Last week, it was widely reported that in the first half of 2019 Mexico replaced China as the United States’ top trade partner. China is now in third place, while Canada is in second. There has been a great deal of discussion in the media about what this means for U.S.-China economic relations. Much less attention has been devoted to what this new alignment means for economic relations within North America.
A Third World Country?
The importance of U.S.-Mexico trade may surprise some. In the minds of many Americans, Mexico is still a Third World country whose largest export is poor people looking for jobs. Truth is, Mexico has the 15th largest economy in the world measured in U.S. dollars. Australia ranks just one spot above Mexico, and countries like Spain, South Korea and Canada are not too far ahead either.
Measured in purchasing power parity, however, Mexico ranks as the 11th largest economy in the world. PPP measures economic activity against the ability of a country’s currency to buy goods. Both PPP and nominal gross domestic product measurements have their flaws. Measuring purchasing power in a country as diverse as Mexico is tough, to say the least. Measuring it against the dollar is also difficult, as currencies fluctuate against the dollar all the time, thereby changing their GDP totals and rankings even though the economy itself hasn’t grown or declined. (Those who already knew this – and those who didn’t want to know this – please forgive me for explaining this in detail.)
The important point here is that Mexico’s economy, whether it’s ranked 11th or 15th, isn’t a developing economy. It is a major economy and a major target for investment. Some parts of Mexico, particularly those in the south and some areas of major cities, resemble the Third World. But most countries have major regional inequalities. Mexico’s are somewhat larger than the average, but its economy is nonetheless substantial. The U.S. and Chinese economies are highly intertwined, but so too are the U.S. and Mexican economies – Mexican auto parts, for example, are indispensable to U.S. car makers. Mexico is also an aeronautical hub, housing Airbus and Bombardier manufacturing plants.
We’re presented, then, with two geopolitical realities. First, North America’s trading bloc is now larger than the European Union in terms of both population and GDP. Many believe that the alternative to globalism is insular nationalism. Many also believe that the only path to regional integration is a high degree of political integration. The European Union demonstrates that excessive politicization of a trade block can breed potentially uncontainable tension. The North American trade system has no significant joint political structure. The U.S., Canada and Mexico have not compromised their sovereignty, yet they are part of a successful trade system that was renegotiated in such a way that maintained the level of interdependence between the three major trade partners, despite expectations that renegotiation would lead to a decline in trade.
Mexico and Canada were America’s top two trade partners in the first six months of 2019 as the escalating China-U.S. Trade War booted China to third place.
With China falling behind Mexico and Canada, President Trumps’ Trade War has succeeded in making North America’s revised trading bloc larger in population and GDP than the 28-nation European Union, according to Geopolitical Futures.
President Trump famously tweeted on December 4, 2018:
“I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN”
Six months later, U.S. importers paid $6 billion in tariffs in June, a 74 percent spike compared to a year ago, despite a slight decline in import values. About $3.4 billion of those tariffs were imposed by President Trump, according to a study titled ‘Tariffs Hurt the Heartland’ by The Trade Partnership, a globalist Washington D.C. consulting firm.
The report claims Trump’s tariffs are highly inflationary by forcing consumers to pay an extra $4.4 billion for apparel, $2.5 billion for footwear, $3.7 billion for toys and $1.6 billion for household appliances.” But U.S. inflation in the first half of 2019 averaged just 1.7 percent, down from 2.4 percent last year, according to the U.S. Inflation Calculator.
The biggest key to holding back inflation has been the rapid global redeployment of manufacturing supply chains from China to Mexico, Canada, and even the United States. The repositioning speed demonstrates that analysts in the New York City to Washington D.C. corridor that predicted an inflationary spike had no clue regarding multinational businesses always having “disaster recovery” plans for alternative suppliers.
Democrats and #NeverTrumper Republicans have fumed that the only economic alternative to political integration of globalism’s multilateral trade pacts is “insular nationalism” and financial decline. But U.S. first-half growth in 2019 was a solid 2.6 percent, while $9.93 trillion of foreign investment was repatriated to the United States.
Critics scoffed when the White House announced the United States–Mexico–Canada Agreement (USMCA) on October 1, 2018 to replace the “failed” North American Free Trade Agreement. Unlike the European Union and rejected Trans-Pacific-Partnership, the USMCA does not require “harmonizing regulations and statutes” that compromise sovereignty by transferring legal authority to panels of multilateral bureaucrats.
The reason the U.K. middle class voted to leave, and five other European Union (EU) members are considering leaving, is the documented income inequality effects from free trade agreements that promote job-killing cheaper goods from low-wage countries, while steering most wage gains to “elite” workers that make more than $88,000 a year.
Although many Americans view Mexico as a Third World country, it now has the 15th largest economy. On a “purchasing power parity” basis, that measures economic activity against the ability to buy goods in a country’s currency, Mexico would rank 11th. According to Geopolitical Partners, “Australia ranks just one spot above Mexico, and countries like Spain, South Korea and Canada are not too far ahead either.”
The USMCA is positioned for a major expansion, with the U.K. set to leave the EU on October 1 and President Trump offering the fifth largest economy in the world a USMCA associated membership on similar free trade terms. Combining the U.K.’s $2.6 trillion GDP with the USMCA’s $22.1 trillion GDP, would create a $24.7 trillion trade pact compared to the $17.3 trillion European Union pact.