The United States’ Deficit in Trade with Mexico

In July of 2017, a month before the beginning of the NAFTA renegotiation talks with Mexico and Canada, The US made a list of the priorities public that would be adhered to by its representatives during the course of deliberations. One of the most important goals that the United States would attempt to accomplish at the talks would be the reduction of its deficit in trade with Mexico.  Some politicians and economists, however, are undecided as to whether or not such a deficit is inherently a bad thing.

WHAT IS A TRADE DEFICIT?

Investopedia states that a “trade deficit is an economic measure of international trade in which a country’s imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets.”  While economic scholars such as Zhiyao Yu and Gary Clyde Hufbauer of the Peterson Institute for International Economics believe that it is things such as an expanding US economy that many times results in a larger deficit and is, hence, “really a good thing,” others believe that a deficit in the trade balance brings with it adverse consequences such as significant US job loss.

In the totality of its global trade in goods and services, during the last year, the United States ran an aggregate deficit in trade of approximately US $500 billion.  This was with all of its commercial partners combined.  The total value of goods shipped from the US to consumers overseas stood at about US $ 2.2 trillion, while imports into the US from foreign suppliers were valued at approximately US $2.7 trillion. The US’ largest deficit in commercial trade was with China.  While as of November of last year, the trade deficit with Mexico amounted to approximately US $58 billion, the US trade shortfall with China reached a value of approximately six times greater in excess of US $319 trillion.

THE US DEFICIT IN TRADE WITH MEXICO IS DIFFERENT FROM THE DEFICIT WITH CHINA

When the NAFTA came into effect in 1994, the United States ran a modest US $1.3 billion trade surplus its southern neighbor.  The following year the US began to experience annual trade deficits with Mexico. This was not because the United States was flooded at that time with Mexican imports, but was because the two countries’ international supply chains became more fully integrated to produce a diversity of products using both Mexican and US inputs.  These items would be for sale in both domestic and international markets.  In no other industry has this US-Mexican integration taken place more comprehensively than in the automotive sector.

Some public figures and economists assert that “without the auto industry the US trade deficit with Mexico would disappear,” and that a small commercial trade surplus might even exist.  In fact, this is an assertion that has also recently been made by the current US Commerce Secretary, Wilbur Ross.  For the auto industry, the US imports a high value of parts (intermediate goods) that are afterward incorporated into the final products that are then sold and utilized domestically, as well as in overseas markets.  A full 40% of goods sent to the United States by Mexico incorporate US content.  It is also noteworthy that vehicle parts that are utilized in the fabrication of North American produced vehicles make the trip across the border up to a “total of eight times,” prior to being worked into the final product. On the other hand, goods from China incorporate a meager 4% of US value into their production.

THE COMMERCIAL IMBALANCE COULD BE RECTIFIED BY TIGHTENED RULES OF ORIGIN

Some experts are of the opinion that a tightening of the rules of origin in the North American Free Trade Agreement, especially those related to the automotive industry, would result in a significant reduction in the US deficit in trade with Mexico.   The NAFTA rules of origin for the automotive industry stipulate to which parts they exactly apply.  Expanding these rules by making them cover more intermediate vehicle products (items that are incorporated into the finished automobile) would greatly reduce the foreign trade imbalance that currently exists between the Mexico and the United States.  As a result of tightening the rules of origin in the industry, Mexico would tend to source more auto parts from US suppliers than is currently the case. In addition to diminishing the trade deficit, have the effect of creating more jobs in the auto industry in the United States.

An additional modification that would have to be put into effect to reduce the deficit in trade with Mexico in the auto industry is through a reformulation of the idea of “substantial transformation.”    Under the rules having to do with “substantial transformation,” a country can consider a product from outside of North America to be of NAFTA origin if it has had significant value-added to it in one of the North American Free Trade Agreement partner countries.  This creates a mean by which items that come from nations outside of North America can be substantially converted in order to receive duty-free status.    Changing and tightening the rules of origin as to what constitutes a substantially transformed product of non-NAFTA imported items can also reduce the commercial imbalance that exists between Mexico and the United States in the automotive industry.

ABOVE AND BEYOND THE NAFTA

Above and beyond the NAFTA, what can be done to reduce the United States’ overall deficit in trade with Mexico and other nations?  Some experts note that levying duties and tariffs on items from countries with which the US has significant commercial trade imbalances is the solution, while others are of that opinion that the way to shrink these deficits is to negotiate improved access for US products in overseas markets.  This is especially the case with China. In other words, the building of barriers to commerce is not the answer, but an increase in international trade and commerce is.

Furthermore, some contend that a means by which to shrink the US’ commercial imbalance between imports and exports is to promote a dollar that is not as strong.  A weaker national currency would cause overseas consumption of US manufactured and other exports to be greater. Additionally, important to note is that the Trump administration has listed negotiating better access to non-US markets for American-made products as a priority.