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Summer 1997 - Volume 3, No. 1

NAFTA and Tennessee
by Steven Livingston

On July 11, President Clinton, reporting to Congress, concluded that NAFTA has had a "modest positive effect" on the U.S. economy. Can the same be said for Tennessee? Let's find out. A full evaluation of NAFTA, of course, should include trade with both Mexico and Canada. But since the last issue of Global Commerce featured an analysis of Tennessee-Canada trade, here we will focus on Mexico. And most of the controversy over NAFTA involves Mexican trade (to Americans that is, Canadians complain about the US!), so this seems especially warranted.

The North American Free Trade Agreement, which came into force on January 1, 1994, is an extension to Mexico of the earlier U.S.-Canadian free trade agreement. Assessing its impact is no easy task. First, NAFTA will not fully be implemented for another decade, so judging it now may be premature. Three years is a pretty short time in which to see a policy's impact. More importantly, the Mexican economic meltdown of late 1994, an event virtually all experts see as unrelated to NAFTA, makes it difficult to isolate the effects of NAFTA from those of the terrible economic depression which has hit Mexico. On top of all of this, NAFTA really only continues a removal of trade barriers which began much earlier; the formal agreement is more the symbol of an ongoing development than a change in direction. Nevertheless, let's see what we can discover about Tennessee's trade with Mexico in the wake of the NAFTA.

Surveying Tennessee's Trade with Mexico

Mexico has long been an important trade partner for Tennessee. It vies with Japan as the state's second largest market (behind Canada). In 1996 Tennessee exported just under $660 million of products to Mexico, roughly 7.3% of all of the state's foreign sales, and about 1.5% of all U.S. exports to its southern neighbor. It's a surging market: Tennessee's Mexican sales have grown more than $360 million since 1991, a 124% increase. Like Canada, it is a varied market.

Tennessee and U.S. Exports to Mexico
(Index, April 1993=100)
Red=Tennessee, Blue=United States

Some fifteen different Tennessee commodities sell more than $1 million a month to Mexico. Also like Canada, the automotive industry is the single biggest state exporter. The pie chart of 1996 exports by commodity groups shows the commanding position of autos and automobile parts in Tennessee's trade, and we should remember that most of the rubber, engine, and electrical machinery sales are also auto related. Where Mexico differs from Canada is in being a more

1996 Tennessee Exports to Mexico

significant market for the state's nonmanufacturing industries. Cotton, especially, is a large export.

Tennessee is every bit as important a market for Mexico. 1996 Mexican sales to Tennessee were $2.283 billion, 3.7% of all that country's exports to the U.S. To put this in perspective, Mexican exports to the Volunteer state actually approach those of Canada ($2.608 billion). Here growth has been even more phenomenal. Imports from Mexico have increased by one billion

Tennessee and U.S. Imports from Mexico
(Index, April 1993=100)
Red=Tennessee, Blue=United States

dollars just since 1994. On the other hand, the range of these imports is very concentrated; the overwhelming majority are associated with the auto industry. Auto related goods account for four-fifths of all of Tennessee's imports from Mexico. This industry concentration distinguishes the pattern of the state's

3 Largest Commodity Groups as a % of Total State Imports from Mexico

imports from its exports, or, for that matter, from the pattern of the state's trade with Canada.

NAFTA and the Trend of the 90s

So how has this picture changed since NAFTA? Tennessee's post-NAFTA export growth to Mexico has generally matched that of the rest of the U.S., and the composition of those exports has not been changing that much. This export growth has remained strong, even in the face of Mexico's grave difficulties; preserving this market for the U.S. over this very rough stretch may indeed be NAFTA's biggest success. As noted above, state exports to Mexico are quite diverse. While many export commodities have been doing very well in the post-NAFTA environment, only the state's apparel, machinery, and vehicle (and parts) industries have appreciably increased their share of state exports over the past several years. This

Quarterly Exports by Industry (in $millions)
Blue=Transportation Equipment, Yellow=Crops, Red=Other

has mostly been at the expense of aluminum and cotton exports so we can see a slow shift to manufactured exports. In the long-run it is the transportation sector which seems destined to dominate: in 1992 it accounted for about a fifth of the state's exports, in 1994 it composed a little under a fourth of the state's exports, and today it has risen to just under one-third.

Imports are another story. Tennessee's imports from Mexico have grown at a much faster rate than imports from Mexico into the rest of the U.S., producing a very large state trade deficit with Mexico. We can explain why with that same word:

Tennessee's Balance of Trade with Mexico (in $millions)

automobiles, in fact, if the automotive related sectors aresubtracted from both the state's exports and imports, the state actually runs a small surplus. Last year, the state imported almost $600 million in car and truck engines and air conditioning equipment, over a billion dollars of electrical machinery (largely for trucks and cars, though this commodity group includes televisions and parts, which are a sizable import into Tennessee), and over $400 million worth of trucks, cars and auto parts. And this does not count automotive glass and other such miscellaneous items. More than eighty-five percent of all imports were in one of these three commodity groups. Within this "big three," imports have been shifting from the electrical components group to the vehicles group.

Though Tennessee imports are overwhelmingly auto related, this hardly means the state is not purchasing other Mexican products. For although these other imports are much smaller in amount, they are growing at an even faster clip. From 1995 to 1996 imports

Exports in Transition: Commodities Undergoing Large Changes in Mexican Sales

from outside the three big sectors grew about 48%, and are now closing in on $300 million per year. Among these smaller commodities, the apparel sector stands out. It now ranks as the largest non-automotive sector, and is growing rapidly.

Is Tennessee Heading South?

Nearly balanced in the early 1990s, Tennessee now has a huge trade gap with Mexico. Imports have soared, and are close to four times the amounts the state is exporting. Superficially, then, NAFTA does not look like it was a good deal for the state. But such a conclusion overlooks two salient facts: a significant portion of Tennessee's trade deficit is due to the peso crisis, and, even more importantly, that deficit is simply the flip side of the vigorous expansion of Tennessee's auto industry, the source of much of the strong state growth of the 1990s. A look at the time chart of Tennessee exports shows the dramatic effects of the Mexican economic crisis on state exports. The crisis has cost Tennessee around 30% of its potential exports over the last three years, an amount equal to $275 million dollars in 1996. The Mexican economy is recovering, and with it state exports, but it will be a number of years before they return to the growth path of 1994. We can infer that imports were also boosted by the extraordinarily cheap peso, though a lack of data does not allow us to project by how much. The end of the steepest rise in import growth by late 1995 seems to confirm the importance of currency rates in the overall trade picture. As much as a third of the increase in the state's Mexican trade deficit is probably due to the 1994 peso crisis.

But of much greater importance in understanding Tennessee's trade relationship with Mexico is the globalization of the automotive industry, in which this state is a key participant. Note that automotive exports to Mexico have also posted considerable gains since 1994. Note also (see the last chart of the Tennessee International Trade Report) that the rise in Mexican imports occurred exactly as Tennessee's global exports exploded in 1994-95, and the driving force, so to speak, of that explosion was the same transportation sector. The surge of Mexican imports into Tennessee is thus but one element of the increasing global integration of the world auto industry, it is part of a larger pattern: Tennessee, for example, buys large amounts of automotive related goods in Mexico and then sells large amounts of automotive products in Canada. This explains why Tennessee runs a large deficit with Mexico at the same time as it has a surplus with Canada. This also shows why looking at Mexico-Tennessee trade in isolation can be a little misleading.

Blaming NAFTA because of a big increase in state imports is thus too easy; the growth in Mexican imports, rather than being a simple "giant sucking sound," is actually a sign of the size and strength of the Tennessee automotive sector. It is today an internationally integrated business, both importer and exporter. Outside of that sector, as we have seen, state trade remains relatively balanced, with both exports and imports growing robustly. By the same token neither should we credit NAFTA for most of this growth. Though our chart does show a rapid gain in exports just following its implementation, the trend towards greater trade and closer economic integration with Mexico predates the agreement by half a decade. Trade with Mexico has developed its own head of steam, with or without NAFTA. As a document, the effects of NAFTA are probably, to date, slight. But as a symbol, NAFTA alerts us to the unalterable fact that Tennessee's economic vitality is tied not just to the U.S. but increasingly to the other economies of North America and the world. Here, perhaps, is its "modest, positive effect."

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