1. NAFTA at 20 Years US Mexico Chamber of Commerce November 7, 2013 Animesh Ghoshal DePaul University

2. North America as a Competitor on the Global Stage Mexico in 1982 Integration of US and Mexican Economies Concerns about China Other issues (demography, employment, border crossing, security, education) Changes in Mexico

3. Economic Situation in Mexico, 1982 Inflation58.9% Foreign Reserves, in months of imports0.58 Debt service, as percentage of exports31% Trade, as percentage of GDP25.6 GDP, constant 2000 US dollars$374 billion Currency change against US dollar-67%

4. Integration of US and Mexican Economies Trade: Amount and Quality Investment Tourism Population Movement

5. Integration of US and Mexican Economies: GDP Growth Rates

6. Growth of Trade, 1985-2012

7. US Imports from Canada, China, Mexico

8. Quality of Trade: US “Vertical Integration” with Major Trading Partners Exports ($b) Imports ($b) Total Trade ($b) Percentage of US Content in Imports Canada29232461625% China110425535 4% Mexico21627749340% Japan 70146216 2% EU-27265380645 2%

9. Intra-Industry Trade: Biggest US imports and exports with Mexico, 2012 (billions of dollars)

10. Intra-Industry Trade: Biggest US imports and exports with China, 2012 (billions of dollars)

11. Growth in Bilateral Investment: US FDI in Mexico

12. Growth in Bilateral Investment: Mexican FDI in US

13. FDI Flows in Mexico, 1992-2011

14. Overall FDI Inflows into Mexico Dependence on US has actually decreased since advent of NAFTA FDI inflows in 2011: Total, from OECD: $19.6 billion US: $10.6 b Spain: $3.3 b Netherlands: $1.5 b Switzerland: $1.2 b

15. Mexican Concerns about Competition from China

16. In some industries, Mexican exports displaced by China

17. In others, no evidence of displacement

18. In Some Industries, China’s Share Growing, but Mexico’s Share Growing Too

19. Mexican Concerns about Competition from China (cont) China joined WTO in 2001 Faced reduced trade barriers (MFN) Very low labor costs In 2003, hourly labor cost in China $0.62, in Mexico $5.06 Many maquiladoras shut down or moved to China, but… Labor costs in China have risen rapidly In 2008, hourly labor cost in China $1.36 in Mexico $6.12 Since 2008, wages in China have increased 10-20 percent a year

20. “Labor Arbitrage” and Manufacturing Costs Manufacturing Outsourcing Cost Index (Percentage of US Cost) 200520102015 (forecast) Mexico898386 China799098 India788283

21. Production Advantages, China vs. Mexico Advantages of Producing in ChinaAdvantages of Producing in Mexico Lower labor costs (but rising rapidly)Closer to US—lower transportation cost Larger domestic marketEasier communication and supervision Better infrastructureShorter time to market in US Stronger supply chain (some products)Greater flexibility for production changes Managed (perhaps undervalued) currency Better protection of intellectual property State assistance (sometimes)More transparent regulation

22. Role of Distance: Travel Time to Northern US

23. Role of Distance: Travel Time to Major World Ports

24. Other Issues Tourism Demography Education: major factor in long term growth

25. Tourism and Population Movement Tourism: Mexico #1 destination for US residents in 2011 Mexico 20.1m, Canada 11.6m, UK 2.4m Mexico #2 source of tourists to US in 2011 Canada 21.3m, Mexico 13.5m, UK 2.4m Population Movement and Social Networks US: 12 m residents born in Mexico, 32 m of Mexican origin Mexico: I m American residents (20% of total)

26. US: Ageing Population: Demographic Challenge

27. Mexico: Younger Population “Demographic Window”

28. Education: Average Years of Schooling for Population over 15

29. Productivity Trends: Changes in Gaps with US, 1980-2011, Annual Average (Source: OECD)

30. Mexico’s Economy Has Some Problems Extremely high dependence on US, with 80% of exports going to one country Trade agreements with many countries, but rules of origin make export diversification difficult Lack of competition in many industries Concerns about violence

31. But Mexico today very different from Mexico of the past Composition of Exports Macroeconomic Conditions Inflation Exchange Rate Debt Service Interest Rate

32. Composition of Mexico’s Exports, 1982 and 2010

33. Economic Situation in Mexico, 1982 and 2011 19822011 Inflation58.9%3.4% Foreign reserves, in months of imports 0.584.38 Debt service as % of exports 31%6% Trade as % of GDP25.6%64.7% GDP, constant 2000 US $$374 billion$722 billion

34. Macroeconomic Conditions in 2012, US and Mexico USMexico GDP Growth2.2%4.0% Inflation (CPI)2.1%4.1% Current Account Balance (% of GDP) -3.0%-0.6% Budget Balance (% of GDP)-7.0%-2.4% Interest Rate (10 year Govt.Bonds)1.82%7.75% Currency Change Against Euro-5.5%-1.7%