US trade deficit with Mexico: More than meets the eye

By: | Issue #658 | at 09:58 AM | Channel(s): International Trade  

The United States-Mexico relationship has been rocked since Donald Trump became president, first over the issue of the border wall and then over issues of trade.

Mexican President Enrique Pena Nieto canceled a meeting in Washington with President Donald Trump early on in the administration because he refused to discuss paying for a border wall between the two countries. Later, the two leaders later had what was described as a friendly discussion, but Trump on the very same day doubled down on his attacks against the imbalance in US-Mexico trade.

“Mexico has taken advantage of the US for long enough,” the president tweeted. “Massive trade deficits & little help on the very weak border, must change, NOW!”

U.S. Trade Representative Robert Lighthizer has made it clear that administration policy is to go after bilateral trade deficits and that deficit reduction is a major U.S. goal in the NAFTA renegotiation. Lighthizer recently told a Washington think tank audience that trade deficits are a symptom of a lack of fairness in trading rules.

US Trade Representative Robert Lighthizer
US Trade Representative Robert Lighthizer

“It’s reasonable to ask,” he said, “whether what we pay and what we receive in these agreements are roughly equivalent.” Lighthizer reiterated that position at the close of the third round of NAFTA talks on September 27 when he said, “We continue to push for ways that will reduce the U.S. trade deficit.” Trading Services

Drilling down into the numbers shows that U.S. trade with Mexico is not as lopsided as Trump would have people believe. Bilateral trade in goods and services was estimated at $579.7 billion in 2016, according to numbers released by the United States Trade Representative. Of that, total US exports to Mexico totaled to $262.0 billion, while Mexican imports to the United States were $317.6 billion—leaving the US with a $55.6 billion overall trade deficit.

But in the category of services, the U.S. ran a surplus. Trade in services between the two countries was $54.5 billion in 2016, with the U.S. exporting $31.1 billion in services and taking in $23.5 billion from Mexico, for a U.S. surplus of $7.6 billion.

Mexico is the second largest export market for the U.S., supporting 1.2 million jobs in the U.S., according to the Department of Commerce, and its third largest overall trading partner. Since signing NAFTA in 1994, U.S. exports to Mexico have increased 468%, accounting for nearly 16% of all U.S. exports.

Besides, the numbers don’t necessarily tell the entire story. In the case of auto parts, the US imported $340 billion over a five-year period, but, of that, $136 billion were exported back to Mexico, where they were used to manufacture cars that are sold back to the U.S.

Since the advent of NAFTA, U.S. automakers have created a continental supply chain, with Canada and Mexico providing parts and some assembly, a fact that has become important to the competitiveness of the U.S. auto industry.

According to a report released last year by the Center for Automotive Research (CAR), “It is…highly likely that the automotive firms in the United States and Canada are part of a supply chain that includes Mexico as either a source of inputs, destination of their output, or both.”

Also, key to a competitive North American auto industry is the growing population of skilled labor that Mexico offers. While the extreme differential in labor costs may not last forever—automotive assembly compensation is currently 80 percent lower in Mexico than in the U.S., according to CAR—wages aren’t the only factor that attracts manufacturing investments to Mexico.

“Mexico offers workforce development and training programs and other aggressive development incentives,” noted the CAR report, including “multiple coordinated strategies” at the federal level, a factor that sets it apart from its neighbor to the north.

Peter Buxbaum's avatar

American Journal of Transportation

More on Peter Buxbaum
Peter Buxbaum has been writing about international trade and transportation, as well as security, defense, technology, and foreign policy, for over 20 years. Besides contributing to the AJOT, Buxbaum's work has appeared in such leading publications as [em]Fortune, Forbes, Chief Executive, Computerworld, and Jane's Defence Weekly[/em]. He was educated at Columbia University.