Mexico and the Philippines: Economic relations with the US compared

This week, Mexico was brought again into the trade wars of President Donald Trump. The US president threatens to put unilateral tariffs on Mexican goods mainly to enlist the latter to cooperate on immigration issues.

I choose Mexico as my topic today for a different reason: to demonstrate the need for our leaders to adopt faster economic reforms and to emphasize lessons from economic history.

The Mexican example for the Philippines. Mexico achieved great economic stride in the last two decades. But before that, progress was erratic and slow.

Of all countries that I often cite about missing many economic opportunities in the past, Mexico comes close to being in our image.

For Mexico, like us, had tried to put up all kinds of nationalistic laws to keep their investment climate favorable mainly to Mexicans in their own country. In part, this was to keep American investments from dominating them. Their fear of the economic giant north of them is understandable.

To America, Mexico lost territories that today comprise almost one-fourth of the geography of the United States. Remember, the American states of Texas, New Mexico, Nevada, and California used to be part of Mexico. (One could even argue that parts of Oregon, Colorado and Utah were once Mexico, but for the westward move of the American empire in its early history.) Through a succession of wars, unequal threats of war, and impotent diplomatic negotiations and American westward expansion, Mexico lost those territories to the United States.

Mexicans had truly good reasons to hate Americans. But most nations pay heed to the needs of their current citizens and do not delve on the past too much.

NAFTA. Mexican-American economic relations during the post-World War II era progressed, but rather slowly. Nationalistic policies and fear of the US was a major factor.

Economic disparity at the border had led to an unbalanced one-way flow of migrants to the US. Year after year, Mexico was exporting people, but not much goods to the US.

Then in 1994, the North American Free Trade Agreement (NAFTA) was created and took effect. This was an economic treaty involving the US, Canada and Mexico. One of the aims of NAFTA was to help integrate Mexico’s development with that of its industrial northern neighbors and for all countries to derive benefits from trade, investments, and business.

NAFTA was a free trade arrangement. It removed all tariff and non-tariff barriers between the countries. It introduced a rules-based regime of trade and investment that was particular to the contracting parties, leaving out a few nasty issues that protected special domestic interests.

This happened at a time when Mexico was also liberalizing its economic policies. NAFTA helped to realize many benefits of this economic reform.

Mexico’s trade and investment boom took off. Mexico’s economic growth changed the dynamics of the US-Mexico relations. More US industries moved into Mexico to reduce costs and take advantage of the low cost of wages in Mexico and to re-export such transformed goods to the US. Trade relations expanded, especially in industry, in agriculture, in tourism and in other major services.

In 2018, total merchandise trade between the two countries was six times the level in 1993, the year before NAFTA. In 1993, the US had a trade surplus in its bilateral trade with Mexico amounting to US$1.7 billion. But in 2018 Mexico enjoyed a trade surplus amounting to $81.5 billion.

Mexico’s most important exports of goods – 80 percent of them – go to the US market. Traditionally, Mexico’s agricultural exports used to dominate exports to the US.

Today, Mexico’s car exports to the US lead all the major exporters of cars which are Japan, Canada, Germany and South Korea. The same situation applies to car parts exports. In addition, Mexico exports electrical machinery, industrial machinery, plastics, and even agricultural exports have further risen.

In fact, the total volume of trade between Mexico and the United States in 2018 amounts to $561.3 billion. Much of this trade revolves around supply chains of manufacturers between the US and companies located on the Mexican side of the border. Intermediate goods manufactured in the United States are exported to investments located in Mexico which then sell them as finished products back to the US.

Laurel-Langley Agreement. Now I go back in reference to our Philippine-US trade agreement which took effect since independence until 1973. This was revised even to improve the provisions under the Laurel-Langley Agreement in 1955.

The provision of this trade agreement was a gradually bilateral preferential tariff agreement for all export trade between our country and the US. Though it was designed as a diminishing preferential agreement, it was in its time unique.

No other country after the early years of that period had enjoyed such privileges with the US. After yielding to our demand for total independence, the US allowed us a period of adjustment through a preferential trade agreement.

That was one reason why, in the early postwar period, the Philippines was considered most likely to succeed and lead economic development in the region.

By focusing on the “negatives” of engagement in trade and commerce with the United States and by putting excessive weight in protecting mainly our traditional exports, especially sugar, we misused the advantage that we enjoyed over many countries.

Of course, we were entitled to commit early mistakes of independence. But we prolonged the mistakes, once started. We adopted stringent foreign exchange and import controls. We introduced nationalistic rules that essentially closed the economy toward more open competition.

In extracting benefits from the Laurel-Langley Agreement, we focused mainly on protecting and increasing the benefits derived by the sugar bloc interests in the US market.

In the meantime, we let other countries that had no special preferential trade relations with the US make the gains in exploiting the American economic market.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/