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ARTICLE OF THE WEEK
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U.S., Mexico Deepen Economic Ties - Part 1
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By Jesus Cañas, Roberto Coronado and Robert W. Gilmer
Federal Reserve Bank of Dallas |
 Globalization
has become a widely used term to describe the forces knitting economies
closer together. For the United States and Mexico, it’s just a
new word for an old phenomenon. The two economies—one highly
advanced, the other still developing—have for decades been on a
path toward ever greater integration.
The
U.S. is Mexico’s top trading partner by far. About 88 percent of
Mexico’s exports go to the U.S., and 56 percent of its imports
come from U.S. sources. At the same time, 14 percent of U.S. exports go
to Mexico and 11 percent of imports come across the Rio Grande. Perhaps
more important, U.S.–Mexico trade has grown exponentially since
the signing of the North American Free Trade Agreement (NAFTA), growing
from $89.5 billion in 1993 to $275.3 billion in 2004, a threefold
increase.
Americans
are the biggest investors in Mexico, further evidence of NAFTA pulling
the two countries together. Since 1994, the U.S. has accounted for 62
percent of all foreign direct investment in Mexico.
 The
two economies are also linked by the flow of Mexican immigrants to the
U.S. and the remittances they send back home to their families. The
approximately 10 million Mexican nationals who reside in the U.S. sent
back an estimated $20 billion in 2005, an amount equivalent to 3
percent of Mexico’s GDP.
The
U.S. and Mexican economies have become increasingly synchronized. The
coincident indexes for economic activity for both countries show that
the degree of synchronization since 1993 is about a third higher than
it was in 1980–93. The two economies now march almost in
lockstep. [1]
The
facts of U.S.–Mexico economic interaction are clear, but new
questions continue to arise. How is China affecting trade between the
countries? What has been the impact of NAFTA on Mexico’s economic
growth, specifically on regional wages? Is the maquiladora industry
tied to the U.S. business cycle? Are remittances reducing poverty
levels in Mexico? What skills does the typical Mexican immigrant bring
to the U.S.?
In
November 2005, researchers from the U.S. and Mexico gathered in Houston
to address these issues at a Dallas Fed conference, “The U.S. and
Mexico: Are We Still Connected?” The presentations pointed to
even greater interdependence for the two economies, a conclusion in
sync with the worldwide trend toward increasing globalization.
U.S.–Mexico Trade
Mexico
opened its economy to trade in two important steps: joining the General
Agreement on Tariffs and Trade in 1985 and signing NAFTA in 1994.
Reducing trade barriers represented an epochal change in Mexican
policy, and it has brought a sustained increase in the inflow of
foreign direct investment, made the country more competitive and
insulated it against external shocks.
How
have two decades of market opening impacted Mexicans’ pay? Daniel
Chiquiar, a researcher from Banco de México, considered the role
of trade in changing the distribution of wages in Mexico.
 Several
economic geography models have noted that Mexico’s trade
liberalization had dramatic impacts that differed greatly by region,
especially in manufacturing. The traditional Mexico City factory belt,
located in the middle of the country, was optimal for a closed economy.
After 1985, central Mexico lost at least some of its advantage. Led by
maquiladora expansion, manufacturing employment and wages grew sharply
in the states close to the U.S., and these gains came at the expense of
the center of the country (Chart 1). See more
About the Authors
Cañas and Coronado are assistant economists at
the El Paso Branch of the Federal Reserve Bank of Dallas. Gilmer is a
vice president at the Federal Reserve Bank of Dallas.
Notes
1. From 1980 to 1993, the correlation coefficient between the
coincident indexes of economic activity in the U.S. and Mexico was
0.73. This same measure increased to 0.96 between 1993 and 2004.
2. “U.S.–Mexico Trade: Are We Still Connected?” by
Jesus Cañas and Roberto Coronado, Federal Reserve Bank of Dallas
Business Frontier, Issue 3, 2004.
About Southwest Economy
Southwest Economy is published six times annually by
the Federal Reserve Bank of Dallas. The views expressed are those of
the authors and should not be attributed to the Federal Reserve Bank of
Dallas or the Federal Reserve System.
The point of view is strictly from the author and does not represent
the vision on any of the author institutions relationships.
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