In NAFTA, there were several key provisions that impacted Mexico’s auto industry, making it one of the big beneficiaries of the agreement.
Since 1994, Mexico’s auto production has been on an upward trend. In 2008, Mexico displaced Canada as the second largest auto producer in North America, and by 2014, its light vehicle production reached over three million units. Approximately 75 percent of these vehicles are exported to North America (U.S. and Canada).
Mexico is also a big player in auto parts. One-third of all auto parts imported to the U.S. come from Mexico, making Mexico the leading supplier to the U.S. In addition, a significant portion of auto parts are produced in maquiladoras along the U.S.–Mexico border.
Tom Klier from the Federal Reserve Bank of Chicago discussed the agglomeration of auto plants and suppliers. In 1985, most major assembly plants were located in the Detroit area. But by 2013, manufacturing plants began to locate not only in the southern U.S. but also in Mexico. Since suppliers may sometimes serve several assembly plants, they tend to cluster near them. In addition, as the need for just-in-time inventory has grown, suppliers are more likely to be close to the plants they supply. As assembly plants have migrated to the southern U.S. and Mexico, so have suppliers.
Mexico’s standout performance in auto manufacturing stems not only from its growing clusters and supply chain but from several other elements as well. According to Eduardo Solis, president of the Mexican Automotive Industry Association, Mexico’s attractiveness is also attributed to its young and skilled workforce that is eager to learn. Solis also referred to the country’s economic stability and its geographic location. Finally, Mexico’s attractiveness also stems from the numerous trade agreements, which allow manufacturers to export duty-free to countries other than the U.S.
Mexico’s auto industry is expected to have a strong future. Not only is Mexico an attractive country for investment, but also, vehicles tend to be produced in the region in which they are sold; thus, Mexico will continue to be a viable place to manufacture vehicles. By 2020, it is expected that Mexico will have installed capacity to produce five million vehicles.
U.S.–Mexico Manufacturing: Back in the Race?
Since the implementation of the North American Free Trade Agreement (NAFTA), trade between the U.S. and Mexico has seen tremendous growth, increasing from approximately $160 billion in 1994 to currently over $530 billion.
For the U.S., Mexico has become its third most important trade partner (after Canada and China), and for Mexico, the U.S. is the top trade partner.
Due to NAFTA’s reduction in tariffs and elimination of trade barriers, U.S.–Mexico intraindustry trade has also expanded notably. Currently, approximately 40 percent of content in
U.S. imports from Mexico originated in the U.S., surpassing the U.S. content in imports from Canada (25 percent) and China (4 percent). The increased bilateral trade and production sharing between the U.S. and Mexico resulted in stronger economic integration among the two countries and in a synchronization of the U.S. and Mexico business cycles. It is clearly visible that in the post-NAFTA period, both U.S. and Mexico industrial production became quite synchronized.
As trade between both nations has grown and as their business cycles move more in step, the border region has been at the core of this process. Not only is the border the point of entry and exit for goods, but manufacturing is also one of the main drivers of border economies. The Paso del Norte region, comprising El Paso, Ciudad Juárez and Las Cruces, boasts over 250,000 manufacturing employees, making the region one of the largest manufacturing hubs in North America.
Editor’s Note: The two stories posted above were written by Roberto Coronado and Marycruz De León, economists with the Federal Reserve Bank of Dallas-El Paso Branch. The stories first appeared in Crossroads – Economic Trends in the Desert Southwest, Issue 1, 2016, a publication of the Federal Reserve Bank of Dallas. There are eight stories by Coronado and De León in the publication. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Crossroads is available on the Bank’s website at www.dallasfed.org.
Editor’s Note: The main image accompanying this guest column shows workers at Honda’s Celaya, Mexico, plant. Photo: Susana Gonzalez/Bloomberg News.