Depressed Energy Prices Cause Decline in U.S.-Mexico Trade
Deputy Director Christopher Wilson writes about the impact of low energy prices on U.S.-Mexico trade.
Deputy Director Christopher Wilson writes about the impact of low energy prices on U.S.-Mexico trade.
From 2009-2014, U.S.-Mexico trade skyrocketed. Bilateral trade grew 75%, faster than U.S. trade with any other major trading partner, including China (61%), and importantly, both imports and exports were growing rapidly. In 2015, trade growth came to a screeching halt, though strong fundamentals suggest this may be more of a temporary blip than a new trajectory.
The Census Bureau recently released U.S. merchandise trade statistics for 2015, and though Mexico is still the United States’ second largest export market and third largest overall trading partner, for the first time since the economic crisis of 2008-2009, U.S.-Mexico trade declined from the previous year’s level. Interestingly, as shown in the graph below, U.S.-Canada trade dropped sharply in 2015, allowing China to become the United States’ top trading partner. In 2014, the two countries traded $534.3 billion, but in 2015 that number fell to $531.1, a decline of some $3.2 billion dollars. U.S. imports from Mexico basically held steady, growing from $294.1 to $294.7 billion, although this apparent stagnation masks multiple underlying trends. Exports, on the other hand, dropped some $3.8 billion. This brief analysis examines recent trends in bilateral trade and their implications for the future of U.S. and Mexican economies.
Energy
By far the biggest reason why trade values declined this past year is the tremendous drop in oil prices, which mean the same volume of trade is now worth much less than it used to be. Throughout most of 2014, U.S. buyers were paying about $90 per barrel of Mexican Mayan Crude Oil, according to data from the U.S. Energy Information Administration, but just like global energy prices, the cost of Mexican crude fell sharply, ranging from about $30-$55 dollars throughout 2015. This caused U.S. imports of crude oil from Mexico to fall from $27.7 billion in 2014 to $12.5 billion in 2015, a drop of more than $15 billion dollars. On top of that was another $1.3 billion dollar decline in Mexican exports of refined (non-crude) product.
Some of Mexico’s oil exports are consumed in the United States, but a large portion are refined in the U.S. (some by PEMEX itself at the Texas Deer Park refinery, which is co-owned with Shell) and exported back to Mexico. In this context, U.S. refined oil exports to Mexico declined by $3.6 billion dollars between 2014 and 2015. It is this $3.6 billion dollar drop, more than anything else, that explains last year’s $3.8 billion decline in overall U.S. exports to Mexico. Low oil prices drive declines in the values of other energy products and petrochemicals, and U.S. exports to Mexico in these categories fell by approximately another $2.5 billion.
Adding up all of these energy and energy-related losses, one would expect the value of U.S.-Mexico trade to have fallen by more than $20 billion dollars from its 2014 value. In reality, bilateral trade fell just $3.8 billion, meaning non-energy-related trade experienced net growth of around $16 billion. This, too, has a fairly simple explanation.
Manufactured Goods
Manufactured goods trade in general and auto industry trade in particular experienced significant growth, largely offsetting the energy sector losses. Mexican exports of cars to the United States increased by $2.4 billion and car parts by even more ($2.2 billion under the trade code for car parts, plus significant additional parts used by the auto industry but listed under headings such as electronics or machinery). Elsewhere in the transportation equipment sector, Mexico also boosted tractor for semi-trailer exports by $1.2 billion and other motor vehicles used for commercial transportation by nearly $600 million.
Beyond the auto sector, Mexico saw major growth in telecommunications equipment exports to the United States, which grew by $2.5 billion. Semiconductors, flat screen televisions, medical devices, and produce—especially avocados and berries—also experienced significant export growth.
U.S. non-energy-related exports to Mexico also increased from 2014 to 2015, although by less than imports. The U.S. auto industry also had a good year, boosting exports of vehicles and parts to Mexico by $1.2 billion.
The U.S. aerospace industry had a similarly good year, also expanding exports by $1.2 billion. This included $300 million in export growth of civilian aircraft and parts, but the largest growth—$700 million—came from the delivery of two satellites to the Mexican government by Boeing (although the first was lost due to an unsuccessful launch from Kazakhstan). The second was successfully launched by ULA out of Cape Canaveral, Florida.
What does this tell us about the economic relationship?
Over the last year in bilateral trade, both the United States and Mexico experienced declines in energy industry exports and nearly offsetting increases in manufactured goods trade led by the auto sector. The synchronized movements of U.S. and Mexican industries show the deep level of economic integration in the region. Even within a single industry, supply chains run in both directions. This also clearly demonstrates that trade between the United States and Mexico is not zero-sum; the two countries tend to experience economic ups and downs together, not one at the expense of the other.
As demonstrated by recent budget cuts, low energy prices are a significant challenge for the Mexican economy and a mixed bag for the United States. Low energy prices will continue to act as a drag on bilateral trade in the short-term, but the long-term outlook is more mixed. Natural gas development in particular has been driving down electricity costs in the region, which is associated with increased manufacturing competitiveness and, therefore, growing trade within the region.
The recently released figures from the U.S. Census Bureau only include merchandise trade, so all of the above 2014 to 2015 comparisons only take into account bilateral trade in goods. For the United States and Mexico, merchandise trade makes up the vast majority of all trade (82% in 2014), but including services trade does affect the balance of bilateral trade. Full year 2015 data for services trade with Mexico will not be available for a few months, but we can expect that the United States will, as it has for the past several years, export more services to Mexico than it imports. In 2014, the United States exported $30.0 billion in services to Mexico, while it imported $19.5 billion. Based on the data available from the first three quarters of 2015, it appears that both imports and exports with Mexico will have grown slightly from their 2014 levels, with an estimated 2015 total of $31.1 billion in exports to Mexico and $21.2 billion in imports.
Recently released data on the U.S. manufacturing sector has been mixed (some strong, some soft), but barring any major surprises, U.S.-Mexico trade in manufactured goods will continue to grow in 2016. Despite low energy prices, the overall U.S.-Mexico economic relationship is strong. This is evidenced in the ongoing growth of trade in manufactured goods, services, and other sectors. Including the above estimated values for 2015 services trade, U.S.-Mexico trade in 2015 totaled a staggering $1.6 billion dollars each day. Over the past two decades, the two countries have developed a highly integrated and highly competitive production platform, which promises to continue growing.
The Mexico Institute seeks to improve understanding, communication, and cooperation between Mexico and the United States by promoting original research, encouraging public discussion, and proposing policy options for enhancing the bilateral relationship. A binational Advisory Board, chaired by Luis Téllez and Earl Anthony Wayne, oversees the work of the Mexico Institute. Read more