What makes Mexico attractive?
On January 23, U.S. President Donald Trump withdrew the U.S. from the Trans-Pacific Partnership or the TPP, stating the decision to be a “great thing for the American worker.”
Mexico, with its relatively low labor costs and close proximity to the US, has long served as an ideal destination for manufacturers to set up production facilities. In 2015, labor costs in Mexico averaged a $6.20 per hour, as compared to its peer group average of $18.7/hour, according to a Deloitte report. Moreover, the average industrial gas prices in the region are 63% lower and electricity costs 4% lower when compared to the prices in China.
Consequently, we’ve seen many US manufacturers move their manufacturing setups to Mexico in order to take advantage of lower costs. According to President Trump, this has also led to a job drain from the US to Mexico. Consequently, by withdrawing from the TPP, Trump intends to get jobs back to America.
President Trump has also set out to renegotiate the North American Free Trade Agreement (NAFTA). The NAFTA, signed in 1994, has created a common trading market among the United States (SPY) (IWM) (QQQ), Mexico (EWW), and Canada (EWC). Trade between the United States and Mexico (EWW) has also increased manifold since the NAFTA was put into place. The United States is the top export destination for Mexican goods accounting for about 73% of all Mexican exports. It is also the largest supplier of goods to Mexico accounting for 51% of Mexico’s imports. According to the US Census Bureau, last year the U.S. trade deficit with Mexico stood at about $58.8 billion as of November 2016.
Who stands to lose?
Now, Mexico exports more to the U.S. than it imports from it. Mexico’s industry therefore stands to suffer more in the event of weakening trade ties between two nations. The reeling Mexican peso is already playing its part in fueling inflation in the economy which has reached 3.36% as of December 2016 from 2.54% in June 2016.
Mexico’s President Enrique Pena Nieto has already said that “Mexico will immediately start talks that would lead to bilateral agreements [with TPP signatories].”