Regional Advantages: Why U.S.–Mexico Trade Is Robust and Permanent

Abstract

Mexico and the USA have the second largest bilateral trade relationship in the world, after only U.S.–Canadian trade. The free trade agreement facilitates the flow of goods and services, but other factors are important enough that an abrogation of the agreement would not likely alter the volume of trade in a significant way. Mexico–U.S. trade is driven by five factors in addition to the effects of the trade agreement. First, the proximity of the USA and Mexico reduces transportation costs. Second, the size of both the U.S. and Mexican economies creates a large demand for each other’s goods and services. Third, economic policy reforms in Mexico and the USA encouraged closer trade ties, particularly in the border region where Mexico’s export processing zone was deeply integrated with the American economy. Fourth, new information and communication technologies led to the development of cross-border value chains that further integrated manufacturing systems. And fifth, state and local efforts along the border have strengthened cross-border economic ties.

1 Introduction: U.S.–Mexico Trade Is Robust and Permanent

On July 1, 2020, Canada, Mexico, and the USA replaced the North American Free Trade Agreement (NAFTA) with an updated version of the trade accord. The NAFTA had been in effect since January 1, 1994 and was in need of changes to cover new issues such as digital commerce, electronic payment systems, and data storage and security. The new agreement, called the United States–Mexico–Canada Agreement (USMCA),¹ is similar to NAFTA in most respects although it has additional clauses covering some of the aforementioned issues, as well as new rules governing trade in automotive products and intellectual property protections. In the end, however, the net benefits are expected to be limited. The United States International Trade Commission (USITC) estimated that U.S. GDP would increase by 0.35% once the agreement was fully implemented and as long as it was adequately enforced. Even so, as modest as the estimated benefits are, they stemmed almost entirely from the USITC’s assumption that uncertainty would be reduced and that the agreement would be fully enforced (United States International Trade Commission 2019). While there is little in the agreement itself that will generate significant new benefits, the new rules of origin and wage requirements in the automobile sector will add administrative and record keeping burdens that may be a step backward in terms of trade facilitation.

In the short run, there is no doubt that the successful negotiation and legislative passage of the agreement reduced most of the uncertainty that had been introduced by the rhetoric and actions of the ex-U.S. President who had campaigned in 2016 on a platform that was hostile to trade agreements in general and NAFTA in particular. After he assumed office on January 20, 2017, the ex-President moved quickly to demonstrate that his administration would treat international trade differently than his predecessors. On Monday, January 23, 2017, he pulled the USA out of the Trans-Pacific Partnership, a 12-country negotiation that his predecessor had viewed as an expansion and update of the NAFTA.² Approximately 3 months later, on April 28, the new administration formally agreed to begin negotiations for a replacement of NAFTA but continued to create uncertainty with threats to terminate both the negotiations and NAFTA whenever a roadblock was encountered. Further, in March of 2018, the administration announced that it would impose tariffs of 25% on steel and 10% on aluminum as necessary national security measures. These tariffs fell most heavily on the U.S.’ main trading partners, Canada and Mexico, and close allies such as the European Union and caused many economists and observers to question the legitimacy of the national security rationale.

In spite of these obstacles, the three NAFTA nations successfully concluded modifications to the agreement and gave it a new name in order to disassociate it from the old NAFTA. In effect, there is less that is new than supposed. New rules of origin and wage standards were applied to the car industry, intellectual property rights were extended in some cases, particularly pharmaceuticals, and Mexico was required to make it easier for workers to unionize. Most other changes were minor. Furthermore, the new agreement does not eliminate uncertainty since threats of new and increased tariffs continued and the text of the new agreement included a sunset clause and a periodic mandatory review of the agreement. The sunset clause stated that the terms of the agreement expire after 16 years and the review process required all three countries to affirm a continued commitment to the agreement every 6 years. Nevertheless, in spite of the new uncertainties and the relatively modest changes, many business executives, farmers, and other interested parties breathed a sigh of relief that at least there was an agreement.

In what follows, I will argue that the direct effects of any free trade agreement between the USA and Mexico are overestimated and that there are several more fundamental reasons why the two countries are important trade partners to each other.³ Consequently, a revised NAFTA in the form of the USMCA, or a continuation of the status quo, or even the absence of any formal agreement, would not radically alter the volume of trade between the two countries (or between the USA and Canada). To be sure, uncertainty reduces trade flows and an abrogation of the free trade agreement would be a shock that would require adjustments that might prove costly. Nevertheless, disruption and the forced adjustments would not lead to significant declines in the volume of trade.

In the sections that follow, the reasons for a robust and ever-present trade relationship between the USA and Mexico are explored. Section 3.2 focuses on the gravity model of trade as the primary force behind the long-run trade relationship. The gravity model is consistent with the main theoretical approach of international trade theory, known as the Heckscher–Ohlin model (Deardorff 1998) and is probably the most robust explanation for bilateral trade flows in general. The model is discussed within the context of the long history of U.S.–Mexico trade. Section 3.3 explores some of the policy changes that caused manufacturing in the border region to take off before there was an FTA. The four U.S. and six Mexican border states account for more than half of their respective country’s exports to each other. Section 3.4 follows with a brief discussion of the ways that new developments in information and communication technologies have enabled the growth of cross-border value chains and further integrated Mexican and U.S. manufacturing. Section 3.5 delves into some of the efforts by state and local governments in the border region to support trade and economic development through the encouragement of cross-border commerce and investment. A final section offers a few concluding remarks.

2 The Gravity Model and U.S.–Mexico Trade in Historical Perspective

The U.S. and Mexico bilateral trade relationship is the second largest in the world and is only slightly smaller than the world’s largest flow of trade between Canada and the USA. The importance to both Mexico and the USA of trade between the two has persisted for many decades through different trade regimes, profound political changes, and turbulent economic conditions. In the 1880s, the USA began to purchase more than half of Mexico’s exports and has continued to do so for 140 years, without exception. By the first years of the twentieth century, the USA was supplying more than half of Mexico’s imports. That trend continued until 2007, when the U.S. share of Mexican imports dropped below 50% for the first time since 1913 (Kuntz Ficker 2007, pp. 467–474; INEGI 2020). Figure 1 shows the U.S. share of Mexican imports and exports, 1950–2020. The decline in the import share that began around 2001 aligns with the entrance of China into the WTO although it is uncertain if that is the main causal factor.⁴ Even so, Mexico entered the top group of traders with the USA as early as the late 1800s, moved into the top three in 1989, and continues to be the second most important trade relationship, after Canada (Irwin 2006, Tables Ee533-Ee568).

Fig. 1

Share of Total Mexican Exports and Imports with the USA. Source: International Monetary Fund 2020; Instituto Nacional de Estadística y Geografía (INEGI) 2020

The Mexico-U.S. trade relationship persisted through the first wave of globalization in the late 1800s and early 1900s, the Mexican Revolution (1910–1917), highly protectionist U.S. policies during the late nineteenth century and the first half of the twentieth century, through two world wars, the worldwide Great Depression of the 1930s, Mexico’s adoption of protectionist trade policies during its import substitution industrialization period from the 1940s through the 1970s, Mexico’s switch to neoliberal market-oriented reforms in the 1980s, and various presidential administrations in both countries. It would be incorrect to say that trade policies and trade agreements do not matter, but the size, longevity, and persistence of U.S.-Mexico trade through a wide range of political and economic conditions imply a deeper set of factors than trade policies alone.

The gravity model explains this trade pattern. The model is based on Newton’s description of the forces that determine the gravitational attraction of bodies in space. In Newton’s model, gravitational strength is a function of the size of the celestial bodies and their distance from each other. The gravity model of trade uses the same idea to explain the flow of goods between two countries with size represented by GDP and distance by the actual physical distance between main commercial centers. The gravity model illustrates a fundamental trade law: Countries trade more with bigger economies and with closer neighbors, all else equal. With or without the NAFTA or the USMCA, the USA and Mexico would be major trade partners by virtue of location and size. This was true before there was a free trade agreement and would continue to be true if it were to disappear. Major policy changes such as an abrogation of the trade treaty or major world events such as China’s reclaiming of a prominent position in the world economy, undoubtedly cause significant disruptions and adjustments, but the USA and Mexico continue as main trading partners for each other.

Another perspective that supports a gravity model interpretation of Mexico-U.S. trade can be viewed through the lens of comparative rates of growth of imports and exports before and after the free trade agreement. Table 1 shows real, price adjusted average annual growth rates of U.S. trade with Mexico. For purposes of comparison, total U.S. merchandise trade with the world and with Canada is also included. The data are for 1961–1990 and 1990–2019. The year 1990 is selected instead of 1994, when the agreement was implemented, because it is the year that NAFTA was proposed, after which firms began adjusting their future plans. As shown, total U.S. merchandise trade with Mexico has grown faster than trade with either the world or Canada. Further, and perhaps surprisingly, trade grew faster in the 29 years before the beginning of NAFTA negotiations than in the subsequent 29 years.⁵ Clearly, the lack of a trade agreement was not a hindrance to trade growth. There are many possible explanations for the patterns shown in Table 1 but one of the key explanations is illustrated by the contemporary geography of Mexico–U.S. trade.

Table 1 Average annual growth in real U.S. imports and exports

Table 2 shows the percentage of Mexican exports that originate in its six northern border states and the percentages of U.S. exports to Mexico originating in the four U.S. southern border states. The Mexican and U.S. panels of Table 2 are not symmetric since the U.S. panel shows exports to Mexico, while the data for Mexican states is all exports, including those to the USA and other countries. Mexican trade data does not identify the destination country for state exports but given border states’ proximity to the U.S. market and the dominance of trade with the USA in overall Mexican exports, the data give a good idea of border state exports to the USA. Table 2 assumes that their share of exports to the USA is the same as their share of overall exports, but if gravity effects are present, this is probably an underestimate of their share.

Table 2 Share of border states in Mexico-U.S. trade, 2019

Three elements stand out in Table 2. The first is that both Mexican and U.S. border states dominate their nation’s exports to their USMCA partner.⁶ Exports to the U.S. from Mexican border states range from 13.7% of total national exports originating in Chihuahua to 4.6% in Sonora. U.S. border states are heavily dominated by Texas which is on the direct infrastructure route to the main Mexican industrial and commercial centers, has over 60% (1254 miles) of the Mexico-U.S. border running through it, and a preponderance of border crossings. Texas’ role appears lopsided, but its percentage matches the estimate of Mexico’s exports to the USA that originate in the four Mexican states on the Texas border (Tamaulipas, Nuevo Leon, Coahuila, and Chihuahua).

A second element shown in Table 2 is the dominance of two categories: Computers and Electronic Products (NAICS 334) and Transportation Equipment (NAICS 336).⁷ These two industries are also the main categories of overall Mexico-U.S. trade, a fact that points to the importance of the composition of border states’ exports as well as their volume. As discussed below, the products exported by border states reflect the growth of extensive cross-border value chains in the manufacturing sectors of transportation equipment and computers and electronic products. These sectors have a relatively long history and have played key roles in the development of Mexico-U.S. trade, production off-shoring. and the rise of transborder value chains. As shown in the next section, their role antedates the growth of global value chains in international trade.

A third item of importance shown in Table 2 is lesser but yet important role of traditional natural resource based exports. Petroleum products exported by Texas through its many pipeline connections to Mexico are significant at the national as well as the state level, and while minerals and basic metals are less so, in Arizona, Sonora, and Coahuila these traditional exports continue to be important.

3 How Border Manufacturing Grew to Prominence

Although geography and GDP are probably the two most important factors in the determination of Mexico–U.S. trade, they are not the only ones. Another influential factor that shaped bilateral trade flows was the change in Mexican economic policies that began in the 1960s. Policy changes were initially small and regional in scope, but they gained momentum and depth in the 1980s. This section briefly describes the changes and then illustrates how Mexico moved from traditional resource based exports towards mostly manufactured goods. In the process of its transformation, it created much closer economic ties to U.S. businesses and the U.S. economy.

An important impetus for the growth of non-traditional manufactured exports was the beginning of the Border Industrialization Program (BIP) in 1965. As the name implies this program was focused on the industrialization of Mexico’s northern border and was probably a central reason for the concentration of manufactured export industries in border states. In short, the BIP created a different set of incentives for Mexican manufactured exports, particularly in the northern border region. Responding to the incentives, manufacturing in the border region started to grow noticeably in the 1960s, continued to build slowly in the 1970s, and took off in the 1980s, particularly after a more comprehensive set of policy changes was enacted. The BIP, or maquila program, was Mexico’s version of an export processing zone (EPZ).⁸ It was a small but important shift away from the existing import substitution industrialization (ISI) policies that had focused on the twin goals of production for the domestic market and greater autonomy from the U.S. economy. With the BIP, Mexican authorities created tax incentives for export industries, whether Mexican or foreign. As with other EPZs, raw materials and intermediate goods were allowed duty free entrance for processing in Mexico so long as the output, whether a final product or not, was exported. Initially the program was limited to Mexico’s northern border region in an area that is close to the USA. Its original purpose was to absorb the large number of unemployed Mexican workers who had been seasonal migrants in the USA until that country’s guest worker program was terminated on December 31, 1964. The idea for the BIP came from Mexico’s Secretary of Industry and Commerce, Campos Salas, after a tour of U.S. owned manufacturing plants in the export processing zones of several Asian countries, including Hong Kong, Singapore, Malaysia, and others (Taylor Hansen 2003). Campos Salas saw the BIP as a solution to northern unemployment, but in creating the program, he subtlety shifted Mexican economic policy towards greater economic ties with the USA.

The USA cooperated by agreeing to allow Mexican intermediate goods imports to move through its ports without being subjected to U.S. tariffs. This enabled firms in Mexico to import intermediate goods through ports in Los Angeles, Houston, and other nearby U.S. ports and to avoid the higher transportation costs for goods entering through Mexican ports. After processing in Mexico, goods shipped back to the USA were only tariffed on the Mexican value added. The policy was designed to encourage collaboration between U.S. and Mexican firms and to encourage investment in border manufacturing. The ability of manufacturers to cut their value chain into discreet steps and locate the unskilled or semi-skilled processes in Mexico was still in its infancy and awaited revolutions in communication and information technologies to take off, but the potential for collaboration embodied by the maquila industry was significant and the industry flourished through the 1970s and 1980s. As the EPZ grew, limits were removed on the location of firms and the volume of manufacturing and manufactured exports began a long-run increase.

Between 1964, the year before the BIP began, and 1984, real manufacturing output increased 3.2 times, or nearly 6% per year (INEGI 2009, 11.1). The growth of manufacturing in Mexico was particularly notable along its northern border with the USA where proximity to the wealthy U.S. market attracted foreign direct investment from the north and job seekers from the south. Gravity model effects led to the development of large manufacturing sectors in Mexico’s northern border states and in cities directly adjacent to the USA. As shown in Table 3.3, the composition of exports changed as traditional resource based exports declined, and manufactured exports increased. In 1964, Mexico’s top-10 2-digit SITC export categories comprised 77% of total exports and were nearly entirely resource based (see Table 3) They included tropical fruits and coffee, sugar, fish products, petroleum, lead, zinc and other minerals, yarns and fabric, and live animals. Twenty years later, in 1984, the composition of exports was fundamentally different. Natural resource based products were still present (petroleum, coffee, fish) but so were several new categories of more sophisticated manufactured goods, including electrical machinery, power generation equipment, telecommunications equipment, and automobiles. In 1964, all of the top products are resource based; 20 years later, at least four of the top ten exports are manufactured, non-resource based products. The BIP played an important role in the transformation of Mexican exports through its ability to attract foreign investment, particularly but not only from the USA, and its incentives for closer economic ties with U.S. manufacturing interests.

Table 3 Top 10 Mexican Goods Exports to the USA, 1964 and 1984

Mexican goods exports to the USA shifted from agricultural and mineral commodities to manufactured goods between 1964 and 1984; petroleum and its products also increased in importance.

Closer ties with the USA were also supported by pre-NAFTA changes in Mexico’s commercial policies. Throughout the post-World War II period, Mexico pursued an industrial development strategy known as import substitution industrialization (ISI). As the name implies, ISI promotes industrialization by concentrating on production of goods that substitute for imports. Mexico abandoned this policy framework in the 1980s, but until then, one key component was a relatively high level of trade barriers. Over time, these increasingly took the form of quantitative restrictions and were less dependent on tariffs (King 1970; Wallace 1980). Beginning in the 1980s, tariffs began to fall unilaterally, and quotas were removed so that they were nearly gone by the early 1990s. For example, in 1987, Mexico’s average unweighted tariff rate was cut from 23 to 11%; by the time NAFTA was implemented, its applied average tariffs varied from 0 to 25% with an average of 10%. U.S. tariffs before NAFTA averaged 4%, but on a trade weighted basis were 3.1% (Agama and McDaniel 2002). The NAFTA agreement began a phased elimination of all tariffs so that by 2003, trade between the U.S. and Mexico was mostly tariff free, with the exception of some sensitive products with long phase-out periods, such as corn in Mexico and tomatoes in the USA.

4 Post-NAFTA: The Rise of Global Value Chains

The ability of multi-plant firms to send information back and forth between their different sites is a relatively new phenomenon. Looking back to the moment in 1994 when the NAFTA was implemented, or even further to the late 1980s before the announcement of the NAFTA negotiations, the differences in technology between then and now are striking. For example, the Internet was just beginning to come into widespread usage in the 1990s. Google Ngram Viewer tracks the frequency of words and concepts over time, based on the digitalization of millions of books dating back to 1500. The term “World Wide Web” is never used before the 1960s and only rarely appears in print books up until the mid-1980s. Around the end of the 1980s the usage of the term hits an inflection point and comes into wide usage by 1995. The pattern for the term “Internet” is similar and is approximately the same for the term “global value chain” (Google Books 2019).

The advent of the Internet is an example of the types of radical breakthroughs that occurred in information and communication technologies and also illustrates how young these technologies are. As new technologies led to radical improvements in the quality and quantity of information that could cheaply and easily move across large geographical distances, manufacturing firms began to shift production stages to different locations where they could exploit the comparative advantages of different regions and countries. In the earlier age of fax machines and expensive telephone landlines, cross-border coordination of production activities was expensive, risky, and complicated. However, with the new ability to communicate and move information across national boundaries, the transaction costs of using off-site production facilities in another country were much less.⁹

Within the NAFTA region, the development of new information and communication technologies promoted the growth of trade in intermediate goods such as car parts, electronic assemblies, parts for medical devices, and others. In 2015, 40% of Mexico’s goods exports and 63% of its goods imports were intermediate goods (WTO 2019).¹⁰ And Mexico’s share of intermediates trade between the three NAFTA partners has increased continuously between 1995 and 2015 (World Bank 2017, p. 62). Overall, 36.1% of the value of Mexican exports is value added that was created outside Mexico, mostly in the USA and with the percentage varying by industry. For example, 48% of the value of Mexico’s motor vehicle exports and 58.4% of computer and electronic parts exports are created outside the country. Most other Mexican manufacturing sectors have a smaller percentage of foreign value added in exports, but these two are notable for three reasons: (1) they are at the core of exports from border states (see Table 3.2), (2) they are among the largest export sectors, and (3) they have high percentages of intra-industry trade. The implication is that many goods exported to Mexico from the USA are likely to return to the USA after having been transformed in some way and that a large share of U.S. imports from Mexico contain significant amounts of U.S. value added. For example, in 2019 the USA exported to Mexico $20.7 billion in Motor Vehicle Parts (NAICS 3363) and $3.6 billion in Motor Vehicle Bodies (NAICS 3362). At the same time, it imported $70.7 billion in motor vehicles, many of which had U.S. made parts in them. Similarly, in the same year the USA imported over $50 billion in motor vehicle parts from Mexico, which it used in its production of $787 billion in gross motor vehicle output. Transportation Equipment (NAICS 336) was the largest ($128 billion) U.S. import from Mexico in 2019 and earlier and was nearly double the size of the second category, Computers and Electronic Components (NAICS 334, $65 billion). Transportation equipment was also the most important category of exports from four of the six Mexican border states and the second most important after Computers and Electronic Components in the other two border states.

The movement of auto parts between plants in Mexico and the USA played an important role in the construction of the three-country North American auto industry, not only in the border region but in all of the places where production occurs. U.S. imports of $50 billion in auto parts went to Texas ($12 billion) and California ($2.6 billion) but also to traditional auto manufacturing states such as Michigan ($16 billion) and Ohio ($3.3 billion) and relatively newer auto manufacturing states such as Tennessee ($2.5 billion), Kentucky ($2.3 billion), and South Carolina ($2.2 billion). These value chains played an important role in the NAFTA/USMCA renegotiations because they were responsible for the creation of a broad base of political support for maintaining existing value chains and opposition to a new agreement that would weaken them (Althaus and Rogers 2016). It is conceivable that an upheaval in U.S.–Mexico relations or a radical nationalist agenda could break these ties, but under normal circumstances, it seems unlikely. Multinational automobile manufacturers, auto parts companies, and their affiliates have taken advantage of the opportunities to locate production stages on both sides of the U.S.–Mexico border and their business models and their future competitiveness in the global economy depend on those efficiency enhancing efforts.

5 State and Local Governments Support Mexico–U.S. Trade

The auto, electronics, and other industries have a set of allies in the border region that help keep trade flowing. These are state and local officials concerned about the economic development and prosperity of their communities and engage in paradiplomacy when it is in their interests.¹¹ In most countries, paradiplomacy is extremely limited or even completely forbidden given the reasonable fears of national governments that local diplomatic efforts might undermine national agendas. There is evidence, however, Mexico is somewhat more receptive to sub-national interinstitutional agreements and that sub-national governments in both the USA and Mexico engage in paradiplomacy to attract foreign investment and promote exports. In addition, state and local governments on the border are more likely to engage in paradiplomacy (Kincaid 1984; Schiavon 2010, 2018).

U.S.–Mexico border states and communities have a wide range of interinstitutional agreements and cross-border private agreements, both formal and informal. Even small scale entrepreneurs use the asymmetric conditions found across the borderline to gain competitive advantages through multi-site operations that often do not include formal cooperation agreements (Pisani and Richardson 2012). While some state and local agreements deal with issues of public health and law enforcement, many are focused on the facilitation of trade and regional economic development. The degree of closeness between cross-border communities is not well perceived by outsiders but should be unsurprising when one considers that all four U.S. border states were Spanish colonies and part of the territory of Mexico after its independence in 1821. Texas’ formal ties to Mexico lasted until 1836 when it achieved its own independence, and the other U.S. border states were ceded to the USA in 1848 after the war between the two countries (1846–1848). Although the border region was sparsely populated in the mid-1800s, the drawing of the contemporary borderline divided families, businesses, and urban centers and created the system of twin cities that dominates the region today. To be sure, before modern communication and transportation technologies, the border region was a long way from the centers of political and economic power in both countries, but that only served to allow for the development of a more hybrid society with shared U.S. and Mexican characteristics of language, culture, economy, and politics.

Texas may be the best example of paradiplomacy with Mexico given its long border, its numerous border cities that form single metropolitan conurbations with Mexican cities, its many ports of entry, and the seaport, rail, highway, and pipeline infrastructure that connect central Mexico to Texas and U.S. industrial and commercial centers. Paradiplomacy began in the 1970s with the opening of the state’s first and only foreign trade office in Mexico City. By the 1980s the state was signing state-to-state agreements with Mexican states. The 1984 Texas-Tamaulipas Bilateral Exchange Committee was followed by agreements with border states Nuevo Leon and Coahuila and, in 1985, an agreement with the federal government of Mexico called the Mexico-Texas Exchange Commission, or M-TEC (Blase 2003). Most of these agreements had a heavy trade promotion focus and were largely superseded by the NAFTA. Before that, however, a decade-long economic crisis in the 1980s in Texas convinced state officials of the opportunities presented by its geographical location on the Mexican border and of the need to strengthen ties beyond what occurred at the national level. Today, the state has more foreign trade zones than any other U.S. state where in-bond storage facilities help to attract investment from many countries and facilitate cooperation with Mexican manufacturing on the Texas border. The state has a Border Trade Advisory Group, overseen by the state-level Secretary of State, that engages in various forms of trade promotion and national lobbying. The Advisory Group recommends trade facilitation policies such as the creation of the Texas–Mexico Border Transportation Master Plan (BMTP) which is a collaboration with several bordering Mexican states and the Mexican and U.S. federal governments. Texas also has a multi-agency Texas–Mexico Strategic Investment Commission to facilitate trade and to lobby the federal government.

The private sector also engages in cross-border trade facilitation. One of the most significant efforts is the Borderplex Alliance collaboration between three cities in three states and two countries: El Paso, Texas; Las Cruces, New Mexico, and Ciudad Juarez, Chihuahua. The goal is trade facilitation, but also lobbying at the federal level to encourage favorable policies, the attraction of new investment to the region, and economic development. Las Cruces is in New Mexico which is the state with the smallest border with Mexico and the smallest border economy and population. Hence, it is the border state with the least amount of trade and other relations with Mexico although its state agency, the New Mexico Border Authority has successfully attracted one of the largest U.S. railroads to build an intermodal rail facility to connect El Paso to Los Angeles and industrial centers in the Midwest.

Arizona began to strengthen commercial ties with Mexico long before the free trade agreement was considered. In 1959, the governors of Arizona and Sonora founded what was to become the Arizona–Mexico Commission (AMC). The goals of the AMC are to promote trade, commerce, tourism, and infrastructure development, and to collaborate in education and research (Arizona-Mexico Commission 2019). While Arizona lagged Texas and California in its creation of a trade office in Mexico, the AMC was an active promoter of closer ties to Mexico. The strength of Arizona’s state policy varied with different state leaders but was often in favor of much closer commercial ties even when contentious issues such as trade in illegal drugs and unauthorized migration flows were obstacles.¹²

California is an outlier compared to the other border states and is the only state with a smaller share of U.S. exports to Mexico (10.9) than its share of U.S. income (14.5). This is probably a result of its relatively small border with Mexico (140 miles, approximately) and its location further away from central Mexico and the primary transportation infrastructure linking the two countries. In addition, California’s location on the Pacific Ocean and the fact that its most vibrant centers of economic activity are the non-border regions of the Los Angeles basin and the San Francisco-Bay Area gives the state a trans-Pacific economic orientation that is absent in other border states. Mexico is an important commercial partner for California, but so are China, Japan, Korea, Taiwan, and other Asian economies. Nevertheless, the state has long held important commercial ties to Mexico which have been supported and developed further by local initiatives. The CaliBaja Mega Region supports industrial clusters and cross-border value chain development in Baja California and Southern California, particularly in the border cities. And private interests have developed an innovative self-financing port of entry that directly connects the city of San Diego to the Abelardo Rodriguez Airport in Tijuana.¹³

Given the differences in geography, history, and proximity to industrial heartlands, commercial centers, and population concentrations, each U.S. and Mexican border state has responded differently to the opportunities offered by trade. Mexican cities and states are more constrained by limited budgets and Mexico’s more centralized federal, but local private initiatives in collaboration with cross-border counterparts have been significant factors in lobbying both federal governments for policies that support international commercial ties and trade facilitation. The cumulative effect of these efforts is to reduce trade frictions and transaction costs, increase awareness on each side of the possibilities and opportunities on the other, and to support the growth of cross-border value chains.

6 Conclusion

The main argument of this essay is that U.S.–Mexico trade is less a result of the free trade agreement than often assumed. Consequently, fears surrounding the recent renegotiations were mostly unwarranted. To be sure, a revocation of the free trade agreement would create major disruptions and a period of transition as firms adjusted to a new reality. The necessary changes would be difficult and expensive and would take some time. Nevertheless, there are strong reasons and historical precedents for believing that the absence of a formal agreement would create smaller changes than many people feared.

Two consequences follow directly from this analysis. First, proponents of a formal free trade agreement who argue that its termination would create significant harm to the USA and Mexico economies are not correct. Regardless of the asymmetry between the two economies, Mexico probably has more room to maneuver and less need to accede to unreasonable or undesirable U.S. demands. Second, opponents of the agreement who argue that it has imposed painful and lasting costs on the U.S. economy and workers are not correct either. Setting aside the issue of trade impacts on wages and economic growth, the factors discussed in this chapter show that the U.S.–Mexico trade relationship is not dependent on a free trade agreement. Even if it had never been implemented, we would likely have something very close to present conditions.

Geographical proximity and the size of the NAFTA economies all but guarantee that Canada, Mexico, and the USA will continue to be each other’s main trading partners. Furthermore, the last 35 to 40 years of economic policy in all three countries at national, state, and local levels have reinforced this pattern and have been further supported by recent developments in information and communication technologies. None of those facts will change, and while a determined and radical nationalist might try to undo some of the policies and the effects of technological changes, they would encounter a series of very strong opposing currents in both the private and public sectors.