Economic History of Mexico and the United States
The "Economic History of Mexico and the United States" is still a work in progress. Please contact me if you would like to share your perspectives.
Thank you Sheila McGrath (Evercore ISI) and Bob Batting (Black Creek Group) for your contributions to this report.
Mexico and the United States
Historic Rivals Turn Friends
After the bombing of Pearl Harbor, the United States called upon the neighboring countries of Latin America to ally against the Axis Powers of Germany and Japan. For many Latin American countries, it must have been ironic.
The United States of America, the first colony of the New World to break free from Europe, walled off the Western Hemisphere from the Old World only to serve as their new master during a century of interference in Latin American affairs. Bananas!
In May 1942, Mexico sided with America and declared war against the Axis Powers. On the battlefield, the Mexican government deployed newly minted air crews called the Aztec Eagles, 33 pilots and 270 support personnel, to provide aerial support to U.S troops fighting in the Philippines in the South Pacific theater. The trust earned by this military alliance opened the door for additional cooperation, mostly economic.
Defense Spending by the United States as a Percentage of GDP. In the years before Japan bombed Pearl Harbor, the U.S. spent less than 2% of GDP on defense. On December 8, 1941, the United States declared war against the Axis Powers, and the entire American civilian population was mobilized to win what scholars called a "Total War." By 1945, defense spending in the U.S. increased to 36% of gross domestic product.
From 1941 to 1945, the war consumed one-third of total American economic output, totaling $249 billion in those years. In today's dollars, a total war of similar magnitude would cost $20 trillion dollars.
Oil was the vital commodity of World War II. — With processing, petroleum produced critical materials for war, including synthetic rubber, asphalt for roads and runways, and toulene for TNT and bombs. The most important petroleum product of all was high octane gasoline which fueled the Allied tank and mechanized infantry battalions as well as airplane squadrons and naval fleets.
Thank you Northwestern University for hosting these digital archives.
League of Nations | Statistical Yearbook Archive
America was the global leader in petroleum — In 1940, the United States produced two-thirds of all the oil in the world. Soon after declaring war, the U.S. government established the Petroleum Administration for War (which would later become the Department of the Interior) in 1942 to maximize the production of the oil, its processing and refinement into fuel and war material, and its transportation from American soil to battlefield theaters around the world. It was government and private sector cooperation, at an unprecedented scale.
Historian Keith Miller noted that the U.S. supplied 6 billion of the 7 billion barrels of oil used by the Allies during World War II. He and other historians have noted the herculean efforts of the American oil industry, acting in concert with the Petroleum Administration for War, to produce oil in Texas and deliver gasoline to the battlefront.
The Petroleum for Administration for War secured oil from both domestic and foreign sources. From Latin America, the U.S. bought oil from Venezuela, Colombia and Mexico, which consolidated America's dominant oil position in the Americas — Regarding Mexico, following the Expropriation of Foreign Oil Assets of 1938, America's oil industry boycotted Mexican oil. PAW facilitated the Cooke-Zevada Agreement, signed April 18, 1942 — the Mexican government paid $29 million in compensation to settle outstanding legal claims by American companies Jersey Standard and Socal. The U.S. government then became the largest customer for PEMEX, the newly formed national oil company, displacing Nazi Germany.
According to the League of Nations Statistical Yearbook, Mexico's oil industry produced approximately 38 million barrels in 1942 and 1943 — slightly more than 100,000 barrels per day (the unit conversion is 7.14 barrels per metric ton). Over the course of WW2, PEMEX would have sold approximately 150 million barrels of oil to the U.S. government at the prevailing price of $1.00 per barrel.
Mexico is a land abundant with natural resources. And in addition to oil, America also paid cash for the vast quantities of mercury, copper and silver needed for weapons manufacture. In certain cases, the U.S. even directed capital investment into Mexico's mining industry to accelerate mineral extraction.
The Mexican Miracle
(1940—1976)
Import Substitution Industrialization. Mexico's cooperative economic relationship with the United States accelerated its period of rapid industrialization leading into World War II. When the war ended, Mexico had a treasury flush with foreign reserves, and an industrial base undamaged by bombardment. Using central planning principles, the Mexican government erected protective trade barriers to promote domestic factory production of consumer goods, a policy called import substitution industrialization. This strategy attracted foreign capital and produced steady growth of 3% per year from 1940 to 1970 while inflation was tame. These three decades of economic growth constituted a Golden Age commonly referred to as the Mexican Miracle.
The Miracle Ended. The Mexican model of closed economic growth lasted only one generation as fiscal mismanagement undermined Mexico's economic sustainability. For a while, Oil provided a lifeline. The super-giant Cantarell field was discovered in 1972 amid surging oil prices following the Arab Oil Embargo of 1973. Against this windfall, the government borrowed heavily, in U.S. dollars, to finance domestic programs designed to offset the diminishing effectiveness of the aging economic strategy of Import Substitution Industrialization. Ultimately, the decade ended with a significant devaluation of the Mexican peso, from $80 to $44 dollars per peso.
Miracle Ends
At Mexico's height, one centavo, a Mexican penny, could be traded for a U.S. dollar. Mexican inflation had subsided in the years leading into NAFTA, but over the preceding decades, the Mexican peso had already collapsed. From 1976 to 1994, the amount of pesos required to buy a dollar increased 30000% to 3 pesos. It was on this foreign exchange basis that the United States entered into a free trade agreement with Mexico (and Canada).
The Mexican Lost Decade. High oil prices prices did not last long and later proved to be a double edged sword. Persistent inflation doomed the currency and the economy. In 1982, Mexico's CPI hit 117% and then soared to 176% in 1988. In January 1982, the peso exchange rate was fixed at $38 U.S. dollars. On February 18, 1982, the peso was devalued to $26.66 and soon faded to $20.00 for a few months and then in September 1982, the peso broke well below $10 to the peso. By 1988, the exchange rate broke below $1 dollar, marking a 99.6% reduction in the value of the Mexican peso since the Miracle Days.
America’s Bull Run
As Mexico was entering its Lost Decade, Reagonomics thrust America into birthing its Bull Run. In 1980, America elected Ronald Reagan, whose free market principles, including lower taxation and lower industry regulations stimulated the American economy. And in 1982, the Federal Reserve led by Paul Volcker, beat inflation by raising short term interest rates as high as 20% to choke off pressure lingering from the 1970's oil shocks. From 1982 to 1987, U.S. economic growth averaged 4.9% while inflation remained under control.
Liberal Democracy Beat Communism. In 1989, the Berlin Wall fell, and West Germany reunified the East in 1990. — Despite Gorbachev’s attempt for Glasnost and Perestroika, in 1991, the Soviet Union disintegrated into Russia, Belarus, Moldova, Ukraine, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Georgia, Armenia, Azerbaijan, and the Baltic states of Estonia, Latvia and Lithuania.
The Cold War ended with the fall of the Berlin Wall — America’s economy boomed.
Good Neighbor At Last
The End of the Cold War ushered in a Global Wave of Multilateralism. In my freshman year International Relations class at Dartmouth, Francis Fukuyama’s famous essay "The End of History” was the first assigned reading — Around the world, foreign policy experts declared victory for liberal democracy and free market capitalism around the world.
The End of All Wars (Forever)
World War II resulted in tens of millions dead and inflicted catastrophic economic destruction around the world. After the war, many of Europe's leaders (now referred to as the Founding Fathers of the EU) called for the greater integration of European countries. When the Cold War ended with Fall of the Berlin Wall, twelve European countries — Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom — signed the Maastricht Treaty on February 7, 1992. The Treaty created a common market and also laid the groundwork for a common European currency and the eventual political union of its European member states.
Mexico Requests Free Trade Agreement
In 1993, Mexico requested the United States enter into a free trade agreement. Mexican President Carlos Salinas de Gortari (1988—1994) appealed to the open market principles of the the Bush Administration, and later said: "The modernization of Mexico is essential if we are to meet the demands of the 85 million Mexicans of today . . . In brief, we need to modernize politics, the economy, and society. The modernization of Mexico is, moreover, an absolute imperative. This is the only way we will be able to affirm our sovereignty in a world undergoing profound transformation."
NAFTA Recollections
(1992—2018)
Ross Perot & the Giant Sucking Sound
I was in the tenth grade when I first heard H. Ross Perot, and I will never forget this giant of a man. In 1992, George H. W. Bush was running for reelection against "New Democrat" Bill Clinton and the independent candidate Ross Perot. — In 1999, I met Mr. Perot in person during the IPO roadshow for his company Perot Systems. He took great interest in my family’s own immigration from Korea to Wapakoneta, Ohio in 1976.
Ross Perot desperately wanted Americans to understand the dangers of opening our economy to cheap foreign labor. Before joining NAFTA in 1993, there were 17.1 million manufacturing jobs in the United States
We have got to stop sending jobs overseas. It's pretty simple: If you're paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor, ... have no health care—that's the most expensive single element in making a car— have no environmental controls, no pollution controls and no retirement, and you don't care about anything but making money, there will be a giant sucking sound going south.
From 1969 to 1993, manufacturing jobs in the United States averaged 17.8 million. Ross Perot was right ― NAFTA did result in a Giant Sucking Sound — Manufacturing jobs in the United States declined to 11.5 million.
In 1992, Americans had little knowledge or opinion on NAFTA. While a vast majority Americans agreed that trade deals could threaten jobs, 40% said that they did not have a strong opinion on the NAFTA issue. During his presidential campaign Ross Perot used graphics — simple, well designed charts to explain his points on national television. President George H. W. Bush, a Republican seeking reelection, supported trade liberalization and signed NAFTA in December 1992 during his lame duck session. Then it was the new President Bill Clinton, a Democrat, who pushed NAFTA ratification through a skeptical Democratic-controlled House of Representatives and Senate, with the overwhelming support of the Republican minority.
Tequila Crisis of 1994
NAFTA provided Mexico with unprecedented access to the international credit markets, and the Mexican government borrowed heavily to fund programs to boost the domestic economy.
NAFTA came to life on January 1, 1994 ― On that same day, a violent uprising in Chiapas formed, and in the spring, Luis Donaldo Colosio, the presidential candidate of the ruling party was assassinated in Tijuana by a gunshot wound to his head — This unpropitious timing of internal political turmoil spooked newly invested foreign capital which raised the risk premium on Mexican bonds.
Destruction of the Mexican Peso ― Entering NAFTA, the Mexican peso was fixed at an exchange rate of 3 pesos to the dollar, valuing each peso at $0.33. Following the Colosio assassination, the Salinas administration directed the Mexican Treasury to issue Tesobonos, Mexican debt denominated in U.S. dollars to ward off capital flight. Economist Jeff Sachs noted that the Mexican Central Bank had $29 billion in foreign exchange reserves to maintain the peso peg to the dollar. However, heightened concern around the government's growing budget deficit — 1994 was a presidential election year — and a second political assassination in September overwhelmed the Central Bank and reserves were depleted to $6 billion.
Mexican Peso Crisis of 1994 ― On December 8, 1994, Mexico devalued the peso by 50%. Ross Perot warned about losing American jobs to cheap Mexican labor. But even Ross Perot failed to imagine the spectacular devaluation of the Mexican peso almost immediately after completion of the free trade agreement. Effectively the price of labor in Mexico, directly tied to the price of the Mexican currency, also collapsed.
My parents owned and operated the Golden Phoenix, a Chinese restaurant located across an automobile factory for General Motors located in Moraine, Ohio, a suburb of Dayton, Ohio, my hometown. The Moraine Assembly used to make Chevy S-10 pickup trucks, and growing up, I would see thousands of shiny trucks in the parking lot awaiting shipment. Moraine Assembly was closed in 2008. Maquiladoras (shown in blue text above) are auto assembly factories owned by a foreign company to manufacture cars for export.
And it got worse in Mexico — Persistent inflation continued to erode the value of the peso. From 1993 to 2003, the peso exchange rate tripled from 3 to 10 pesos to the dollar, as the peso plummeted in value from $0.33 to $0.10. The North American Free Trade Agreement established the complete duty free movement of automobiles between the U.S. and Mexico ten years after enactment. As depicted in the chart above, foreign auto manufacturers opened auto assembly plants in Mexico called Maquiladoras to assemble cars for export.
Another Mexican Miracle?
Mexico bounced back from the Tequila Crisis — From 1996 to 2017, Mexico achieved economic growth of 2.8% on average for two decades, with only two years of negative growth. This economic record is a significant turnaround from the Lost Decade and reminiscent of the Mexican Miracle following World War II.
Mexico experienced stable growth following NAFTA but below projections.
The New Normal
For the United States, trade liberalization came at a cost. After bringing Mexico into the North American Free Trade Agreement, the Clinton Administration championed China's entry into the World Trade Organization. President Clinton argued that China would open up its vast and rapidly growing consumer market. President Clinton also theorized that economic liberalization within China, at a time when the potential of the Internet was unfolding, would ultimately lead to the political liberalization of the Chinese people and China's participation in multilateral institutions in a global system of rules.
From 1994 to 2008, manufacturing jobs in the United States declined from 17.1 million to 11.5 million.
In the United States, economic growth lagged previous cycles. In 2010, Economist Mohamed El-Erian coined the term "The New Normal" to explain the lackluster growth since the Financial Crisis and ensuing Great Recession.
Despite Quantitative Easing in the United States, economic growth following the Great Recession averaged only 2%, well below previous economic recoveries.
In the two decades after NAFTA, economic growth in the United States lagged that of Mexico
NAFTA was supposed to benefit the America economy, but instead we see that the Mexican economy rode the American engine. In addition to the jobs lost to Mexico, America also created strong financial incentives for companies to outsource manufacturing and jobs to China. Since NAFTA came into force in 1994, U.S. economic growth (depicted in the blue line) trailed that of Mexico.
The North American Free Trade Agreement was shepherded by George H. W. Bush, the last American President to fight in World War II. President Bush championed the expansion of free trade to bridge the poor countries of the world into a global system led by American virtues and ideals around freedom, democracy and open economies.
Though noble in concept, the Architects of NAFTA Failed to Consider a Worthless Peso. In 1994, the combination of political turmoil and financial mismanagement forced the Central Bank to devalue the Mexican peso by 50% within the first year of the North American Free Trade Agreement.
On December 31, 1993, the day before NAFTA went into effect, the Mexican Peso exchange rate for one U.S dollar was 3.1 pesos. From 1994 to 2016, the Mexican Peso depreciated by 85%.
December 31, 1994: 5.1 pesos (Clinton)
December 31, 1995: 7.7 pesos (Clinton)
December 31, 1996: 7.9 pesos (Clinton)
December 31, 1997: 8.1 pesos (Clinton)
December 31, 1998: 9.9 pesos (Clinton)
December 31, 1999: 9.5 pesos (Clinton)
December 31, 2000: 9.6 pesos (G.W. Bush)
December 31, 2001: 9.1 pesos (G.W. Bush)
December 31, 2002: 10.4 pesos (G.W. Bush)
December 31, 2003: 11.2 pesos (G.W. Bush)
December 31, 2004: 11.1 pesos (G.W. Bush)
December 31, 2005: 10.6 pesos (G.W. Bush)
December 31, 2006: 10.8 pesos (G.W. Bush)
December 31, 2007: 10.9 pesos (G.W. Bush)
December 31, 2008: 13.7 pesos (Obama)
December 31, 2009: 13.1 pesos (Obama)
December 31, 2010: 12.3 pesos (Obama)
December 31, 2011: 13.9 pesos (Obama)
December 31, 2012: 12.9 pesos (Obama)
December 31, 2013: 13.0 pesos (Obama)
December 31, 2014: 14.8 pesos (Obama)
December 31, 2015: 17.2 pesos (Obama)
December 31, 2016: 20.7 pesos (Donald Trump)
December 31, 2017: 19.7 pesos (Donald Trump)
December 5, 2017: 20.3 pesos (pending USMCA) (Donald Trump)
The green line shows the price of 1 U.S. Dollar in Mexican pesos. When Mexico and the United States entered into NAFTA in 1994, it took 3 pesos to buy one U.S. dollar. By 1998, the value of the peso plunged—it took 10 pesos to buy one dollar. By 2018, the value of the peso continued to plunge—it now takes 20 pesos to buy one dollar.
USMCA
Agreement Between the United States, the United Mexican States and Canada
Signed November 30, 2018, at the 2018 G20 Buenos Aires Summit, The United States — Mexico — Canada Agreement (each signatory refers to the agreement differently) is not yet in force until it is ratified by each country. In the United States, President Trump has publicly declared his affection for the implicit militarily reference in the letters "U-S-M-C-a." In Canada, the agreement is called Canada—United States—Mexico Agreement (CUSMA). In Mexico, it's called Accord Canada—Estas Unis—Mexique for the acronym (ACEUM). Lol.
Special Trade War Update I: What America Wants (dated March 30, 2018)
Special Trade War Update II: What China Wants (dated April 18, 2018)
After concluding The United States — Mexico — Canada Agreement, the U.S. will consolidate its position in North America. The United States remains in a trade dispute with China.
Trade War
In January 2018, the United States confronted the Chinese government regarding unfair trade practices, including the access to markets, the protection of intellectual property rights, and the forced transfer of technology.
Mexico is an Abundant Land
I am bullish on the future of U.S. — Mexico relations in this Global Wave of Regionalism. During World War II, Mexico benefited from increased economic integration with the United States and earned revenues through the sale of oil and other natural resources to the U.S. government. For a while, the Mexican government cooperated with the United States to provide Mexican labor to alleviate labor shortages during the war. Known later as the Braceros Program, thousands of Mexicans used this opportunity to establish roots in the United States.
Human Capital
Oil was the vital commodity of World War II — In today's knowledge economy, human capital is the critical resource and Mexico is loaded with working age citizens eager to learn and improve upon their professional skills.
The United States has run out of both skilled and unskilled labor. — There are more job openings than Americans in the labor force available to fill them.
IndexMundi created these population pyramid graphics, URL: https://www.indexmundi.com/about.html
What Mexico Does Not Need
Mexico does not need carpetbaggers pursuing short term financial speculation. And besides, although Mexico may experience improved economic growth, without stabilization of the peso, investors seeking short term gains from financial market returns may be disappointed after currency conversion. "Evening in the desert" by artist Tracy Stuckey ― Visions West Contemporary in Denver, Colorado.
Tracy Stuckey at Visions West Contemporary Gallery in Denver, Colorado
Go South, Young Man
Come With Me to Mexico
[This section is still a work-in-progress]
Washington is not a place to live in. The rents are high, the food is bad, the dust is disgusting and the morals are deplorable. Go West, young man, go West and grow up with the country. -- Horace Greeley, Editor of the New York Tribune
Thank you, Minyoung Sohn, CFA
Thanks to John Obering for copy editing support on my essays
Reading List
Wikipedia is an outstanding resource “Mexican Miracle”
“How Important Was Oil in World War II?” by Keith Miller, History News Network
Time Magazine, “A Brief History of NAFTA” by Andrea Ford. December 30, 2008