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Slaughter & Rees Report - Buenos Días, President Obama

April 29, 2013 --

President Obama arrives in Mexico City on Thursday for an official state visit. Coming just five months after the inauguration of Mexico’s new president, Enrique Peña Nieto, the visit reflects the vital importance of the U.S.-Mexico relationship. But the visit is also a testament to Mexico’s economic progress.

It is easy to forget that just a few years ago Mexico was seen as one of the big losers in the beauty contest among emerging markets. When Goldman Sachs in 2001 identified four high-potential developing countries, which would be christened the “BRIC” countries, Mexico was noticeably absent. In his 2005 book The World is Flat, Thomas Friedman wrote in some detail about how Mexico was being surpassed by China. And in 2009, Mexico’s GDP contracted 6 percent—in large part because of recession in the United States, Mexico’s biggest export market.

But since then, Mexico has bounced back. Growth was 5.5 percent in 2010, 3.9 percent in 2011, and 4.0 percent last year. The International Monetary Fund projects growth will be 3.5 percent in 2013 and 2014.  Perhaps inevitably, the country is now being labeled an “Aztec tiger.”

One key element of Mexico’s growth (and resilience) is the country’s openness to trade. The Financial Times has reported that in 2010, the sum of imports and exports as a share of Mexico’s GDP was 58.6 percent—higher than any other country in the world, and comfortably exceeding China (47.9 percent), Russia (41.9 percent), and the U.S. (21.6 percent). Mexico also has free-trade or preferential-trade agreements with 44 countries—NAFTA being the most important of all. The United States and Mexico traded nearly $500 billion last year, up from $80 billion in 1993, the year NAFTA passed.

Emblematic of Mexico’s rise has been its success in competing with China. Mexico’s share of U.S. manufacturing imports has been growing since 2010, much of it coming at the expense of China, according to the IMF. Chinese and Mexican wages have been equalizing:  Mexico’s were six times higher than China’s in 2003—but just 40 percent higher in 2011.

Looking ahead, President Peña Nieto appears determined to enact reforms that will help unlock opportunity throughout the economy. He has struck agreements with legislators to deregulate telecoms and open them up to foreign investment, to overhaul education, and to inject greater flexibility into labor markets.

Mexico still faces major challenges, of course. Organized crime and drug cartels continue to handicap the country. And the failure to open up Pemex, the state-owned oil and gas company, is stifling exploration and potentially depriving the country of billions in new revenues.

But the government’s willingness to confront other tough challenges bodes well. It also suggests that Mexico can be a model for emerging markets seeking to sustain growth amidst the competitive pressures of the BRICs. Indeed, if President Obama comes away from his visit with some lessons from Mexico’s renaissance that he can apply back home, his trip will have been a success.

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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