I should really cover Mexico more, as I finally do with today’s video. This channel is very much based on US policy. Sure, I go in depth on the history and politics of a range of other countries, but it’s almost always in the framework of their significance for US foreign policy. Mexico is probably more important for the long term success or failure of the United States than any other country, except maybe China. Mexico is vastly more important for the US than any of the Middle Eastern wars or conflicts I have described.
Mexico is a trillion dollar economy. There are not many of those. It also shares one of the world’s longest borders with the United States. As I talk about today, there’s a good chance that the US and Mexico are going to converge further over the next couple decades, creating a block, with just three countries, that could remain vastly richer than China throughout the century. Or it could go in the other direction. Drug Wars, border nastiness, and outright US racism could derail this happy future. This is a topic I should cover more.
Video Transcript after the jump…
Hey there. Over the past year, there has been a seismic shift in Washington DC’s attitude towards China. Trump has led the charge of course, but unlike most of his lunacy, everybody from big business to the Democratic party is fully on board with the turn against China. My instinct is that this is a bad thing, but I need to do more research before I speak to it seriously. I am also sick of bad news. So today I want to talk about the silver lining here. Mexico is about to have a great decade.
In 1994 Mexico, the United States and Canada joined together in the North American Free Trade Agreement. Hopes were extraordinarily high. This was finally going to be the economic big bang that Mexico needed. Growth would accelerate, and poverty would quickly fade away. That’s not what ended happening. 25 years later growth has been steady, but honestly not all that impressive. It’s not that NAFTA did nothing. In fact it did quite a lot. There was a flood of consumer goods from the North. The US economy has benefited a lot more than Mexico’s has.
Free Trade put the country through a painful transformation. Mexican Standards of production have been upgraded to US levels, and many industries have been fully integrated with US and European companies. Competition with US agriculture destroyed many small farms and helped drive the massive wave of undocumented migration to the U.S. around the turn of the century. The economists had expected some of this creative destruction. But there was very little profit to go with all this pain.
The reason behind this was simple. Mexico’s cheap labor was supposed to make all the suffering worthwhile. US businesses were supposed to flood in to take advantage. Many did. But many, many more went to China. In 2001, China formally acceded to the World Trade Organization. After struggling for 7 years to transform its economy, Mexico was ready for the promised tidal wave of investment. Instead, all that money and all those jobs started flowing to China instead. Since the beginning of NAFTA in 1994, Mexican GDP has doubled. China’s has gone up by a factor of ten.
Basically, China took the economic miracle that Mexico was promised. China did so well that its labor isn’t that much cheaper than Mexico’s anymore, once you factor in transportation, fuel costs and other risks. Mexico was already beginning to chip away at China’s business, but Trump’s trade war has opened a whole new era. NAFTA, even Trump’s slightly modified version, is likely to finally start doing what was promised.
The consensus in the US has now turned firmly against China. Sadly, it now seems clear that the rhetoric will get more civilized with the next president, but the policy won’t change much. Capitalism with Chinese characteristics is a very weird, arbitrary system. US business and government was happy to overlook this when they were getting cheap components and paying pennies for labor. But now the labor isn’t so cheap, and Chinese businesses are actual competitors now. China’s system will have to go through massive, painful changes before it conforms to the standards of international trade law. Mexico has already made all those changes.
Once we are past Trump’s insanity, the US will spend the coming decades working with all the truly free market economies against China. Because of NAFTA’s transformations, Mexico is one of those economies. Even Trump seems to be backing off Mexico and Canada. Plenty of countries will be clamoring for the US business that is shifting out of China. But none of them are as well positioned as Mexico is. Mexico is about to have a very good decade.
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