Mexico as a Major Power

BY GEORGE FRIEDMAN MARCH 14, 2016

Mexico has the 11th-highest GDP in the world based on purchasing power parity, according to the International Monetary Fund. As Europe weakens, it will be in the top 10 in the not-too-distant future. Yet, this country is regarded by many Americans as a Third World nation, dominated by drug cartels and impoverished people desperate to get into the United States.

While it is true that organized crime exists in Mexico and that many Mexicans want to immigrate to the US, a roughly equal number are leaving the US and returning to Mexico… drawn by economic opportunities in their home country. The largest auto plant in the Western Hemisphere is in Mexico, and Bombardier builds major components for aircraft there. Mexico has many problems, of course, but so does the U.K. (the 10th-largest economy) and Italy (12th).

No one would be surprised by the U.K. or Italy rankings, but many people would be stunned to find that Mexico is ranked right up with them. Obviously, Mexico is not as developed as Britain is. Like most nations transitioning from underdevelopment to greater development, Mexico suffers from substantial class and regional inequality, and the emergence of a dominant middle class is still unfolding.

At the same time, Italy also has substantial regional inequality. Mexico can't aspire to British standards, but Italy is a reasonable model. Inequality diminishes the significance of being 11th in some ways, but it doesn't change the basic reality of Mexico’s relative strength.

Mexico is commonly perceived, far too simplistically, as a Third World country with a general breakdown of law and a population seeking to flee north. That perception is also common among many Mexicans, who seem to have internalized the contempt in which they are held.

Mexicans know that their country’s economy grew 2.5 percent last year and is forecast to grow between 2 percent and 3 percent in 2016—roughly equal to the growth projection for the US economy. But, oddly, they tend to discount the significance of Mexico’s competitive growth numbers in a sluggish global economy.

Here, therefore, we have an interesting phenomenon. Mexico is, in fact, one of the leading economies of the world, yet most people don’t recognize it as such and tend to dismiss its importance.

This week, I spoke at the annual meeting of the Mexican Association of Banks in Acapulco. It was a major event, with the Mexican president and the head of the central Bank speaking, along with Americans such as Larry Fink, chairman of BlackRock. The contrast between what Fink and I had to say about Mexico, and what the Mexicans had to say, is interesting. The Mexicans were cautious, frequently dwelling on the challenges facing Mexico and not focusing very much on the country’s achievements.

Fink and I were effusive about Mexico. Given the condition of the rest of the world, we argued, North America is an island of tranquility and opportunity—with Mexico as the most promising region economically. The contrast between our views, the views of many Mexicans, and the views of most Americans is so vast that it feels as if we dwell on different planets. I know of few places on earth that are viewed so differently by different observers.

Let me summarize the argument I made. First, the Eastern Hemisphere (Eurasia in particular) is moving toward systemic failure. The EU is struggling to manage a host of problems. Russia is contending with strategic and economic challenges, particularly the collapse in oil prices. China is trying to find a stable new normal and maintain social stability. As for the Middle East, no summary will suffice. The rest of the Eastern Hemisphere is experiencing what I might call “normal instability.”

Compared to other parts of the world, North America is not only remarkably stable but is also doing well economically. One of the main views of the Geopolitical Futures model is that, following the collapse of the Soviet Union, there was no longer any European global power. The center of gravity of the international system had shifted away from Europe, to North America. This argument rests heavily on the inherent military and economic power of the United States. The US Navy controls the oceans, and the United States produces 22% of the world’s GDP. Just as important, the United States is an inefficient exporter, a factor that cushions the US from the Eastern Hemisphere’s crisis.

While roughly 30% of GDP comes from exports in Russia, 46% in Germany, and 23% in China, US exports account for only 13% of GDP with over a third of that total sold to Canada and Mexico. Thus, while Eastern Hemisphere powers teeter on the edge of an economic volcano or tumble in, the United States finds itself relatively insulated from declines in global import demand, and the US insulates the countries on its northern and southern borders to a great extent.

The contrast between the European Union and NAFTA is critical. There are institutional differences between the attempt by the EU to integrate heterogeneous countries and NAFTA’s limits on integration. But the most important difference is that Germany, the foundation of the European system, is a massive exporter, while the United States is a net importer. Given the vastness of the US economic base, the net negative flow has little impact. However, it has an important twist in terms of Mexico. Exports, more than 80% of which go to the United States, constitute 32% of Mexico’s GDP. Thus Mexican exports to the United States amount to about a quarter of Mexico’s economy.

US GDP is about $17 trillion, and imports from Mexico’s are about 0.2 percent of the US economy, so they have very limited impact. But their impact is further mitigated because Mexican-manufactured exports contain a substantial quantity of components made in the United States. For example, Mexico is one of the top exporters of automobiles to the United States. These cars are not sold under a Mexican label, since Mexico manufactures them for foreign companies. But unlike Japanese or Chinese exports to the United States, cars manufactured in Mexico contain about 40% of their parts purchased from the United States. This means that US manufacturers contribute to the total value of Mexican exports.

Synergies have driven Mexico into dependence on the United States. The US has had the option of shifting its imports away from China and sourcing from Mexico instead. This shift has had a huge impact on Mexico’s growth. It is also one of the reasons why the Mexicans are less than positive about their economic position.

There is much history between Mexico and the United States, with the pivotal event being the American conquest of northern Mexico—from present-day California to Texas—in the 1830s and 1840s. This conquest created a complex view of the United States, informed by both anger and envy. The tragedy of Mexico, from its point of view, is that it is still so tied to the United States.

NAFTA, much debated in the US, had an even greater effect on Mexico. Access to the American market reshaped the Mexican economy, strengthening it immeasurably. It also created an enormous imbalance—economically in Mexico’s favor, politically in the United States’ favor. When you send 80% of your exports to one country, that country has tremendous power over you. This is not only a political fact, in the sense that some politician could try to shut down trade, it is also distinctly macroeconomic: If the American economy catches a cold, Mexico catches pneumonia. As other exporting countries have discovered, their well-being is in the hands of their customers. So long as the US–Mexico imbalance is there, the Mexicans will and ought to feel uneasy.

The American conquest of Northern Mexico implanted an image in American minds. The Mexicans ought to have defeated the Texans. The Mexicans had the larger army, better equipment, and, in many ways, better commanders. But the Mexicans also had the defect of a class-ridden society. The army General Santa Anna brought north into Texas had well-trained French generals and good artillery, but it was an army drawn from Chiapas, composed of indigenous people without shoes or training. It was a Napoleonic army of the impoverished led by the nobility, fighting as a mass rather than with individual skill.

When Santa Anna crossed the northern deserts, his army found itself facing the coldest winter in years, with ice and even snow. The soldiers suffered terribly, and by the time they reached the Alamo, they were exhausted. Their commanders didn’t care about the troops and made their way east to San Jacinto… where the Texans defeated them.

It is important to understand the vast chasm that existed between the officers and soldiers in Mexico's army. There are always such differences, and they sometimes run very deep. But the chasm in the Mexican army resembled the divide in the British army so apparent at Waterloo, when the commander, Wellington, called his men “scum.” The Mexicans adopted the European model, in which the soldiers were induced by money or simply pressed into service. This was the lot of Mexican soldiers; it was their lives. But when they confronted the Americans, where the gap between enlisted men and officers was substantially smaller, an army that was inert (unless pressed) confronted an army that encouraged initiative at all levels. The latter army won.

The model of European colonialism defined the Mexican forces… but not the Americans. And for the next century and a half, the Mexican legacy of colonialism continued to define the difference between the two countries’ armies.

The experience of the Mexican-American War also defined American perceptions, and perceptions turn into habits, and habits become truths. The Mexican soldiers were seen as typical Mexicans and held in contempt, while the generals were seen as fools.

Further, the border that was created shielded Americans from a real understanding of Mexico. The border was arid and mountainous—hard to penetrate. As in many borderlands, it was a brutal place of criminals and desperate men. Certain commodities are always worth more on one side of the border than on the other. Sometimes it is cattle; sometimes it is drugs. Sometimes the goods are rightfully owned, and sometimes they are stolen.

The area north of the US–Mexico border is not like the rest of the United States, and the area south of the border is not like the rest of Mexico. But the borderland is a shield, and the shield is all that most people on either side tend to see.

The American view of Mexico was formed at San Jacinto and confirmed by endless images of Mexican revolutionary Pancho Villa raiding US border towns. He was depicted as ignorant, brutal, and dangerous. Today, Mexico is seen as a land of drug dealers, the descendants of Villa, far more dangerous than he was to American security. This perception is like viewing the United States today as if it were Chicago in the 1920s and 1930s and as if Al Capone were the typical American.

The Mexican fear of the United States is not unreasonable. Nor is the American fear of Mexico. It is easy to construct a tale of Mexico that is heavy on cartels and illegal aliens seeking to plunder and terrify the country. There is a deep history between our nations, a history that regenerates in different ways at different times.

The bankers I met at the conference in Mexico were cautious. They have been disappointed many times before by their own country. The Americans were enthusiastic. Americans tend to forego history in favor of the future… especially where money is concerned. But everyone there knew what Donald Trump has been saying during his campaign and resented the way he preys on American fears. There is no denying these fears, and there is no denying that Trump understands them. There is also no denying that, like most fears, there is some truth to them. There are cartels, and there are illegal immigrants, if fewer than before. But it is the distance between the Mexico that these fears conjure and the reality of what Mexico has become that is startling. The Mexicans themselves don’t trust the transformation of their country that has happened. They expect success to be snatched from them—probably by the United States.

But the fact is that Mexico is the 11th-largest economy in the world, with free access to the largest economy in the world and vast amounts of American investment pouring in. It may still have to contend with the challenges of sharing a border with Central America, but with China in decline, even the poor of the south might be mobilized by the low-level industries that made China successful and that now seek a new home.

The borderland and the smugglers who live there do not represent Mexico. Mexico will be one of the top 10 economies in the world shortly, and since North America is now what Europe once was, the prospect of two great powers on one continent is worrisome.

Of course, most of us cannot imagine Mexico as a great power. Nor could most people have foreseen the emergence of China or the resurrection of Japan—or even the United States itself—as a great power. This is a failure of imagination masquerading as common sense. I always doubt the ability of humanity to manage its future. The inevitable rolls over us. But here is a moment when an understanding of what Mexico has become might just have some real value, if only for our grandchildren.

There is an old Mexican saying: “Poor Mexico. So far from God, so close to the United States.” I don’t know about Mexico’s proximity to God, but it is clear to me that Mexico is no longer paying a price for its closeness to the United States, and neither is the United States. But now Mexico, as the junior partner, must manage this relationship.

George Friedman

Economic Power In Latin America Shifting From Brazil To Mexico

Over the last year three key factors have weighed heavily on Latin American economies: The end of the U.S. Fed’s quantitative easing, which has brought about less favorable international funding conditions; the decline in commodity prices, which has depressed LatAm export revenues, and the Chinese economic slowdown, which also has hit commodity-exporting countries in the region. As a result, economic growth this year has been a huge disappointment. In January, the consensus forecast was for GDP growth of about 3%, but now expectations have fallen dramatically to a 0.4% contraction.

The impact of the shocks, though, has been uneven across the region, reflecting very different economic fundamentals in each country. Brazil, the biggest economy in the region, is the standout disaster area, suffering its worst recession in 25 years. This alone has been responsible for most of the sharp deterioration in growth expectations for LatAm as a whole. The list of problems in Brazil is daunting: Interest rates have rocketed in the face of high inflation; confidence has been depressed by corruption scandals; and the public finances are a mess. As a result, the labor market has fallen apart. Ultimately, these problems are the self-inflicted consequences of President Rousseff’s inappropriate populist policies, state interventionism, and a lack of real structural and fiscal reform. No one should have been surprised when Brazilian debt was downgraded to junk status in September by Standard and Poors, while the currency, the real, has lost about 30% this year against the dollar.

As a result of the appalling situation in Brazil, economic power in the region has shifted rapidly to Mexico, the second biggest economy in LatAm. Mexico’s growth has been hampered by the crash in oil prices but the economy is growing, by around 2% year-over-year, and the economic outlook is positive. Solid domestic economic fundamentals, and my expectation of a resilient and improving U.S. economy over the next year, should help push Mexican growth towards 2.5%.


Read more at Forbes

Peso at Record Low, Growth Forecast Cut

Mexico News Daily reported "The peso plunged today to a record low of 17.28 to the dollar to crown a week of dismal news, including another reduction in the growth forecast for this year, lower industrial output, sliding oil prices and worries about U.S. interest rates, China and Greece.

The Finance Secretariat yesterday reduced its forecast for growth this year to 2% to 2.8%, down from May’s figures of 2.2% to 3.2%. The Bank of Mexico lowered its forecast last week to 1.7% to 2.5%.

The Mexican economy expanded by 0.5% in the second quarter, which was just above expectations. But industrial output was flat, another cause for concern, as exports to the U.S. were uneven and oil production continued to drop.

Those two factors are weighing on the economy, said Undersecretary of Finance Fernando Aportela. And Deutsche Bank economist Alexis Milo said industrial output “remains the main concern for growth.”

If there was any good news it was in the 0.9% expansion in the second quarter of the service sector, the strongest in a year.

Source: Reuters (en), Bloomberg (en)

Mexican Peso Plunges To 16/USD - Record Lows

The Mexican Peso has devalued 23.5% in the last 12 months, breaking 16.00/USD for the first time in history today.

Charts: Bloomberg

This is the fastest collapse in the currency since Lehman.

This is terrific for tourists and for expats, but it is a hardship for the Mexican people. Prices will be surging and it will make it harder for everyone in the end.

The Rio Grande nexus

Mexico is becoming a vibrant middle-class nation. Already, it is the largest trading partner of California, Texas and Arizona, and is responsible for hundreds of thousands of jobs across the Southwest. And that might be just the beginning. With economic and educational reforms under way, Mexico’s rise could accelerate. By one estimate, Mexico will be the world’s fifth-largest economy by 2050.

What will the emergence of a First World Mexico mean for the Southwest?

The Rio Grande nexus

By Michael Lind

The Rio Grande, which once divided the hinterlands of two countries, is becoming the seam that stitches together two of their most dynamic regions. North of the river, the revolution in oil and gas production enabled by hydraulic fracturing (fracking) has produced an economic boom in the land above the 23-county Eagle Ford Shale. Further north, the Texas Triangle bounded by Austin-San Antonio, Dallas-Fort Worth and Houston is exploding in population and prosperity, as it attracts migrants and jobs from the rest of the country and the world.

Meanwhile, the region south of the Rio Grande is the most prosperous in Mexico. Monterrey, the economic capital of the area, is the second-wealthiest city in Mexico, hosting affiliates of multinationals including General Electric and Toyota. The Mexican states in the Rio Grande Basin — Durango, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas — have a per capita GDP that is 2.3 times higher than that of the rest of the country. In Mexico as a whole, the middle class has grown to include as much as 40 percent of the population. As rates of Mexican fertility and immigration fall, the Great Migration from rural Mexico to the U.S. appears to have been a one-time phenomenon, like the Great Migration of rural blacks and whites to the Northern U.S. between the two world wars.

The continuing challenges of crime and poverty along the border should not obscure the outlines of a historic transformation in North America. The centers of economic dynamism in both the U.S. and Mexico — nations predicted to have the second- and fifth-largest economies in the world by 2050 — are converging at la frontera. A new transnational core in the global economy, like the Benelux nations of Europe and the concentration of wealth in East Asia, is emerging on both sides of the area between the Rio Grande and Nueces rivers once known as the Wild Horse Desert. In an age obsessed with bad news, this is very good news indeed.

Michael Lind is co-founder of the New America Foundation and author of “Land of Promise: An Economic History of the United States.”