Mexico's Economy: Facts, Opportunites, Challenges
Fewer Mexicans Immigrate to America Than Vice Versa
Mexico is quickly becoming an emerging market heavy-weight. Its economic output, as measured by gross domestic product was $2.2 trillion in 2015. This was much less than its primary trading partner, the United States ($17.9 trillion) but larger than its other NAFTA partner, Canada ($1.6 trillion). Mexico's geographic size is equivalent to Saudi Arabia. But it supports five times as many people while exporting one-fourth of the oil.
Mexico's 2015 GDP growth rate was 2.3 percent. That's better than the 2.1 percent rate in 2014, and the 1.4 percent rate in 2013. Its standard of living, as measured by GDP per capita, was $18,500, less than half that of its other NAFTA partners. (Source: CIA Factbook)
Mexico's Economy Depends on Exports
Mexico is the 12th largest exporter in the world. In 2015, 80 percent of its exports went to the United States. Trade with the United States and Canada has tripled since the implementation of the North American Free Trade Agreement in 1994. More than 90 percent of Mexico's trade is under 12 free trade agreements with over 40 countries.
Mexico's largest trade partners are the United States (48 percent), China (16.6 percent), and Japan (4.4 percent). Other trade partners are Guatemala, Honduras, El Salvador, and the European Union. 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 #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 nearly three million barrels per day.
This is less than Canada, Iran, or Iraq but more than other big exporters such as Kuwait, Brazil, or Nigeria. (Source: "Senores, Start Your Engines," The Economist, November 24, 2012. "Mexico's Economy," CIA World Factbook.)
Mexico imports machinery for metalworking and agriculture. It also imports electrical equipment, automobile and aircraft parts, and steel mill products. (Source: CIA World Factbook.)
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. (Source: "Mexico, the New China," The New York Times, January 26, 2013.)
Mexico has 44 free trade agreements. That means any company that manufactures there has duty-free access to 60 percent of the world GDP. International trade (exports plus imports) equals 66 percent of the country's GDP. That's much higher than Brazil (26 percent) or even China (42 percent). (Source: "Open for Business," The Economist , March 12, 2016.)
Mexico has grown from the ninth to the seventh largest auto manufacturer in the world between 2010 and 2015.
It's the fourth largest auto exporter. It recently surpassed Japan as the second-largest U.S. auto parts exporter. (Source: Dudley Althaus and William Boston, "Trade Pacts Give Mexico an Edge," Wall Street Journal, March 18, 2015.)
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.
Part of the change includes a new President, Enrique Peña Nieto. In December 2013, Congress passed his bill, proposed in August, to partly privatize Mexico's oil industry to attract the foreign direct investment needed. Foreign oil companies could share in any profits from oil recovered from new wells. If the terms are right, this would allow exploration of Mexico's rich deep-water oil fields and its natural gas reserves.
Foreign investors will help extract more oil only if they can share in the revenue. (Source: "Behind Mexico's Oil Revolution," The Wall Street Journal, December 19, 2013.)
Privatization was resisted by prior administrations.The country's oil monopoly, Pemex, was state-owned, and 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 had been treating Pemex like a cash cow, trying only to maximize short-term profit. As a result, production fell 25 percent in the last ten years. The CEO was replaced by Congress in February 2016. The new CEO must become competitive in the face of lower oil prices.
President Peña Nieto is also looking to privatize electricity generation, lowering its price. Investors also like Mexico's involvement in NAFTA, the independence of its central bank, and its fiscal restraint. (Source: "Mexico Vows to Overhaul Oil and Gas Industries," The Wall Street Journal, August 13, 2013.)
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 percent of mobile phones, 80 percent of home phone lines, and 70 percent of broadband.
This lack of competition hampers growth. Mobile-phone penetration in Mexico is only 85 percent, about the same as Iraq. A fast broadband connection costs double, the same as in Chile. Other near-monopolies include Bimbo (bread), Cemex (cement), and Televisa (television).
Helu's position is threatened by Mexico's new policies of deregulating the telecommunications industry. America company AT&T is entering the market thanks to lowered tariffs.
Challenges to Mexico's Economy
The biggest challenge is getting rid of the drug cartels. President Peña Nieto's focus is to increase security spending from 1.5 percent to 5 percent of GDP -- the level that worked for Colombia. He would draft 40,000 soldiers into the police departments. (Source: "A Glimmer of Hope," The Economist, November 24, 2012.)
President Peña Nieto replaced President Felipe Calderón-Hinojosa. He initiated a controversial crackdown on organized crime and corrupt local police. It created an all-out war. That increased violence including retaliation to civilians by the cartels. Many Mexicans blamed Calderon for upsetting the cartels and increasing 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 take over local governments. Calderon cracked down to improve Mexico's economic competitiveness. He also took steps to provide better healthcare, uphold legal institutions, and protect the environment.
President Pena has promised to upgrade schools, roads, and health care services, and modernize the tax system and labor laws. His biggest challenge is the southern part of the country. It doesn't benefit from the maquiladora program on the northern border. For more, see NAFTA Pros and Cons.
Surprising Facts About Mexico and Immigration
Many Americans worry about illegal immigration from Mexico. The country is actually gaining immigrants itself. The legal foreign-born population doubled from 2000 - 2010. It's now one 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. (Source: "For Migrants, New Land of Opportunity Is Mexico," The New York Times, September 21, 2013.)
Furthermore, the country's birth rate is trending down. It may soon be below that of the United States. The violence associated with drug cartels continues, as Mexico is a major underground trade route to U.S. addicts. However, the country's murder rate is slowly falling for the first time in five years. (Source: "After Darkness, Dawn," The Economist, November 24, 2012.)