Geopolitics on the rocks

Joseph Shupac

Why Canada and Mexico are bound to get closer

North America

Maybe the US will divide and conquer, economically speaking, both its North American partners but there are many reasons to believe Canada and Mexico will draw closer together

With the US being a 17 trillion dollar economy, it can sometimes be easy to forget that both of its neighbours, Canada and Mexico, are in the trillion dollar club as well. Canada is the 10th largest economy in the world by nominal GDP and 17th by purchasing power parity (PPP)-adjusted GDP; Mexico is the 15th in the world by nominal GDP and 11th when adjusted for purchasing power parity.

Outside of the US or EU, in fact, Canada and Mexico are already the two largest
economies in the world within the same trade bloc. With continued decent GDP growth—both are expected to grow 2-3 percent in 2017—they may soon overtake more EU economies in size too.

And yet, as the NAFTA renegotitation begins its second round of formal talks this week, the trade bloc shared by Canada and Mexico may to some extent now be on the chopping block. Not surprisingly, the two countries are now attempting, diplomatically, to stand shoulder to shoulder with one another, to present a unified front to the US. But this can be hard to do ,especially when those shoulders are separated by a few thousand km of US territory.

It may be, then, that the US will divide and conquer them, economically speaking, and get the best deal for itself. That said, there are many other reasons to believe Canada and Mexico’s economies will draw closer together—perhaps far closer together—in the months or years ahead. These reasons include:

  1. Mexican Growth:

Along with the US and the BRIC countries, Mexico is the only state in the world to be ranked in the top fifteen in terms of economic size, population size, and territory size. In terms of GDP per capita, Mexico also ranks alongside most of the BRICs: Mexico, China, Brazil, and Russia are all estimated to have per capita GDP’s (in nominal terms) of between $8000- $9000.

Yet Mexico’s near-term growth prospects are perhaps higher than those economies are, because Mexico (unlike Russia, Brazil, or many other developing economies) is not too dependent on exports of commodities, the prices of which mostly crashed in mid-2015 and have not yet recovered.

Also, because Mexico, unlike China or Russia, still has a youthful population. Mexico has a lot of growing to do if it wants to catch up to the average North American GDP per capita, which is roughly $55,000. If Mexico does continues to grow, so too will its trade with Canada be likely to. Mexico has a propensity to trade with Canada that is higher than some might think, given that the two countries still do not trade together so much in absolute terms.

  1. China :

In Canadian politics and business, it has become common in recent years to say that by exporting natural resources to China, Canada can finally reduce the near-monopoly that the US has on buying Canadian exports. This view, however, is based on a false extrapolation of a trend that is now nearing (or has already reached) its end: industrial growth in coastal Chinese cities.

As China now seeks to rebalance its economy, investing instead in service sectors (which are less resource-intensive than industrial ones) and interior cities (which have a lower propensity to engage in trans-Pacific trade than coastal ones), its demand for Canadian resources is unlikely to continue to surge. Most of the natural resources it does buy will probably continue to come from within its own borders — China only imports 15 percent of the energy it consumes, for example — or else from its “One Belt, One Road” partners in Asia.

Similarly, as Chinese growth moves away from the coastal industrial sector, the growth rate of outsourcing to China by countries like Canada is likely to decrease. For Canada, much of that future outsourcing of industry and much of that exporting of natural resources that has may instead go to Mexico rather than China, given the size and proximity of Mexico’s labour force.

  1. Immigration:

With a young population that is increasingly of Mexican or Hispanic descent, there has
grown within the United States a political faction which is wary of further Mexican or
Hispanic immigration, seeing it both as a threat to the singular position held by the English language in America and also as a threat to US employment levels.

This faction includes many of those who voted for Trump in the Republican primaries, and thus it is not surprising to see that the US government has recently been trying to reduce both legal and illegal immigration to the country, while simultaneously prioritizing English-language proficiency (which Latin Americans mostly lack), rather than family reunification, as a factor in selecting immigrants.

Canada, however, unlike the United States, has an aging, Baby Boomer-dominated
population, and prioritizes immigrants based not only on English proficiency but also French proficiency. It is much easier for a Spanish-speaker to learn French than English, and, indeed, Canada’s French-speaking areas (Quebec and parts of New Brunswick) have the oldest populations, which are most in need of immigration.

Already, Trump’s rhetoric has led to an increase in emigration of groups like Haitians and Salvadorans from the US to Quebec. Canada’s Mexican population may grow as well. Certainly it has plenty of room to: in spite of the fact that 21 percent of Canada’s population is foreign-born—compared to 14 percent in the US —only 0.3 percent of Canada’s population is Mexican, compared to an estimated 11 percent of the population in the US. Even the state with the smallest share of its population being Mexican or Mexican-American — Maine — has a higher proportion, 0.4 percent, than Canada.

  1. Canadian Demographics:

The aging population of Canada’s Baby Boomers, and especially of Quebec’s Baby
Boomers, also indicates another area in which Canada-Mexico economic ties are likely to grow: tourism. Already today, Mexico is the largest destination for Canadian travellers apart from the US. (Plus,the areas of the US that Canadian snowbirds spend the most time — Florida, the Southwest) — are the very ones that Mexican-Americans (or in Florida’s case, Hispanic-Americans in general) inhabit in large numbers.

As Canadian Baby Boomers reach old age or retire in the years ahead, they are likely to spend more time in places like Mexico, in order to avoid the discomfort (even danger) of dark, icy Canadian winters. This will be most true of Quebec, given its older population, colder winters, and ability to learn basic Spanish.

  1. The Shale Boom:

Economic journalists frequently focus on direct trade relationships (country A’s trade with country B) but ignore indirect trade relationships (country A and B’s joint trade with country C). Canada and Mexico already have the largest, second-degree indirect trade relationship in the world; as the graph below shows, Canada’s trade with the US plus Mexico’s trade with the US is greater than even China-US trade plus China-