several times during production.

Mexico’s exports of fruits and vegetables would also heavily suffer. According to the Fresh Produce Association of the Americas, a trade association representing importers and distributors of Mexican produce, Mexico supplies more than 60% of all fresh produce sold in the United States during the winter and early spring. Mexico is the US’s largest foreign source of food.

Not only would Mexican exports be drastically curtailed or blocked, Mexican truckers would also lose business. For example, trucking accounts for 69% of agricultural trade across the border.

The impact of a border closing would be felt in the north near the US border. As a result of US investment and reliance on Mexican suppliers, the majority of manufacturing is concentrated near the northern border. These Mexican “maquiladoras” have generally been focused on meeting the requirements of US importers. Raw materials are often imported from the US and not produced in Mexico, and generally only American manufacturing technologies are used. Therefore, finding alternative domestic or foreign markets will be difficult.

Since implementation of NAFTA, Mexico became more and more economically dependent on the United States.  Mexican industrial potential grew increasingly dependent on American market. This caused a negative impact on the Mexican economy, which was not significant while Mexico was still the leader in exports to the United States. As a result of the economic growth of China, Chinese manufacturers gradually replaced many Mexican exports and pushed Mexico to third place among exporters to the United States. Dependence on the US market has also caused deeper technological marginalization of Mexico as compared to the United States and has hindered the emergence of competitive Mexican goods.  Any reduction or slowdown in Mexican exports to the United States would therefore be devastating for the Mexican economy.

Business and Investment Relevance

Should President Trump implement his threat on Mexico, there will be a highly negative economic impact on Mexican manufacturers, particularly in the industrial clusters located in the North, bordering the United States. Moreover, this event will generate anti-US feelings in the Mexican population and the (already difficult) social and cultural relationship between the two countries will soon deteriorate. On a broader level, a harsh dispute between Mexico and United States might also produce negative consequences in the Organization of American States.

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