U.S.-Mexico Economic Relations: Trends, Issues, and Implications

Publication Date: July 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Coverage: Mexico

Abstract:

Mexico has a population of slightly over 100 million people making it the most populous Spanish-speaking country in the world and the third most populous country in the Western Hemisphere. Based on a gross domestic product (GDP) of $677 billion in 2004 (about six percent of U.S. GDP), Mexico has a free market economy with a strong export sector that is very sensitive to changes in the U.S. economy. Mexico's economy is relatively small compared to the U.S. economy. Economic conditions in Mexico are important to the United States because of the close trade and investment interactions, and because of other social and political issues that could be affected by economic conditions, such as immigration.

The bilateral economic relationship with Mexico is among the most important for the United States. The most significant feature of the relationship is the North American Free Trade Agreement (NAFTA), which has been in effect since 1994. In bilateral trade, Mexico is the United States' second most important trading partner, while the United States is Mexico's most important trading partner. In U.S. imports, Mexico ranks third among U.S. trading partners, after Canada and China, while in exports Mexico ranks second, after Canada. The United States is the largest source of foreign direct investment (FDI) in Mexico. These links are critical to many U.S. industries and border communities.

In 2004, about 13% of total U.S. merchandise exports were destined for Mexico and 10% of U.S. merchandise imports came from Mexico. In the same year U.S. exports to Mexico increased almost 14%, while imports from Mexico increased about 13%. For Mexico, the United States is a much more significant trading partner. Almost 90% of Mexico's exports go to the United States and about 60% of Mexico's imports come from the United States. FDI forms another part of the economic relationship between the United States and Mexico. The United States is the largest source of FDI in Mexico, accounting for 65% of total FDI in 2003. The overall effect of NAFTA on the U.S. economy has been relatively small, primarily because two-way trade with Mexico amounts to less than three percent of U.S. GDP. The most significant trade issues that the United States and Mexico are focusing on in 2005 include agricultural products, the trucking industry, and rules of origin.

Over the last decade, the economic relationship between the United States and Mexico has strengthened significantly. The two countries continue to cooperate on issues of mutual concern. On March 23, 2005, President Bush met with President Fox and Prime Minister Martin of Canada to discuss issues related to North American trade, immigration and defense. After the meeting, the three leaders announced the Security and Prosperity Partnership of North America (SPP) in which they seek to establish a cooperative approach to advance their common security and prosperity; develop a common security strategy; and promote economic growth, competitiveness, and quality of life. This report will be updated as events warrant.