Introduction
The U.S. is Mexico’s major commercial partner by trade volume; Mexico ranks third for the U.S. after China and Canada. In 1992, the United States, Mexico, and Canada became signatories to the North American Free Trade Agreement, designed to remove trade and investment barriers (Butler et al., 2019). Since then, U.S. exports to Mexico have increased by 468%, from $41.6 billion in 1993 to $236.4 billion in 2015. Investments have increased 639%, from $39.9 billion to $294.7 billion (Butler et al., 2019). The history of economic relations between these countries is long and rich. In 1822, a year after Mexico received its independence from Spain, the United States and the newfound First Mexican Empire formed diplomatic ties. During the early years, the relationship was strained by the issue of ownership of Texas, which had seceded from Mexico in 1836 because of the War of Independence.
In 1845 it was incorporated into the United States, which was followed by the American-Mexican War. As a result, Mexico recognized Texas as a U.S. territory and ceded some of its territories in exchange for $15 million (Butler et al., 2019). In 1853, as an act of the Hadsden Purchase, the U.S. acquired 120,000 square kilometers of territory from Mexico for $10 million, finally shaping the boundary. The last armed incidents between the two countries occurred as part of the Mexican Revolution. In World War II, Mexico and the United States had been members of the anti-Hitler alliance. After that, the nations kept good relationships with each other and developed commercial links.
Comparison of Politics, Laws, and Economics
When comparing the United States and Mexico, the first thing to pay attention to is the compatibility of their policies and laws. Mexico’s foreign policy has traditionally focused on the principle of multilateralism in international relations, the rule of international law, and non-interference in the internal affairs of other states. By contrast, the U.S. is actively interested in the affairs of neighboring countries and is actively trying to expand its area of influence in the world. Mexico, like the U.S., is a participating State of the United Nations and is a contributing State of all the specialized agencies of that organization, a member of the WTO, Interpol, the G20, and observers in the Non-Aligned Movement. In addition, Mexico was the first Latin American country to join the OECD and the only country in the region to co-found the EBRD. Mexico’s geopolitical position is characterized by close ties with the United States, Canada, and the leading nations of South America and the Caribbean. One of the key international agreements for the country was the North American Free Trade Agreement, signed in 1992 (Butler et al., 2019).
By 2008, all commercial obstacles that existed between the United States and Mexico had been completely removed (Congestional Research Service, 2020). However, after the election of President D. Trump to the U.S., foreign policy changed somewhat, the country adopted a policy of protectionism. This led to a modification of the format of cooperation between the nations, and a new agreement was signed in the fall of 2018.
The deal, which provides for the introduction of trade duties on different categories of goods, entered into force in 2020 (Congestional Research Service, 2020). Mexico participates in many other integration structures to strengthen trade and economic ties and political cooperation. In addition, Mexico has observer status in some Latin American integration groupings. The U.S. is a member of most European and international organizations. Deepening economic and political cooperation with countries in Europe and Asia is essential for the U.S. and Mexico. Close ties with the U.S., both in manufacturing and services, have made Mexico’s economy virtually dependent on the financial well-being of its northern neighbor.
In this context, one can move on to a comparison of the economies of these countries. Mexico’s $2.4 trillion economy is the 11th largest globally (Butler et al., 2019). It has become more manufacturing-oriented since the North American Free Trade Agreement. Its per capita income is about a third of that of the U.S., and its income distribution stays extremely uneven. The U.S. has the most technologically powerful economy globally, with a per capita GDP of $59,500 (Congestional Research Service, 2020). U.S. firms are at the forefront of technology developments, particularly in computing, pharmaceuticals, medical devices, aerospace, and military technology. Mexico emerged as the number two export market for the U.S. and the number three source of imports. In 2017, bilateral commerce and services surpassed $623 billion.
Comparison of Culture, Ethics, and Norms
Mexico is a strongly hierarchical system. This implies that individuals embrace a hierarchical order in which everyone has a position and does not need any extra grounding. Organizational hierarchy is considered a representation of inequality. In the United States, one of the most prominent dimensions of disparity is the extent of power that each person has or can have over other people. For example, this is expressed in the voting procedure, where the person with at least one vote more than half wins. This phenomenon is called the dictatorship of the majority and reflects inequality. Mexico is considered a collectivist society (Hofstede Insights, n.d.). This is seen in the strong lasting dedication to a group of members, whether family, extended household or extended community. In a collectivist culture, loyalty is primary and takes precedence over the majority of other social norms. Society fosters strong relationships in which everyone takes ownership of the group members. In contrast, the United States is one of the most individualistic societies in the world. This is demonstrated by the explicit focus on equal opportunities in all facets of the American community and government.
Society in Mexico also prefers to avert uncertainty. Countries that demonstrate high levels of uncertainty espouse strict convictions and behavioral codes and are not tolerant of non-orthodox attitudes and opinions. There is an effective demand for regulations in this culture. The United States, on the other hand, exhibits a low level of uncertainty avoidance. There is a degree of embracing new initiatives, innovative goods, and a readiness to try new things involving science, business methods, or cuisine. Americans are more accepting of all thoughts and opinions and tolerate a greater degree of self-expression than Mexicans. At the same time, Americans do not require many regulations and are less emphatically explicit than Mexicans.
Assessment of Applicable Trade Theories, Import/Export Flows, Competitive Advantage
The theory of comparative advantage can describe economic relations existing between the United States and Mexico. According to this theory, two circumstances should be taken into account when analyzing the direction of foreign trade. First, it should be taken into account that economic resources – natural and labor resources – are unevenly distributed between countries. Secondly, the efficient production of different goods requires different technologies or combinations of resources. The advantages that countries have are not once and for all given, so even countries with absolutely higher production costs can benefit from trade exchange. It is in the interest of each country to specialize in the production in which it has the greatest advantage and the smallest weakness and for which the relative rather than the absolute benefit is greatest. The aggregate output will be greatest when the country produces each good with the lowest opportunity cost. Thus, the relative advantage is a benefit based on lower opportunity costs in the exporting country. Hence, as a result of specialization and trade, both countries involved in the exchange will benefit.
After the NAFTA trade agreement was signed, U.S. car companies moved some manufacturing to Mexico, where manpower is cheaper. From that time, Mexico emerged as the seventh-largest producer and fourth-largest automotive exporter in the world. The sector accounts for 750,000 workers (Butler et al., 2019). Donald Trump, who has declared a policy to bring jobs back to the U.S., has promised to levy massive taxes on car imports from Mexico. Mexico continues to be a significant exporter of agricultural raw materials for – cotton, coffee, tomatoes, and henequen. The country’s exports tend to expand its structure by supplying industrial goods to foreign markets.
The leading role is played by exports of automobiles and auto parts, mainly to the U.S. market. In recent years, thanks to the active participation of Japanese firms, Mexico has intensively increased its exports of electrical products. Imports from the U.S. play an essential role in the country’s economy, at the expense of which the bulk of the country’s needs in industrial products is satisfied. Mexican imports are dominated by semi-finished products, machinery and equipment, and consumer goods. The U.S. has a competitive advantage in trade at the moment. This country is a critical exporter in the commodity market of Mexico.
FDI with Coverage of Home vs. Host advantages
Mexico is one of the developing countries the most open to foreign direct investment, and the ninth-largest beneficiary of FDI globally. Foreign direct investment in Mexico fell to 11.7 percent in 2020 due to the COVID-19 pandemic to $29.079 billion (Butler et al., 2019). In 2020, 39.1 percent of all foreign investment in Mexico came from the United States. Manufacturing and financial services accounted for the bulk of investment, followed by mining, trade, and construction. Mexico is the second-largest investment destination in Latin America after Brazil. Nevertheless, the country is heavily reliant on its relationship with the U.S. and thus susceptible to any modifications to the free trade agreement. Home and host advantages for these two countries should also be considered. Host advantages are the benefits that Mexico receives from attracting FDI. Among them is the increase in employment and economic growth of the country.
FDI inflows stimulate both the manufacturing and service sectors. This, in turn, creates jobs and helps reduce unemployment among the country’s educated youth and skilled and unskilled labor. Increased employment leads to increased income and equips the population with increased purchasing power. It also includes developing human resources, an increase in exports, and stabilization of the exchange rate. As for home advantages, these are the benefits that the U.S. receives by investing. These include gaining an economic and political ally in Mexico, an influx of foreign labor, and tax stabilization.
Nature of Foreign Exchange Relationship
The U.S. relationship with Mexico is strong and stable. The nations have a 2,000-mile border in common with 55 operational ground ports of the entrance (Congestional Research Service, 2020). The bilateral relationship between them directly affects the lives and livelihoods of many people in both countries. The relationship between the U.S. and Mexico is broad and goes further than both diplomatic and formal ties. It includes extensive trade and cultural and educational relations. Mexico is presently our second-largest merchandise trading counterpart. In 2019, hundreds of thousands of people crossed the border legally every day (Congestional Research Service, 2020). There are currently 1.6 million U.S. citizens living in Mexico, and Mexico is a major overseas destination for U.S. travelers.
Trade Agreements and Barriers
In May 2013, the presidents of the United States and Mexico decided to create a high-level Economic Dialogue (Congestional Research Service, 2020). Its purpose is to generate new workplaces and foster reciprocal economic development. In February 2016, the U.S. and Mexico were among the 12 countries that became signatories to the Trans-Pacific Partnership, which provided for the lowering or removal of most customs tariffs on goods and services. On January 23, 2017, Donald Trump signed an executive order releasing the U.S. from the TPP, calling it a great step for American workers (Congestional Research Service, 2020). A barrier to the bilateral relationship is primarily illegal migration. More than 50 percent of the 11 million illegal immigrants living in the U.S. are from Mexico. Former U.S. President Barack Obama intended to address this problem by liberalizing immigration policy. Donald Trump decided to construct a boundary wall at the expense of his neighbor to the south.
Another factor complicating the U.S.-Mexico relationship is drug trafficking. According to customs and immigration officials in both countries, the combined revenues of Mexican drug lords reach $19-29 billion a year (Congestional Research Service, 2020). Most of the methamphetamine shipped to the U.S. is produced in laboratories in Mexico. The U.S. has been working with Mexico since 2007 on a program called Initiative MĂ©rida to combat drug trafficking and associated forms of organized crime (Congestional Research Service, 2020). It includes training and the provision of equipment. MĂ©rida’s initiative has increased the number of drug criminals expelled from Mexico to the U.S.
Summary & Conclusion
To summarize, the U.S.-Mexico trade relationship has a long history. It dates back to the time of American expansionism. Despite the initial hostility between the two countries, they still established fruitful economic cooperation. The U.S. and Mexico cooperate economically and politically by membership in numerous international organizations. Comparing the cultures of the two countries, the United States has a much more developed ethic of individualism. Also, Americans are much less likely to choose the unknown than Mexicans. The theory of comparative advantage best describes the trade relationship between the two countries. It considers the benefits that both countries can derive from the trade, depending on their backgrounds. The U.S. is the largest source of foreign direct investment inflows for Mexico. Drug trafficking and windowless migration remain significant barriers to bilateral relations. Thus, there are still challenges in the U.S.-Mexico relationship, yet both countries benefit from close cooperation.
References
Butler, E. W., Pick, J. B., & Hettrick, W. J. (2019). Mexico and Mexico City in the world economy. Routledge. Web.
Congestional Research Service. (2020). U.S.-Mexico economic relations: Trends, issues, and implications. Congestional Research Service. Web.
Hofstede Insights. (n.d.). Country comparison. Hofstede Insights. Web.