Globalization revolutionized world commerce in the 1990s, and Mexico joined the movement with gusto. This decision paid dividends to the Mexican economy for over a decade. But greater openness has increased Mexico’s exposure to the world recession, the most serious test globalisation has faced to date. Is Mexico coping, and more importantly, will its new openness survive the downturn?
The Mexican economy fared well through the past economic cycle. Following the peso crisis of 1995, growth averaged 5.5% annually for five years. The mild US recession in 2001 reined in growth for three years, but Mexico rebounded. Growth averaged just under 4% annually from 2004-07, comparing favourably with the average for Latin America. In the good years, international trade was a key growth driver, with exports expanding at more than double the pace of the entire economy.
Unfortunately, the good news came to an abrupt end a year ago. The first of four sharp quarterly contractions occurred between July and September of 2008, and over the past four quarters, economic activity has fallen by an estimated 9.7% - led by an estimated 24% contraction in exports. Mexican GDP has followed the path of US industrial production closely, and the effects have spilled into domestic activity. Retail sales are now 5% below year-ago levels, and the trend is downward.
A number of indicators suggest that the worst may be over. Business confidence is on the rise, recovering more than half of the late-2008 loss. Manufacturers are much more upbeat than they were six months ago, and confidence is gaining momentum. The stock market has recovered almost all of the ground lost in late 2008. Moreover, international borrowing costs have stabilized. Bond spreads peaked at over 500 basis points last fall, but have since normalized to 250 basis points currently.
The stage is set for recovery – but the big question is, when? As in Canada, Mexico’s trade dependence ties its fortunes to global – and mostly US – performance. Mexican trade intensity – exports plus imports as a share of total GDP – has surged from a paltry 20% in the early 1990s to 55% at present, and is expected to surge to 70% in the recovery. But trade remains depressed, and will likely remain so until US economic activity begins to pick up in mid-2010. If Mexican exporters can wait until then, the dividends of trade will again be great. At that point, US growth is set to head up sharply, and will lead the rest of the world, giving both Mexico and Canada a jump-start to recovery.
Will Mexican exporters make it? Time will tell. A big hindrance is the rise of protectionist rhetoric. Starting with the ‘Buy American’ language in US legislation, a wave of measures and counter-measures has begun, and Mexico felt compelled to introduce retaliatory measures of its own. The actions are expected to remain voter-placating rhetoric, as a greater number of jobs – both in Mexico and around the world – depend on free and open trade. Mexico’s policy moves suggest the same. Since 1994, Mexico has signed 10 separate free trade agreements, talks are in place for an 11th, and there are rumours of a possible agreement with Brazil. Mexico remains committed to globalization.
The bottom line? Recessions always threaten to undo the progress of international trade. Mexico’s investment and commitment to global trade is currently being tested. But the gains from freer trade that Mexico has seen to date, and the agreements it is pursuing, suggest the test will be passed.