Is Mexico the next China?

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The long history of trade between Mexico and the US goes back well over a century. As the two countries entered a new age thanks to trade agreements and a shifting of economic resources, the outlook for some is that Mexico could become the new China in terms of becoming a true economic powerhouse.

Such talk is not so farfetched when you consider that not so long ago China was roughly in the same position as Mexico with millions of people working low wage jobs in a stagnant economy. The difference was the opening up of economic freedom in China over the past three decades which has propelled this sleeping giant into a world economic power that is even rivaling the US in many ways. 

However, can Mexico enjoy the same road to success as China in terms of boosting its economy through trade? There are many factors that will need to come into play for that to occur, but there is little doubt that much of the foundation for success is already present in Mexico.

According to the last full year of statistics which was 2013 published on the website of Office of the United States Trade Representative, The US exported approximately $226 billion worth of goods while importing $280 billion which resulted in a trade deficit of about $54 billion for the year. However, the US does enjoy about a $12 billion trade advantage in terms of services, where the US was able to export roughly $27 billion in terms of services in 2012, the latest year that we have statistics.

The NAFTA Treaty was arguably the most important political agreement between the US, Canada and Mexico in the 20th century, allowing all three economic powers to work together and compliment each other’s strengths in terms of goods and services.

There are numerous reasons why Mexico has been called the “next China” when it comes to US trade, especially considering the history of the two countries and the unique relationship that has been experienced over the years.

NAFTA: There is little doubt that the North American Free Trade Agreement which is now nearly two decades old has promoted a very healthy relationship between the US and Mexico. While it can be argued that the trade deficit has increased, the more onerous trade rules that existed in Mexico before NAFTA was signed have been expunged.

Natural Resources: Mexico has an abundance of inexpensive natural gas and oil that provides it with resources that many other countries need, especially the US. Plus, the 75 year old barrier to foreign investment in oil production was dropped in 2013, as reported By Joe Carroll and Bradley Olson on an article published on Bloomberg. This should lead to increased production over the next decade that will bring even more economic power to the country.

Costs: Overall, Mexican employees do not make the wages of their US counterparts and add to that favorable taxes and a business-friendly environment

Location: Being right across the border certainly helps the US when it comes to trade with Mexico over China. China is a considerable distance from the US which results in goods having to travel for weeks before arrival while in Mexico the delivery time is reduced considerably along with the costs. Plus, changes can be made much easier because of the short delivery time that makes Mexico even more attractive.

Productivity: According to as data published on The WSJ in an article by David Luhnow, studies have shown that Mexican workers are actually more productive than Chinese workers when it comes to manufacturing goods. When given the chance, Mexican workers have proven to be quite resourceful especially given the wages that they earn.

However, despite having many advantages, there are a few issues that Mexico will still need to face in order to rival China someday as an economic superpower.

Population: With a mere 117 million people, Mexico does not even have half the population of the US, let alone rival China or India who have well over a billion people within their respective borders. Population means power if you can employ them in factories and manufacturing facilities, so Mexico is not likely to rival China or India anytime in the near future. However, becoming the economic powerhouse south of the US is a much more obtainable goal as Brazil is currently the biggest rival of Mexico.

Government Control: Unlike China where the government is stable and has effective control of all the major economic sectors of the country, the history of the Mexican government is not nearly as successful. While Mexico City and the large urban areas in the country are under nominal control, there are widespread places especially along the border in which control has been less established. This lack of stability is a concern for many businesses moving into the region.

Organized Crime: Unlike the US where organized crime holds but a fraction of the power it did during the 1920s and early 1930s, Mexico still suffers from having larger, well organized crime syndicates that make it difficult to attract new businesses into the country. The weak rule of law is of no help to Mexico either which allows these crime syndicates to prosper. However, it must be noted that the number of homicides is down currently compared to recent years.

The potential is certainly there for Mexico to become a real economic powerhouse over the next ten to twenty years. The productivity of the Mexican worker, the close proximity to the United States, the natural resources available and the overall favorable conditions of being in the Western Hemisphere provide a solid platform for Mexico to become a very potent force in the world. However, there are major political and crime issues still within Mexico that will limit the overall economic potential of the country. Until such problems are solved by the rule of law which needs to extend to all parts of Mexico, fewer businesses will relocate to the country which slows overall growth. For Mexico, the chance to rival China may seem like wishful thinking, but it is certainly within their power to become the biggest economic force, save for the US, in the Western Hemisphere.