The United States-Mexico-Canada Agreement (USMCA) is back in the news this week. The USMCA is NAFTA 2.0. NAFTA is often blamed as the reason why poverty has exacerbated in México. In 1991, I published a white paper on NAFTA; “North American Free Trade Agreement – A Hesitant Handshake Between Neighbors”. (link) This paper was the catalyst for my business endeavors. I firmly believe that NAFTA, however much maligned on both sides of the border, is the sole reason México is not facing the economy catastrophe that Venezuela faces today. But discussing the global economy is difficult because every attempt at comparison analysis results in very different models turning the comparison into an argument of who is right and who is wrong.
One of the metrics often used is the GDP, or the Gross Domestic Product.
The GDP attempts to quantify the total income of a country by quantifying what the country produces. But does one dollar in the United States buy the same thing in México? Therein lies a difficult conundrum, how do you equate a tortilla to bread? Or better yet, how do you quantify access to healthcare?
Poverty in México is very different from poverty in the United States. In tomorrow’s post I’ll offer an example of the difference. But poverty, often equated to neoliberalism and by extension to NAFTA misses the point about NAFTA and México.
Trying to compare diverse economies with diverse cultures is complicated. It is further complicated by how countries manipulate their currencies to inflate or deflate their economies. Most readers are aware that China is often accused of “currency manipulation”.
To try to address the incompatibility of different economies, The Economist tried to find a common commodity to use to compare across different nations and currencies. McDonald’s has a global footprint selling the same thing using the same business model in several nations. Thus “The Big Mac index” was born in 1986.
The Big Mac index compares what a Big Mac costs in different nations. “Burgonomics,” as it has come to be known takes the GDP (PPP), or purchasing power of a nation, and adjusts its exchange rate to make the comparison as accurate as possible. It is not perfect, but it is the best we have at this time.
In 2018, the United States was the third most expensive country to buy a Big Mac. Canada was the fifth most expensive place. According to Burgonomics, a Big Mac cost $5.58 USD on January 2019. In México, it costs $2.54.
But unfortunately, the price does not give us an accurate figure. We need to account for how long it takes a worker in a country to make the money to buy the Big Mac. In Mexico City, it takes a worker about 78.4 minutes of paid labor to earn enough to buy the Big Mac. That makes Mexico City the third worst city to work for a burger because it takes longer to earn the money to buy it. These are 2017 figures. It is important to point out that the cost of the burger varies from city to city as well as country to country.
But the figure gives us a useful comparison. We now know that the United States is the third most expensive place to buy a Big Mac and although Mexico’s burgers are one of the least expensive it takes longer to make enough money to but one.
Let me confuse you some more.
The world economy is often measured as GDP. One version of the GDP tries to account for the purchasing power of the individual in the country. This version is known as the GDP (PPP) model.
In 2019, the GDP (PPP) ranks China as the largest economy in the world. The EU is second, but the EU is comprised of various countries. The United States is ranked number three. Now you see why China dominates U.S. politics so much. México is ranked number eleventh on the list. Canada rounds up the North American countries at sixteenth.
Now to understand the part that NAFTA plays into all this we must see the historical record. Prior to NAFTA, Mexico’s major export was oil. Many consumer goods were either not available or very expensive in México because of tariffs imposed by the Mexican government to protect the domestic producers.
In 1980, the United States was ranked the largest economy by GDP (PPP). The Soviet Union was number two. México was number nine on the list. China was eleventh on the list. By 1985, the US and the Soviet Union continued to dominate the rankings, but México dropped to the eleventh position on the list, and China took the ninth position from México.
From there, México has stagnated in the eleventh position.
But by 1995, China had jumped up the tanks to the third position based on GDP (PPP). In 2015, China took the first place from the US, leaving the US in second place. The Canadian GDP (PPP) has lagged Mexico’s the whole time.
The important thing to note is that although the Mexican economy is stagnant in the eleventh position, it has remained there even though the Mexican economy has been transformed from a finite resource – oil – into a commodities producer. Had México remained on the oil economy, it would be at the bottom of the list.
Let us explore this a little further.
GDP is what a country produces for the global economy. People produce goods that consumers consume. One metric we should consider is how productive a country’s population is towards the global economy.
One important question is how does the Mexican worker compare to the Chinese and U.S. workers?
Taking the GDP (PPP) for 2019 for the countries we are exploring and the dividing that number by the county’s population gives us an approximation of the population’s productivity. Yes, I am aware of the issue of the differences in ages of the populations, but this issue gives us even more information to work with in that the U.S. population is aging while the Mexican population is younger.
But I digress.
The Chinese produce about $53 worth of goods per person. The U.S. accounts for about $15 per individual. Canada chimes in at $20 per person. And, México produces $49 per person. For context, the total global output divided by the world’s population gives us a value of $55 per individual.
What does is all mean?
China accounts for 18.4% of the world’s population. The United States accounts for 4.22%. México accounts for only 1.64% of the world’s population.
However, in the countries we are comparing, Mexico’s productivity per Mexican is only slightly behind China’s and significantly greater than the United States worker.
Clearly, the Mexican worker is very productive.
Now let’s tie everything together.
China has the largest GDP (PPP) but it also has significantly the largest population. The U.S. comes in at second in GDP (PPP), but its workers produce significantly less than the other workers. México remains stagnant in the eleventh position, but its workers produce at almost the global average.
Now let us add the population rankings to the countries we are looking at and everything falls into place.
China is the most populous country in the world. The United States comes in at third place. México is the tenth most populous country in the world.
Why is this important to point out?
Andrés Manuel López Obrador (AMLO) has argued that NAFTA is to blame for low wages in México. AMLO, like many detractors of NAFTA argue that neoliberalism is to blame for poverty. Most readers know that Donald Trump has labeled NAFTA the “worst deal”.
But AMLO, like Donald Trump are fully embracing the USMCA now before the U.S. Congress. Why?
It all circles back to Mexico’s productive worker and their ability to complete against the Chinese.
NAFTA saved México from a ruined economy like Venezuela’s. For all its failures it has done a lot for México and, yes, the United States. Without NAFTA, the U.S. economy would not be second to China’s, it would be well down the list on the GDP. Remember, the U.S. worker only produces $15 compared to China’s $53 and Mexico’s $49.
But there remains the issue of purchasing power as demonstrated by the Big Mac index.
Mexican workers are productive, but it takes longer work hours to afford the Big Mac. Mexican wages must go up for the Mexican workers.
The USMCA addresses that to some extent. But make no mistake, the USMCA is NAFTA 2.0 dressed up to look like a Trump win.
For all its perceived problems, NAFTA saved the U.S. and the Mexican economy from a Chinese onslaught.