Chris Wilson on the Campbell Conversations

Feb 16, 2019

The new trade agreement between the United State, Mexico and Canada has been negotiated, but it still needs congressional approval. That will have to happen in a polarized political environment amidst an ongoing and bitter conflict over border security. This week, Grant Reeher talks with Chris Wilson, deputy director of the Mexico Institute at the Wilson Center in Washington D.C. 

Interview highlights

Reeher: I wanted to get a sense of the amount of trade that exists between the United States and Mexico. I think most of us know that it’s a lot, but let’s just start by trying to quantify it a bit. Roughly, what percentage of the U.S. gross domestic product is accounted for by trade with Mexico? And what percentage of the Mexican economy is accounted for by trade with the U.S.?

Wilson: I don’t have it exactly in GDP terms. For the United States, it would be a relatively small percentage of GDP, very small, actually. But in terms of our percentage of overall exports, we send about 15 percent of all of our exports to Mexico. Mexico’s our third-largest trading partner, behind only Canada and China. And there’s about a half billion dollars of trade a year between the United States and Mexico. That means that every day, there’s more than a billion dollars’ worth of goods moving back and forth across the U.S.-Mexico border. Every minute, there’s a million dollars of commerce between our two countries. We send more exports to Mexico than to all of the brick countries combined. So, if you add up what we export to Brazil, Russia, India and China, that still doesn’t add up to what we export to Mexico every year.

Reeher: And I imagine that the magnitude, relatively speaking, is greater for Mexico because they have a smaller economy than ours.

Wilson: It’s totally asymmetric in that sense. It’s very important for both countries, of course, but Mexico sends 80 percent of its exports to the United States. And Mexico is a very trade-dependent country, so, when you add up imports and exports and put them over GDP in Mexico, you get somewhere around two-thirds of their economy, that represents. Now, that’s not exactly a fair way to do it. It doesn’t actually mean that two-thirds of all economic activity in Mexico are related to trade, but a huge chunk is. This is an economy that depends on trade and, within that, depends very heavily on the U.S. market.

Reeher: I would think that the economic effects of trade between the two countries, they spread out into the two countries’ economies in far-reaching ways that may not be readily apparent at first, thinking about the supplies that are needed in sectors and industries that produce other things, for example. So, give us a sense of the downstream effects there.

Wilson: That’s just it. The U.S.-Mexico relationship is not just big, but it’s deep and it’s rather unique in that sense. Our relationship with Canada is similar, but only with neighbors that are so close together do you have such deep supply-chain connections. And so, actually half of U.S.-Mexico trade is trading intermediate goods. Those are the inputs that go to support manufacturing or other production processes on the other side of the border. So, we have parts and materials that are actually moving back and forth across the border six or seven times, in some cases, as a product is being made. … It’s really deep supply-chain connections that make our countries economic partners much more than economic competitors. There is competition. Of course, there’s competition to attract investments and for specific aspects of production. But on the bigger scale, we really are economic partners because we’re building things together that get sold on the global market.

Reeher: Has this trade, so far, been affected by any of the political controversies over the border?

Wilson: Very little. We saw, actually, in 2017, trade grew again between the two countries. 2018 numbers are incomplete still but looking like they’re still a large and growing amount of U.S.-Mexico trade. The trade deficit really hasn’t changed very much, which is another one of the things broadened by the political spotlight by the Trump administration and the Trump campaign. It’s very business as usual in many ways. I’d say that the one place where we do see some impact is not in the trade numbers itself but in some investments that maybe companies are sitting on. They’re saying, “There’s this cloud of uncertainty sort of hanging over the Mexican economy over this North American relationship, and we’d love to go and build that next factory, but maybe we’ll just wait a year or two and see where things stand before we decide to pull the trigger on that.”

Reeher: Let’s talk about this new trade deal, then. Canada, the United States and Mexico signed a new trade deal last November. It’s called the United States-Canada-Mexico Agreement or USMCA. … It would replace the North American Free Trade Agreement, which is better known as NAFTA. My understanding is the deal still needs to be ratified by the three governments, which means, in the United States, Congress is still going to have to approve it. So, let’s get some basics here again. First, broadly, everybody talks about NAFTA, but what did it establish and change?

Wilson: NAFTA was one of the first U.S. free trade agreements. And so, what it did is it brought tariffs – those are the taxes on imports into the countries, all three countries in this case – it brought them to zero. So, it basically said, if you want to import a car into the United States from Mexico, you don’t have to pay a special tax on that. If you want to import an apple from Washington into Mexico, you don’t have to pay a tax on that. It also had some protections for investors in order to try to stimulate investments in these supply chains we were talking about, factories on both sides of the border. And actually, the interesting thing, sort of side note, is Mexican investment in the Unites States, while still smaller than U.S. investment in Mexico, has been growing at very high rates recently. But that’s what it was. It was a trade and investment agreement. I think it was sold as much more than that. It was sold as a ticket to the first world for Mexico. It was sold as a solution to an immigration challenge in the United States. And if we judge it on those terms, it was definitely a failure – it didn’t do either of those things – but if we judge it as a trade and investment agreement designed to spur both of those, well, it did just that.

Reeher: Now, as President Trump said, that [NAFTA] was a “bad deal” for the United States. And candidates like Bernie Sanders have pretty negative things to say about it as well from the labor front, which we already talked about. Was it a bad deal? Is it possible just to evaluate it that simply? Did the United States come off on the short end of this?

Wilson: I don’t think so. There’s two ways where you can judge trade agreements, and I think we get mixed up between them. One is the trade deficit. It’s seeing this as a pie that can’t grow and saying, “Who gets a bigger slice of the pie?” And the United States had a trade surplus with Mexico before NAFTA. Now, we have a small, in global terms, trade deficit with Mexico. But I think the real point is that you can grow the pie, and you can make things better on both sides. There’s not a winner or loser in a trade agreement. Otherwise, neither side would ever agree to one. We have two winners in a trade agreement, and in my mind, that is what happened with NAFTA. Now, that said, it is really important to say that are distributional impacts as a result of trade agreements. There are more winners than losers in the United States, but there have been losers in the United States, and I don’t think that we as a country have done enough to deal with that fact. So, there are factories that went out of business as a result of NAFTA. There were factories in Mexico that went out of business as a result of NAFTA as well because they had a challenge, trouble competing with strong U.S. companies. But, in certain industries where labor costs are very important, there was a movement of certain factories to Mexico. And so, the question is what do you do with those workers? … There’s something that’s called Trade Adjustment Assistance that was put in place to try to help some of these workers when NAFTA was voted on, but the reality is it’s been too small of a program and too ineffective of a program, and you have too many people who are left behind, not only by trade – because trade is a small piece of it – but especially also by technological change. … It’s not about recreating the new economy, the economy of the 1950s; it’s about reskilling the American workforce so that it can succeed in the 21st century. And, unfortunately, we’ve done a pretty lousy job of that across the United States. And therefore, there’s a lot of resistance to NAFTA and to globalization in general.

Reeher: Let’s take the new agreement, then, the USMCA, United States-Mexico-Canada Agreement. What are the most significant changes that that made to NAFTA?

Wilson: Very few. There are some. There are some important ones, but I think, actually, the starting point is recognizing that this is 90 percent NAFTA. This is basically the same agreement as before, a revised NAFTA. The biggest changes were in the auto sector, in particular. There’re special rules they call rules of origin, essentially, what does it take for a vehicle to be considered made in North America and get that tariff-free access to the other countries. Under the original NAFTA, a vehicle had to be 62.5 percent made in North America. … Now, it’s up to 75 percent, so it’s a stricter rule of origin. It means you can use less parts and materials from Asia, from Europe, as you’re assembling cars in North America. And the other piece of that was there was also 40 to 45 percent, depending on what kind of vehicle, test we made with wages, workers earning wages of $16/hour or higher. Those essentially are workers in the United States or Canada, not line workers in Mexico. Line workers in Mexico make maybe $8/day, $10/day, not $16/hour. Some of the engineers and the managers in Mexico might meet that threshold, but these are the two biggest changes that could actually move production networks, change the way that we build things in North America. There was also a modernization of the agreement. NAFTA was negotiated 25 years ago before we all had smartphones in our pockets, before we shopped on Amazon, before we did business across the internet, sending goods and services back and forth across national airs. And so, there’s a lot of just basic housekeeping that needed to be done to modernize an agreement that was, as we said, one of the first trade agreements that the United States got into.

Reeher: Is it a better deal now for the United States? Is this just a better deal?

Wilson: No. It’s half NAFTA 2.0 and half NAFTA 0.8. We took two steps forward, two steps back. So, where did we end up? I don’t know how you average those two things out. … This is better NAFTA in certain ways for the three countries, but there’re also some things where there clearly are retro-sessions and things that I don’t actually believe will be a benefit to any of the three economies. Again, though, I have to say this is basically NAFTA. This is basically still the same agreement. This sort of interdependence that has been built up, the integration of the North American production platforms, the factories working together across borders, all that will remain. So, more than anything, this became a political promise that required a political solution, and the economics of it are not all that different.

Reeher: Was it worth all the conflict?

Wilson: I’m just happy that we’re, for now, on the other side and that things haven’t gone really negatively, that it hasn’t all gone south. But we still have to ratify the agreement, and in the United States, in this very polarized political environment in which we live, that is going to be no easy task. Especially now that the Democrats have the House, this is something that’s going to require support from both Republicans and Democrats – not an easy thing to accomplish.

Reeher: I need to make sure that people understand we’re talking on Friday morning. There’s been an agreement on the budget, which is going to provide about a quarter of the funding for the border wall or barrier, whatever it is that we’re going to call it, that the president wanted. That seems to have come together. The president is also talking now about declaring an emergency, declaring a crisis and using executive authority to get the rest of the money that he wants. So, that’s where I think we are on Friday morning. Let me just ask you a question here. Do you think that the changes in border security that are likely to come at least from what is in the deal that’s been agreed … that’s really going to affect the trade between the two countries?

Wilson: There’s actually some stuff in the agreement that will impact trade positively between the two countries. So, aside from all this stuff that’s been really politically charged, this debate about whether we do or do not build additional fencing or barrier along the U.S.-Mexico border, in the bill, there’s also funding to modernize ports of entry in California and some other places. There’s funding to hire, in addition, approximately 600 custom officers. So, these are not the border patrol officers that work to stop unauthorized migration between the points of entry, between the official crossing points, but those who facilitate travel and ensure our security at official border crossings. So, there’s some positive stuff in there. The wall, it’s really from an economic perspective and a trade perspective, the only thing it is is a symbol. It’s a symbol of division between the United States and Mexico that makes U.S.-Mexico relations more complicated to manage. And that can have some long-term impacts on trade volumes, on the ability to negotiate an agreement, to have an ongoing dialogue to solve day-to-day problems. But it’s not something that’s going to have a big impact on the type of trade that we’ve been talking about.

Reeher: Do you think it’ll have an impact on labor supply in the United States?

Wilson: In that sense, I agree with you that immigration can have an impact on labor dynamics and labor supply in the United States. I don’t believe that building an extra 100 miles of wall along the U.S.-Mexico border, or even if you build more than that, would have a significant impact on overall levels of migration. I just don’t think that it can be that effective. And there are a few other pieces of the bill that offer investments in technology. There are things that can be done to improve border security. What we really need, though, if you want to deal with that broader migration issue, is comprehensive immigration reform. And you can mean that from a Republican perspective or a Democratic perspective, but we need full-on overall of our immigration system. We need to find a way to do workplace enforcement. It’s not a border issue. What I’m trying to say is that solving the migration problem is not something you’re really going to do at the border, and definitely not only at the border.

Reeher: Bottom-line question on the border: is the border situation as bad as the president portrays it to be?

Wilson: In my opinion, there’s absolutely no crisis at the border, no security crisis, I should say, at the border. There are some humanitarian crises going on. And what’s really happened is back in the ’90s to the early 2000s, we had a huge wave of Mexican migrants that were seeking economic opportunity in the United States. The situation has changed dramatically. For the last several years, it’s no longer a majority of Mexicans that are crossing the border. Rather, they’re Central Americans that are crossing the U.S.-Mexico border. And they’re not just trying to escape poverty; they’re also fleeing violence in their home countries. So, they’re very motivated to get to the United States in a way that will get them across a wall if they need to get across a wall. But they’re also seeking asylum, which means that they can show up at the ports of entry and turn themselves in. They can sneak across the border and turn themselves in to border control. They’re not trying to sneak past. They’re trying to use U.S. law and international law as a way to gain access to the United States. And so, this is a totally different challenge that we’re facing today. And unfortunately, I don’t believe that we’re addressing it in that way. I think that we’re treating as if it was the problem of several decades ago. And it is true that more border security over the past couple of decades has had some level of impact on the number of Mexican migrants trying to move for economic reasons to the United States.

Reeher: From a distance, the country [Mexico] seems to be having trouble in terms of governability, in terms of corruption, in terms of the drug cartels, violence. … Can you give me an idea of has the situation become much worse in Mexico? Just how bad is the problem?

Wilson: Very serious challenge in terms of having the rule of law in Mexico. That has to do with drug trafficking, but it also has to do with just the fact that Mexico’s still in nascent democracy.  It wasn’t until 2000 that an opposition candidate won the presidency in Mexico. So, it’s a young democracy facing challenges that a lot of young democracies face. And then, the drug issue and the money comes from the United States to support that in Mexico feeds into corruption. And so, the challenge is therefore much bigger. That said, let me just leave it on a little bit of a positive note. Mexico is also a modern country with a growing middle class. It’s all of those things at once.