Doing business on the U.S.-Mexico border

The area north and south of the U.S.-Mexico border is a unique region that is economically distinct from the rest of the United States and Mexico. Although political storms continue to rage on both sides of the border, everyday business goes on and will continue, albeit at a slightly subdued pace, according to W. P. Carey experts Dawn McLaren, a research economist, and Jose Mendez, professor of economics and faculty director of the W. P. Carey MBA Mexico City program.

Although political storms rage on both sides of the U.S.-Mexico border, everyday business goes on and will continue, albeit at a slightly subdued pace, according to experts at the W. P. Carey School of Business. North of the border, much furor continues over the presence of an estimated 7.2 million Mexicans who are illegally in the U.S. workforce.

South of the border, controversy lingers over the paper-thin election victory of the conservative Mexican President Felipe Calderon over progressive candidate Manuel Lopez Obrador. Still, a longstanding economic relationship continues to grow all along the 1,952-mile U.S.-Mexico boundary and its 14 sister cities. At least 10 million people live along the border, and its twin cities share common airsheds and watersheds.

The U.S.-Mexico border is the world's busiest, with an estimated 250 million legal crossings from Mexico each year. More than a million undocumented Mexican workers are apprehended in the United States each year. Pushed east by stepped-up security in the San Diego-Tijuana area, hundreds of Mexicans trying to cross the nearly 300-mile Arizona-Sonora border have died in recent years.

But despite the immigration debate in America and presidential controversy in Mexico, residents of the U.S.-Mexico border area often have more in common with each other than they do with their own nations. The area, usually described as extending about 60 miles north and south of the border, constitutes it own economic region.

Economic interests redraw the border

Well-publicized anti-immigrant issues aside, southern California, Arizona, New Mexico and Texas have strong, cooperative economic ties with Mexico. U.S. businesses utilize predominately legal Mexican labor north of the border and depend on "maquildoras" — plants near the U.S. border that employ Mexicans and assemble finished goods out of U.S.-supplied parts and resources.

Americans along the border also enjoy consumer goods unavailable in other U.S. states. Increasingly sophisticated maquildoras, once focused mainly on low-skill assembly operations, now produce electronic, metal, petroleum, transportation and medical products. Economically, the six northern states of Mexico have more in common with southern Californians, Arizonans, New Mexicans and Texans than with Mexico City and the rest of Mexico.

Politically, this gulf is especially pronounced. National Action Party candidate Calderon outpolled Revolutionary Democratic Party candidate Obrador by about a half-percent of the vote nationally, but in Sonora, Calderon beat Obrador by a ratio of nearly 2 to 1: 468,288 votes (50.12 percent) to 240,114 votes (25.70 percent), according to official returns (other parties accounted for the rest of the vote).

And in Mexico, politics and economics are more openly intertwined than in the United States. Calderon ran as a free-trade, pro-globalization candidate while the anti-poverty Obrador questioned two decades of free-market reforms, advocated job-creating infrastructure projects and defended welfare benefits.

Although the final report of the European Union election observer in November defended the official result of the July 2, 2006, election, resentment remains and all the major political parties generally agree that election reforms are needed.

"With the problems over the election ... business concerns have taken a back seat," says Dawn McLaren, a research economist at the W. P. Carey School of Business and editor of the school's México Consenso de Pronósticos Económicos (Mexico Consensus Economic Forecast). "Forecasts for economic performance have been pulled back somewhat."

Deregulation and market-oriented changes are largely on hold as the new president sticks with the status quo. "I think that the politics are too volatile right now for any new proposals to be put into effect, especially those seen as coming from the political right," McLaren says. "Putting policies into place that are from the right might fan the flames."

W. P. Carey economics Professor Jose A. Mendez, who is the faculty director of the W. P. Carey MBA Mexico City program, said Calderon has wisely reached out to address some of the social issues advocated by the progressive side.

"What is encouraging to me is that he's beginning to announce programs to address the poorest of Mexico," Mendez says, pointing to proposals to make young children eligible for the Mexican equivalent of Medicaid and Social Security benefits.

"He recognized he's going to have to deal with this big schism that exists." Mendez credits Calderon for launching a drug interdiction campaign and says Calderon has the potential to build on past national accomplishments. "They've had a lot of success in market reforms and reducing regulations, but there's still much to do."

Mendez said the border region's culture is symbolized by the popularity of baseball instead of soccer in many northern Mexican twin cities. Soccer rules the roost elsewhere in Mexico. He also points out that many managers of maquildoras live in the United States and commute south of the border to their plants.

There are about 2,500 maquildoras in Mexico, about 1,600 of them along the U.S.-Mexican border; more than a half-million of the approximately 800,000 maquildora jobs are in that border region. "Their interests are very, very linked," Mendez says of the 14 sets of twin cities. Employment at maquildoras had sagged early in this decade because of even-cheaper workers in China, but the trend has turned slowly back upward for Mexican workers.

Border security

Among Mexico's potential economic reforms under the new president is the streamlining of border security. "International trade has been hampered by border security, which is why they have been working on more efficiency at the ports of entry, including fast lanes and new procedures," McLaren says.

"One of the problems with NAFTA [the 1994 North American Free Trade Agreement] is that the NAFTA paperwork turned out to be more cumbersome than the old quota system paperwork, so complaints have come from businesses in international trade saying that they rely on the old system instead of NAFTA even today."

Also, businesspeople involved in international trade don't seem to be as worried about border security and terrorism as much as some U.S. politicians are. "It just seems like it's blown out of proportion," Mendez says.

"Surveys in Arizona show Arizonans want more security but favor normalization through a guest-worker program. Every single terrorist that has come through, even the ones that bombed the World Trade Center in 1993, came in legally. I don't think it [entry from Mexico] is something they're considering. There are so many other ways to come in." Besides, trade and interaction can be good for our security if the border system is made more effective, realistic and smart.

"A broken system is never good for security, as it breeds an underground economy," McLaren says. "By a broken system, I mean when the transaction cost becomes too high or that the transaction is unable to be completed because of bureaucracy. A broken immigration system, one that makes low-skilled Mexicans wait 15 years to get a visa to work here legally, has bred an underground economy of illegal immigration and human smuggling."

"Mexican businessmen view all this attention given to it [border security] as creating a negative atmosphere," Mendez says." Stirring up xenophobia on the U.S. side makes business deals less likely." Whether one believes that NAFTA just needs to be fine-tuned, or that it should be completely overhauled, most agree there is room for improvement.

"We are a net importer and we depend upon Mexico for a great deal of our imported goods," McLaren says." They are one of our top trading partners. Increasing the ease of trade can only serve to help the economies on both sides of the border. NAFTA was to do that in theory, but it appears that it didn't ease trade as much as most people thought it would."

Regardless of borders and trade pacts and immigration and politics, an economic entity exists along the border — a separate reality that transcends conventional thinking. As McLaren puts it in specific regard to Arizona: "We are too used to thinking of the region as split by the international boundary, Sonora as part of Mexico and Arizona as part of the U.S., rather than as a unified region with qualities making it unique in comparison to the countries of which they are a part."

Bottom line:

• The area north and south of the U.S.-Mexico border is a unique region that is economically distinct from the rest of the United States and Mexico.
• U.S. trade exports to Mexico totaled $120.4 billion in 2005; $110.8 billion in 2004; $111.3 billion in 2000; and $13.6 billion 20 years ago in 1985.
• Mexican trade exports to the United States totaled $170.1 billion in 2005; $155.9 billion in 2004; $135.9 billion in 2000; and $19.1 billion in 1985.
• The lingering controversy over the Mexican presidential election will slow down the new president and the progress his free-trade approach promises, but it also seems to be making his governing approach more accommodating to all sectors of Mexican society.
• Improvements in trade agreements and border security are among the improvements that should not be ruled out in the mid- to-long term.
• Millions of Mexicans and Americans cross the border every workweek, depend on each other for their livelihoods, breathe the same air and live and work over the same watersheds.