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 Date:4/21/2009

 

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Restricting Chinese imports to bolster Mexican industry might be the only way to ebb the escalating crisis in the South, says Alan Tonelson.

Earth to President Obama: Long after your meeting with President Calderon, and long after the Summit of the Americas ends, you and the nation are going to have a big and probably worsening Mexico problem on your hands. Drug-related violence will continue and likely escalate on both sides of the border. And illegal Mexican immigrants will keep streaming into the United States (especially if you achieve “Comprehensive Immigration Reform” – aka amnesty).

Order in parts of Mexico has crumbled so dramatically that a Defense Department report last year warned that “failed state” status is approaching. And the chances in the foreseeable future of Mexico’s economy improving enough to ease these problems by creating more Mexican jobs are zilch, because the slumping U.S. economy will keep shrinking the market for Mexican exports to its biggest foreign market by far.

Luckily, Mr. President, a surprisingly easy answer is staring you right in the face – as it did with your predecessor. But it’s going to require you to think a little bit about U.S. trade policy, rather than rely on ever emptier cliches about globalization and trade. And it’s certainly going to require you to abandon the delusion that the fix has anything to do with “improving” the largely symbolic labor and environmental provisions of NAFTA (however important they have been to so many critics of the pact).

The best way to help Mexico remains in effect giving the country’s exporters (including the U.S. and other foreign interests that own so much of its manufacturing) some of that huge share of the U.S. market that these producers have lost recently to China. For Mexicans have been the prime foreign victim of Washington’s longstanding bipartisan failure to set any kind of priorities in U.S. trade policy.

After all, the whole idea for NAFTA to begin with was that America needed to do something serious to stabilize its troubled southern neighbor. Mexico’s problems eventually become America’s problems, U.S. leaders told us over and over again. No other third world country is more important to America. And this analysis was right on the money.

Trouble was, no sooner did NAFTA go into effect, in 1994, than the Clinton administration and its Republican trade policy allies began pushing new trade deals with a host of other developing countries and regions. Their economies, however, depended heavily on producing the same kinds of goods for export to more affluent countries. And the widest open developing world market for these goods was the United States.

The results of this Come One, Come All approach to third world trade? In the United States, imports and trade deficits exploded – setting the stage for the debt and consumption bubble that burst starting in the summer of 2007. Overall U.S. imports from the third world, soared, too. But by the mid-1990s, a disturbing trend appeared. Some developing countries – particularly China – not only began breaking away from the pack, but actually taking market share from the laggards.

Ruthless Chinese mercantilism explains much of China’s out-performance. So does China’s superior record of encouraging productivity gains by building excellent infrastructure systems and developing outstanding schools. From the U.S. standpoint, however, the most important effect by far was that trade gains intended for Mexico for urgent strategic reasons were heading someplace else.

The data make this blunder by U.S. leaders painfully clear. From 1994 – when NAFTA went into effect – annual U.S. goods imports from Mexico rose by 345 percent. That’s faster than the 218 percent rate for U.S. goods imports as a whole. But annual U.S. goods imports from China rose by a jaw-dropping 775 percent during this period – more than twice as fast.

And there’s no “law of small numbers” effect distorting the figures. U.S. goods annual imports from China in 1994 were fully 80 percent of the level of U.S. goods imports from Mexico. By 2008, U.S. goods imports from Mexico were only 64 percent the level of U.S. goods imports from China. Moreover, in terms of job creation, Mexico’s performance has been even less impressive, since recently it has been propped up significantly by elevated oil prices.

In fact, when it comes to manufactures trade with the United States, China has left Mexico in the dust. From 1997 to 2008 (a time-frame needed to ensure apples to apples comparisons), Mexican annual manufactures exports to the United States increased by just under 130 percent – to $163.26 billion. But on an annual basis, China’s manufactures exports to the United States jumped by nearly 450 percent, or some three and a half times faster.

Even more striking have been changes in the auto parts industry. This sector has been absolutely central to the story of NAFTA. A major rationale for the agreement concerned the benefits that were promised for U.S.-owned automotive firms that were struggling even then with protectionism overseas and subsidized foreign competition at home. Freeing up trade with Mexico, Detroit was told (and came to completely believe), would enable the U.S. automotive sector to cut costs dramatically and compete more successfully around the world by enabling low-end production work to be sent to super low-cost Mexico. Detroit’s U.S. workforce would be freed up to do the higher end, more lucrative production jobs (as well as the associated brain work), and this new North American industry could take back market share in its own backyard and even win some outside the hemisphere.

Nothing of the kind transpired. Non-North American automotive imports kept expanding their inroads into the United States. The Big Three never became a big exporter of new vehicles outside the hemisphere. In fact, the vast majority of Detroit vehicles produced or assembled in Mexico were sold right back to the United States, fueling the overall U.S. trade deficit. Yet Mexico attracted so much in the way of vehicle and parts production that as early as March, 1992, a BusinessWeek cover heralded the emergence of a “Detroit South.”

Fast forward to today. In 2008, the United States imported $20.93 billion in auto parts (including tires) from Mexico – just over double the 1997 figure. But the United States imported $8.11 billion worth of these products from China – 18 times the 1997 figure.

And the rejoinder that both countries’ exports keep growing, so that everyone (abroad, anyway) should be happy, is no comfort to Mexico. Third world countries need all the help – and jobs and income – they can get, and they need it yesterday, if only because their populations keep growing and their development starts from such a low base. Yet Mexican manufacturing export growth to the United States has been losing momentum to Chinese growth for at least a decade. Since 1997, the growth rate of Mexico’s manufactures exports to the United States has exceeded that of China’s only once – in 1999. Since 2000, Mexico has achieved double-digit growth rates on this front only once and has actually seen export decreases in two of those years. China’s manufactures exports to the United States have risen continuously, and recorded double-digit growth six times.

The bottom line: The Mexican government is now predicting the economy will shrink by 2.8 percent this year, the year-on-year January contraction was a stunning 9 percent, industrial production was down 11.8 percent year on year in February, and unemployment is surging. Does anyone seriously think that all the lost Mexican job and income and growth opportunities revealed by the trade data have not fueled illegal immigration and drug violence over the years? And that Mexico’s worsening prospects will not intensify both crises?

Since the Mexican economy can’t fill this opportunity gap and other developed countries won’t the U.S. market is Mexico’s – and Washington’s – only realistic hope for preventing disaster. But income-earning opportunities for Mexico must not further undermine America’s own productive base and working families. Someone else needs to take the hit, and who better than China – whose export success owes so largely to predatory trade practices?

Along with taking measures to overcome America’s broader trade and under-production crisis, and decreasing overall U.S. imports in the process, Washington will have to restrict imports from China (and possibly other non-hemispheric sources) and encourage their producers to start moving to Mexico (and possibly other struggling Western hemisphere countries). Many World Trade Organization members won’t like this. But for years they’ve had their chance to participate in a cooperative effort to rebalance U.S. and thus global trade flows and stabilize the world economy, for everyone’s benefit. They’ve completely blown it. So their views should no longer matter – unless a new U.S. unilateralism finally gives them religion.

In his stirring Inaugural Address, President Obama blamed the economic crisis partly on the nation’s “collective failure to make hard choices.” At long last setting sensible and realistic priorities is anything but rocket science conceptually and even administratively. But not only will America’s trade partners go ballistic. So will powerful outsourcing multinational business interests). Obama’s willingness to make this type of hard political choice in trade policy could well make or break Mexico’s future. And his own presidency and country won’t escape the consequences.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C.. A contributor to the Council’s AmericanEconomicAlert.org website, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). Megan Chidester, a Research Assistant at the Council, contributed to this article’s preparation. The views expressed here are their own.