Trade with Mexico: an unfulfilled promise

We new Mexicans are justifiably proud of our tradition of multiculturalism. We share many historical and cultural ties with Mexico and more than one commentator has suggested that these ties, coupled with geographical proximity, gives New Mexico an advantage in trading with Mexico. More than one New Mexican business leader has publicly fantasized about unlimited trading opportunities just waiting to be exploited south of the border. These speculations reached fever pitch with the passage of NAFTA.

Nevertheless, despite the promise of nearly unlimited opportunities, New Mexico's record in trade with Mexico is dismal. While the average American sold $161 worth of goods to Mexicans during 1993, New Mexicans sold only $47.50. Moreover, other border states, with weaker ties to Mexico, have been far more successful at exploiting geography, ranking first (Texas), second (California) and third (Arizona) among the 50 states in Mexico trade. Meanwhile New Mexico sits in 35th place.

What explains New Mexico's low volume of trade with Mexico? Ironically the very similarity which so many pointed as an advantage in trade may actually be a barrier. It is differences not similarities that drive trade. In fact, the driving force behind U.S.-Mexico trade is differences in endowments of inputs into production that drive trade. The U.S. has a relatively high level of capital and specializes in goods requiring large amounts of capital to produce. Mexico has relatively more abundant labor and specializes in labor intensive products.

Generally, manufactured goods are the most capital intensive to produce, and this is reflected in U.S. exports to Mexico. Indeed, 93 percent of U.S. exports to Mexico are manufactured goods. Manufactured goods account for more than 95 percent of commodity exports of Texas, California and Arizona. Of course, Mexico certainly does export manufactured goods to the U.S. and some of the most productive manufacturing plants in the world are located in Mexico. But on average a larger portion of Mexico commodities sold to the U.S. are labor intensive goods such as those produced in agricultural and mineral extraction industries. When it comes to services, a similar pattern is seen. The U.S. is a net exporter of financial and technical services, which are capital intensive. Mexican service exports are primarily in the form of agricultural and other unskilled labor.

An example might better illustrate how trade patterns are established. Take the case of Indiana. Over time, a large capital intensive manufacturing equipment industry has developed, which uses capital intensive techniques in producing industrial equipment. Indiana manufacturers over the years have specialized servicing the equipment needs of heavy manufacturers located in the midwest, especially auto-makers. As U.S. manufactures move labor intensive operations south, they still need to equip their new Mexican factories. Exploiting long term relationships with the U.S. parents, Indiana manufacturers became the suppliers to newly formed Mexican subsidiaries, supplying them with industrial equipment. In the process, Indiana became a major center for exports to Mexico, currently ranking sixth and selling about five times as much as does New Mexico.

New Mexico is not a heavily industrialized state; we are not a large producer of the type of manufactured goods that Mexicans typically import from the U.S. Only 9.7 percent of New Mexicans income generated in manufacturing, about half the national average. At the National labs, White Sands and other facilities, New Mexicans are developing cutting-edge technology. Unfortunately, at Mexico's current level of economic development, it is not likely to become a major customer for New Mexico's star wars technology. New Mexico has a large agricultural sector, but the kind of products we produce often are similar to those produced in northern Mexico. While we do export considerable agricultural products to Mexico, we also often find that, rather than being a customer, Mexico is actually our competitor in agriculture. Thus it is not as surprising that New Mexico exports so little to Mexico: We simply don't produce the products that Mexicans want.

There are bright spots in trade between Old and New Mexico. The opening of the Santa Teresa border crossing helped to double New Mexico exports to Mexico during 1993 compared to 1992. We moved up from 42nd to 35th among the 50 states in one year. An impressive feat, but we still have a long way to go when compared to other border states. The coming on line of the Intel Rio Rancho plant will increase our manufacturing base, and should boost sales to Mexico.

Keep in mind that it is individuals pursuing their own self interest who engage in international trade, and not states and nations. New Mexican business people will continue to find opportunities for profitable trade with Mexico, and will pursue them to their own and their Mexican customers benefit. Relatively capital intensive industries, especially those that sell to manufacturing, will find the readiest market in Mexico. Developing such industries is a slow process, and only time will tell if the promise of trade with Mexico will be realized.

Chris Erickson teaches in the department of economics at New Mexico State University. He is editor of the Business Forecaster.

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