Mexico’s Contribution to U.S. Trade Imbalance

March 7, 2017

Merchandise trade between the United States and its southern neighbor has become a central policy priority of the Trump administration. U.S. companies have been accused of exporting jobs to Mexico where labor is cheaper. A second complaint is that Mexico allegedly engages in unfair trade practices, and a third is that income earned by legal and illegal Mexicans in the United States is being sent back to Mexico rather than recirculating within the U.S. economy.

America’s trade imbalance with Mexico does not comprise a substantial part of its net deficit to all countries. The U.S. bilateral merchandise deficit with Mexico last year equaled $63.2 billion, slightly less than 7.5% of the total. The deficits with China and Europe in 2016 were 5.5 times and 2.6 times greater than that generated by commerce with Mexico. It’s conceptually ill-conceived to run trade policy through the prism of each separate bilateral imbalance, because a country’s global surplus or deficit is not determined by what foreign countries are doing but rather by the mismatch between domestic savings and investment.

However, even if one sets aside that argument, the more obvious observation is that Mexico is not responsible for a meaningful share of the U.S. deficit as noted above. Moreover, while there was a deficit of $63.2 billion with Mexico in 2016, there was also a surplus of $28.8 billion with economies in South and Central America. The deficit with countries south of the border that share the Western Hemisphere with the United States was just $34.4 billion or less than 5% of the total. Furthermore, the U.S./Mexican trade imbalance is shrinking.

The U.S. deficit with Mexico in January 2017 was only $3.95 billion, some 10% less than in December and 25% less than the average monthly imbalance during 2016. Moreover, the U.S. and Mexico engage in healthy, two-way commerce, by which I refer to the proximity of the import/export ratio to unity. In the latest two reported months, U.S. exports to Mexico equaled 82% of its imports from there. The comparable ratios involved in bilateral trade with China and Japan were 27% and 47%. Also, a full sixth of U.S. exports in January were shipped to Mexico versus export shares to China and Japan of just 8.6% and 4.3%, respectively.

On the merit of these data, steps taken by the United States that might elicit retaliatory actions by the Mexican government would create considerable collateral damage in the United States. If imposed U.S. trade barriers weakened the Mexican economy, which after all would be the intent from Trump’s standpoint that every deal produces a winner and a loser, not two winners, that too would come around to hurt the U.S. economy by depressing Mexican demand for U.S. exports as a second order effect.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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