By TBY | Mexico | Mar 01, 2017
The Third Country
The economy of the border states where the US and Mexico meet.
Trucks cross the US-Mexico border at Nogales, AZ
In countless statements over the course of his election campaign and since taking office, Trump has described the agreement, which has increased bilateral trade by 400% since 2014, as the “worst in history.” But if it is detrimental to US interests, why does he not withdraw from it as he did with the TPP?
President Trump just needs to sign an executive order to leave NAFTA, so the decision does not even need to be approved by congress. He doesn’t do it, however, because the commercial interconnectedness of the US and Mexico is so great that leaving the FTA could generate an economic recession. Such a slump would be particularly harsh in the ten border states that run along the frontier (four in the US and six in Mexico), which combined would be the world’s fourth largest economy.
Together, these ten states have a combined GDP of USD4.6 trillion and a total population of almost 100 million. Many of these citizens currently cross the border on a daily basis to find cheaper goods than in their home countries, or to visit relatives on the other side. Mexicans regularly come to the US to purchase fuel and electronic goods, whereas Americans usually go to Mexico to receive cheaper healthcare services.
Many international companies have invested heavily in establishing maquiladoras in Mexico to assemble home appliances and other products for the aerospace and automotive industries. Such investment has provided the northern states with jobs. However, the economic differences between the US border states and those on the Mexican side are enormous. The GDP per capita in the four American states—from California to Texas—is about USD57,000. On the other side, per capita GDP from Baja California to Tamaulipas stands at just under USD10,000.
President Trump’s threats to impose a 20% border tax on Mexican goods seems to have cooled down, and as the Secretary of Economy of Mexico said last week, negotiations for modernizing NAFTA are to start in the summer and finish by early 2018.
US companies sold over USD230 billion in products to Mexico in 2016, a figure close to the GDP of Chile and higher than that of Portugal. Over 500,000 jobs in California depend on exports to Mexico, while in Texas this figure is about 300,000. And more than 80% of the dairy and eggs produced in Texas are exported to Mexico each year, evidence of the great importance of free trade to the US border states.
Comparative populations and GDP of the border states
The economic dynamics along this border are unique on the continent, a place where barriers to trade no longer exist. Certainly, if NAFTA was to be cancelled, the border would be the worst-affected region, as this third country relies greatly on trade to keep its economy running.
While Washington DC and Mexico City still strategize, positioning themselves to hold the best position at any future negotiating table, people and companies in the “third state” continue to invest, buy, and sell on each side of the border. Regardless of what happens at the political level, the mutual reliance of these 10 states will remain in place.