Regional Development Key to a Strong North American Trade Bloc

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Courtesy / Jorge Canavati

Ocean containers from China containing products for H-E-B in San Antonio are moved to an intermodal rail car at the Port of Lázaro Cárdenas, Mexico.

For many years now, a concern of mine has been that the purpose of free trade and the agreements that envelop trade between regions has not been properly explained or promoted to communities, especially at the grass roots level.  

Recently, Guillermo Malpica, trade commissioner of Mexico and executive director at the American Chamber of Commerce in Monterrey, Mexico, paid San Antonio a visit for a series of roundtables and presentations on the United States-Mexico-Canada Agreement (USMCA). At an energy sector meeting with Malpica, San Antonio energy industry leaders investing in Mexico were expecting to get a sense of direction and clarity regarding Mexico’s energy policies.   

One roundtable participant asked “what industries are the winners and the losers” in the USMCA. When you ask questions like these, you are basically taking apart a macroeconomic tool and looking at the individual parts. Separate parts don’t work unless they are put together like a precision clock. 

These types of agreements are not meant to be dissected. Not unlike the cute little frog you dissected in school, the innards don’t look pretty. Trade agreements are macroeconomic tools that are designed to benefit economies. Yes, there were industries that were hit very hard once NAFTA came into play, but those industries were not ready.

The signals were clear when Mexico agreed to enter the General Agreement for Trade and Tariffs GATT in 1978 (today the World Trade Organization). My father, the Deputy Director General for the Foreign Trade Institute of Mexico during the 1970s, would have conferences and meetings with Mexican manufacturers, warning them to be ready to compete, up their quality, and export.

But exporting was a hassle and most did not pay attention. The empresarios were cozy with a captive market in a closed economy, producing shabby products with 400 percent profit margins, and profits were being wired to Switzerland. “Empresarios ricos, empresas pobres” (rich business people, poor businesses) was the old adage.

And then came NAFTA. Companies that were not prepared bit the dust. Those that survived became distributors of foreign goods.      

Today, the North American economy is integrated through sophisticated supply chains. This is no longer a time of selling finished goods to each other, but a time of integration. Integration in terms of technology, advanced manufacturing, supply chain, and logistics, permits North America to compete efficiently as a trade bloc with other regions of the world and to supply these regions as well.

The promotion of regional economic development is a key element in all this. South Texas and Mexico are prime examples. Many of the energy companies – like Howard Energy and Valero – that met with the trade commissioner are headquartered here in San Antonio, while their terminals and refineries are located at the port of Corpus Christi. Using a variety of transportation modes:  rail, pipeline, maritime, and truck – these terminals supply Mexico with refined fuels. 

Related: Tariffs Harmful to Trade, Won’t Solve Immigration Problem, Say Local Banking Leaders

One example is the supply of Eagle Ford Shale natural gas from Corpus Christi via pipeline to industries in Monterrey. Fueled by inexpensive and abundant South Texas natural gas, these industries manufacture goods that are ultimately shipped to world markets. This is a champion example of regional economic integration. 

Mexico continues to develop pipelines for distribution with domestic and foreign direct investment. Many of these pipelines can be interconnected with rail services by Mexico railroads such as the Kansas City Southern de México (KCSM) and Ferromex. Logistics at its finest. 

It is in our best interest to support Mexico’s current policy of developing self-sufficient oil and gas production. The Mexico market is growing exponentially and can be serviced by domestic and foreign fuel products alike. Mexico is in a blessed geographic position. It has the best of both worlds regarding energy, with fossil fuels in the gulf and a great geography for wind and solar renewable energy in the west and northwest.  

Related: The Path to USMCA Passage Is Paved with Uncertainty

While some are concerned about Mexico’s dependence on U.S. fuels, I see this as part of an integrated trade bloc that nourishes itself. But markets can and will shift. Today, Mexico enjoys cheap and abundant South Texas natural gas, tomorrow it may not.

Liquefied Natural Gas (LNG) makes it possible to ship natural gas in a safe and manageable way to worldwide markets. LNG markets are much more lucrative than those serviced by shipping natural gas by pipeline. Mexico needs to be ready by developing the country’s own fuel production and refining. Manufacturing centers in Mexico may run into natural gas supply issues that can damage the integrated supply chain.  

These are confusing times. Protectionist policies have damaged many U.S. industries, as well as those in Canada and Mexico. Tariffs mostly hurt U.S. business and consumers. Costs get passed on to businesses and ultimately the consumer, no different than any other cost.

Ford Motor Company just announced one billion dollars in losses and massive layoffs due to tariffs and trade wars. U.S. agriculture producers are being brutally hurt by trade wars ignited by U.S. protectionist policies.

By the same token, the U.S. government announced subsidies for agricultural producers to balance things out. So how does this work? The protectionist policies cause a trade war that hurts U.S. agricultural exports and then the government offsets the losses with subsidies paid by taxpayer money? History does not lie. Mercantilism has always failed and free trade has always been encouraged during times of peace and prosperity.

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