SHANNON O’NEIL: Mexico and the US, two nations indivisible

17/03/2013 |

Mexico’s future is closely tied to that of the United States; but to get to the next level of prosperity, it must solve its security issues, says Shannon O’Neil

When it comes to Mexico, people usually think about the security issue, and that’s what much of the news coverage has been. But underneath that, behind the headlines, we have seen a transformation of Mexico’s economy over the last couple of decades: it has moved from a very closed, inward-looking economy, one whose exports were dominated by oil, to an economy that is one of the most open and increasingly competitive in the world. In measures like trade to GDP, Mexico outpaces not just the United States or places like Brazil, but it outpaces China. It is quite an open and competitive economy now.

A big part of that is due to its deepening ties to the United States. Since the North American Free Trade Agreement (Nafta) was signed almost 20 years ago, we have seen the creation of regional supply chains for a myriad of different types of industries and companies. For every product that is imported from Mexico in the US, on average 40% of it would actually have been made in the US. It has become a very symbiotic relationship, and it has become an integrated economy in many ways and in many sectors, and particularly in manufacturing. There, we see almost seamless integration in some companies, where production happens on both sides of the border. What it means is these economies, companies and industries are now not only intimately tied, but permanently tied at this point.

Mexico’s positive future is closely tied to the United States, in part because of this integration of production. If it does extend beyond the US, it would most likely be through an expansion of what is already this North American production platform, through agreements like the Trans-Pacific Partnership (TPP), which would expand Nafta beyond Canada and Mexico, to include other Latin American countries and many Asia Pacific countries. It is quite a deep and comprehensive free trade agreement, and one could see it expanding in production chains in many other countries that are participants, and sales would be going up. The US, for all of its hiccups in recent years, is still the largest market in the world, so being tied to the US is not a bad thing at all.

Recently, talk about a mega-agreement on trade between the world’s biggest trading bloc – the European Union – and the US has surfaced. But it is not clear at all that this would hurt Mexico; it already has its own trade agreement with the EU and, on the other hand, there may be incentives to extend the EU-US trade agreement to include other countries. 

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What could hurt Mexico, though, is something coming from inside, as the security problem is one of the gravest threats to the country overall; it affects its politics but it also affects its economics. If Mexico did not have these serious, grave security threats, its growth would be much faster; the security issue is a huge hit on the economy as it influences things like long-term foreign direct investment. When investors think about setting up new factories or new operations, security weighs on their decision-making process.

Part of the security challenge is Mexico’s struggle to strengthen and professionalize its police forces and its court system. Having fair and autonomous courts matters in terms of reducing impunity and therefore violence, but it also matters in terms of economics. It matters when people think about contracts and title disputes.

Violence and the security issue harm the economy, but some of the structural frameworks do so too. Mexico is quite a concentrated economy in many sectors, with a lot of monopolies and oligopolies, so allowing many of these sectors to become more competitive, allowing entrepreneurs to flourish and making it more possible for Mexico to benefit from their ideas, opening up sectors to new ideas, to smaller companies, would be very beneficial for the country.

The biggest catalyst for these reforms will be the country’s electoral democracy. Mexico is now a democracy, a bit messy at times, but it is a stable democracy. And the Institutional Revolutionary Party (PRI) was out of power for 12 years; they very much wanted to get back into power and they very much want to stay in power. But when you look at public opinion polls, the two things that matter most to citizens and voters are the economy and security. So there is an electoral incentive, a strong electoral incentive for President Enrique Peña Nieto to reduce violence. How do you reduce violence? In the medium and long term the only way to reduce violence is to end corruption and impunity. You need to strengthen your courts and you need to strengthen your police forces. I do think that people within Peña Nieto’s party, within his cabinet, see this as the way that Mexico needs to go, and this can be an important driver for reforms.

Shannon O’Neil is Senior Fellow for Latin America Studies at the Council on Foreign Relations. She is the author of the forthcoming book Two Nations Indivisible: Mexico, the United States, and the Road Ahead. Interview by Antonia Oprita

Tagged as: Mexico US economic growth crime corruption justice

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