U.S. Trade Deficit With Mexico Is Lowest Since ’94

Signaling Mexico’s continued economic recovery and a possible boost to President Clinton’s free-trade initiative, the monthly U.S. trade deficit with Mexico in February shrank to its lowest level since the disastrous peso devaluation in late 1994, the Commerce Department reported Friday.

Buoyed by increased demand for U.S. automobiles, heavy machinery and high-tech equipment, the monthly deficit plunged below $600 million--a sharp contrast with the $1-billion-plus average monthly deficits over the last three years. The overall deficit, however, hit a 10-year high.

The continuing deficits with Mexico have been an irritant in U.S.-Mexico relations and a political hot potato. They have helped stymie Clinton’s efforts to expand the North American Free Trade Agreement to include the rest of Latin America and the Caribbean in a Free Trade Area of the Americas (FTAA).

Congressional critics pointed to the deficit--and the U.S. job losses critics say they reflect--as a reason for denying Clinton “fast-track” negotiating authority, or greater autonomy in crafting a hemispheric free-trade accord. Those critics even said such a zone could reverse the trade surplus that the United States now enjoys in non-Mexican Latin America.

But barring unforeseen economic calamities in Mexico, experts were optimistic the deficit would continue to narrow and in so doing “change the tone of the free-trade debate.” said Raul Hinojosa, public policy professor at UCLA and a specialist in trade policy.

“The persistence of a trade deficit gave the impression that Mexico was somehow taking advantage of the United States,” Hinojosa said. “Its elimination could lead to a more positive answer for the question of, ‘Did NAFTA produce?’ and to perceptions of free trade in general.”

Word of the narrowing deficit with Mexico on Friday provided one ray of good news in what was otherwise a dark day for U.S. trade. The Commerce Department reported a $12.1-billion deficit overall for February, the largest since 1987, and a figure that could on its own produce a protectionist backlash.

The president is in Santiago, Chile, this weekend meeting 33 other heads of state at the Summit of the Americas where the group is expected to formally launch negotiations to create the FTAA by 2005. But Clinton’s standing and negotiating power were undercut by his failure to secure fast-track authority last fall.

Fast-track authority would give Clinton the power to negotiate the FTAA and present it to Congress as an all-or-nothing package. Without it, Congress can try to whittle away at provisions or tack on amendments. Clinton is expected to make a renewed case for fast-track later this year, congressional sources said, and continued improvement in Mexican trade figures would help him make a case. Mexico’s economy is expected to grow at the 5% pace this year, which would lead to significantly more sales for U.S. exporters.

“The reason you are seeing the deficit decrease is that the Mexican economy is coming back,” said Mauro Guillen, assistant professor of management at the University of Pennsylvania’s Wharton School. February’s reduction in the deficit with Mexico continued a trend that began four months ago.

The trade figures released Friday showed exports to Mexico in February reached $6.43 billion, up 21% from the same month a year ago, while imports of Mexican goods totaling $7.01 billion were up by only 7.6%. That caused the trade gap to shrink to $583 million. The January deficit was nearly $800 million.

Standing out among the growing export categories were big ticket items. U.S. motor vehicle sales in Mexico grew 40% over the first two months of the year to $1.49 billion. Telecommunications equipment sales spurted 38%, and industrial and specialized machinery sales were up 25%.

“After the devaluation and recession, there was no currency, hard cash. Mexicans couldn’t afford to buy anything,” said Rep. Jim Kolbe (R-Arizona), an advocate of expanded free trade. “Now capital is flowing back and who are they going to buy from but the United States.”

While saying that the improvement should better the political landscape for free trade, Kolbe criticized Clinton for not pushing hard enough for fast-track authority. “There is no sign that he is doing much to get it,” Kolbe said.

However, a spokesman for Rep. Loretta Sanchez (D-Garden Grove), who opposed granting Clinton fast-track authority last fall, said a new fast-track initiative would start soon. “She will reassess, but what really worries her are the jobs, especially in our area of the country, Orange County, that can easily be sent elsewhere,” the spokesman said.

Jeff Faux, president of the Economic Policy Institute, a Washington think tank, said that while the February figures are a positive sign, they were not surprising given the recent 8% rise of the peso’s value against the dollar that is giving Mexicans more buying power.

“We still have a trade deficit with Mexico four years after NAFTA, which was promoted as a means of increasing the trade surplus we had at the time,” Faux said.

Faux and Thea Lee, assistant director of public policy at the AFL-CIO in Washington, which has been critical of NAFTA, said the continued trade deficits are key indicators of NAFTA disappointment because a “trade deficit equates to job losses.”

Noted UCLA’s Hinojosa: “The dark cloud in all this, and there is always a dark cloud, is that as the U.S. trade deficit declines, and Mexico’s reliance on imports increases, there could be a replay of past Mexican economic problems. Rampant consumption of foreign goods was a big reason for not just the last devaluation but the previous ones as well.”

* TRADE GAP GROWS: The U.S. foreign trade deficit widened again in February. D1

* VITAL REFORMS: Reform of the banking system is a litmus test for Mexico. D1

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Turning the Corner?

In February, the United States’ monthly trade deficit with Mexico narrowed to its lowest level--$583 million--since the Mexican peso devaluation in December 1994 reversed years of surpluses. The recent deficits with Mexico have fueled opposition to the North American Free Trade Agreement and to an expanded hemispheric Free Trade Area of the Americas, which critics say might also reverse the current trade surplus that exists with all of Latin America excluding Mexico.

Source: U.S. Commerce Dept.