Mexico's Economy Facts, Opportunities, and Challenges
More Americans Immigrate to Mexico Than Vice Versa
Mexico is an emerging market heavy-weight. In 2018, its gross domestic product was $2.6 trillion. This measurement uses purchasing power parity to account for exchange rate changes over time. It also adjusts for government rate manipulation. It's the best way to compare GDP between countries.
Mexico's output was much less than its primary trading partner, the United States. Its 2018 GDP was $20.5 trillion. But it was larger than its other North American Free Trade Agreement partner, Canada. Its GDP was only $1.9 trillion. Mexico's geographic size is equivalent to Saudi Arabia's. But it supports five times as many people while only exporting 25% of the oil.
Mexico's 2018 GDP growth rate was 2.2%. It's less than the U.S. rate of 2.9% but better than Canada's rate of 2.1%. Mexico's standard of living, as measured by GDP per capita, was $20,645. That compares to $62,518 for the United States and $49,936 for Canada.
Mexico's Economy Depends on Exports
Mexico is the 12th largest exporter in the world. In 2017, the United States received 79% of Mexico's exports. Trade with the United States and Canada has tripled since NAFTA's signing in 1994. More than 90% of Mexico's trade is under 12 free trade agreements. Mexico has agreements with 46 countries, more than any other nation. These trade agreements are a big reason for Mexico's success.
Mexico manufactures and exports the same amount of goods as the rest of Latin America combined. Foreign trade is a larger percentage of Mexico's economy than any other large country. Mexico's No. 1 export is manufactured products. It also exports silver, fruits, vegetables, coffee, and cotton.
Mexico is the world's eighth largest producer of oil, at almost 3 million barrels per day. This is less than Canada, Iran, or Iraq but more than other big exporters such as Kuwait, Brazil, or Nigeria.
Mexico imports machinery for metalworking and agriculture. It also imports electrical equipment, automobile and aircraft parts, and steel mill products. The chart below shows a breakdown of the top 10 exports:
Why Mexico Is Attractive to Investors
Mexico's economy and culture are changing. Until 2012, Mexico's economy underperformed Brazil's. Mexico is now a major manufacturing center for electronics. That includes most of the flat-screen TVs sold in the United States. It also makes medical devices and aerospace parts.
Mexico's trade agreements allow its manufacturers duty-free access to 60% of the world. That benefit attracts foreign factories.
International trade, which is exports plus imports, equals 77% of the country's GDP. That's much higher than Brazil’s 23% or even China’s 48%. Mexican companies have access to the U.S. market. They also share a common language with the rest of Latin America.
This emphasis on trade makes Mexico's companies globally competitive. Gruma is the world's largest tortilla maker. Bimbo is the largest bread maker since it acquired U.S. baker Sara Lee.
Between 2010 and 2015, Mexico grew from the ninth to the seventh largest auto manufacturer. It's the fourth largest auto exporter. It recently surpassed Japan as the second-largest U.S. auto parts exporter.
Part of the change includes a new president, Andrés Manuel López Obrador. He was elected on July 1, 2018, to a six-year term. He promised to end corruption, reduce violence, and address Mexico’s poverty.
AMLO, as he is called, promised to review contracts for oil exploration awarded to foreign firms. Mexico's oil industry needs foreign expertise and investment. In the last 14 years, oil production has dropped from 3.5 million to 1.9 million barrels per day. Its refineries are operating at 40% capacity.
At the same time, AMLO wants to invest $9.4 billion in the state-owned sector. He would build two new refineries and renovate six existing ones. He would award the state-owned oil monopoly, Pemex, $4 billion for exploration. He believes it would boost production to 2.5 million a day within two years.
The former president, Enrique Peña Nieto, awarded 100 contracts to partly privatize Mexico's oil industry. Peña Nieto also strengthened the automobile industry by making it easier for foreign companies to build auto plants. His Pact for Mexico was responsible for convincing Congress to pass 85 major reforms. It tore down monopolies, reformed education, and revamped tax laws. It even passed a new junk-food tax to combat Mexico’s diabetes epidemic.
Prior administrations resisted privatization. Pemex sent all its revenues to the federal government. As a result, about one-third of the government’s income is dependent on oil. Instead of investing in developing new fields, the government treated Pemex like a cash cow, trying only to maximize short-term profit. As a result, production fell 25% in the last 10 years. The CEO was replaced by the Mexican Congress in February 2016.
Mexico built up its infrastructure to enhance trade. That made Carlos Slim Helu, a Mexican telecom tycoon, the world's richest man in 2007. He retained that title until 2013 when Microsoft founder Bill Gates regained that position.
Helu owns three companies: América Móvil, Telmex, and Grupo Financiero Inbursa. They control 70% of mobile phones, 80% of home phone lines, and 70% of broadband. This lack of competition hampers growth. Mobile-phone penetration in Mexico is only 85%, about the same as Iraq. A fast broadband connection costs double, the same as in Chile.
Challenges to Mexico's Economy
The biggest challenge is getting rid of the drug cartels. President Peña Nieto increased security spending from 1.5% to 5% of GDP, the level that worked for Colombia.
Peña Nieto replaced President Felipe Calderón-Hinojosa. His controversial crackdown on organized crime created an all-out war. Cartel retaliated against civilians, who blamed Calderon for the increased violence.
Calderon had reason to be concerned. After Colombia's crackdown, many of its cocaine operations simply moved to Mexico. Without stringent controls, the cartels took over local governments. Calderon cracked down to improve Mexico's economic competitiveness.
Another challenge is the southern part of the country. It doesn't benefit from the maquiladora program on the northern border. An accounting of NAFTA pros and cons revealed that although 30% of Mexico’s labor is employed under maquiladora companies, their working conditions are substandard.
Surprising Facts About Mexico and Immigration
Many Americans worry about illegal immigration from Mexico. They support President Donald Trump's immigration policies. These include a wall on the border, stepped-up deportation, and restriction of asylum seekers.
But Mexico is actually gaining immigrants itself. Between 2000 and 2010, its legal foreign-born population doubled to 1 million total. Of these, 750,000 are Americans. As a result, more Americans have immigrated to Mexico over the past few years than vice-versa. Many are retirees who appreciate the lower cost of living.