As Mexico’s fortunes turn south, squeeze felt to north
Southern neighbor’s fast-shrinking economy adds to pandemic-driven setbacks in Texas
The Texas economy has already taken a double hit from a pandemic-driven recession and devastating oil bust. To those setbacks, add one more: a rapidly shrinking Mexican economy.
Few states are tied as closely to Mexico’s fortunes as Texas, which shares a 1,254-mile border and conducts some $300 billion a year in trade with its southern neighbor. Mexico is, by far, the state’s biggest export market, while the tens of thousands of Mexicans who cross into Texas each day to work, shop, and spend drive a border economy that supports hundreds of thousands of jobs.
Mexico’s economy has been battered by the coronavirus pandemic, adding to existing economic challenges such as widespread poverty that forecast a slow, painful recovery. The Mexican economy is expected to shrink by 12 percent this year — about triple the contraction projected in the United States — and grow less than 1 percent next year, according to Mexico’s central bank.
“The thing we have to remember is that Texas and Mexico are joined at the hip economically,” said Tony Payan, the director of the Mexico Center at Rice University. “There is no reason to believe that Texas will not experience the crunch that it has in every other crisis that has happened in Mexico.”
The 2008 financial crisis provides an example.
From July 2008 to January 2009, trade between the U.S. and Mexico fell $56 billion to $32 billion — a plunge of 43 percent in just six months, according to statistics from Mexico’s National Institute of Statistics and Geography. Mexico’s economy contracted at a 10 percent annualized rate in the fourth quarter
“The sad part is that even when the recovery comes, we are still wondering, is it going to look the way it did before, on both sides of the border?”
Gerald Schwebel, an executive VP at IBC Bank in Laredo
2008.
The sharp downturn in Mexico’s economy and trade, meanwhile, contributed to the decline in economic activity in Texas, analysts said. Retail sales in the state fell 9 percent from 2008 to
2009 while the oil and gas industry’s output fell 16 percent, according to data from the Texas Comptroller.
Texas’ and Mexico’s economies have only become more intertwined over the past decade. For example, each $1 of products that Mexico exports contains about 40 cents of materials made in the United States — a share that is growing.
“There is not a Texas economy or a Mexican economy at this point,” said Jorge Canavati, the owner of the El Paso logistics business, Canavati and Co., which helps companies on both sides of the border. “The U.S. started having issues because of COVID and tariffs on China, and so Mexico has issues. Anything that happens negatively in the U.S. will hurt Mexico and vice versa. It is a vicious cycle.”
‘Economic crisis’
Mexico’s economic outlook for 2021 is bleak: 12 million Mexicans have lost jobs this year, while 10 million Mexicans will move below the poverty line by the end of 2020.
The prospects for a faster recovery have been hurt by the reluctance of President Andres Manuel Lopez Obrador to borrow to finance the massive stimulus spending that other nations have used to support their economies during the pandemic.
Mexico has spent less than 1 percent of its gross domestic product, a measure of the economy’s output of goods and services, on stimulus measures compared to 13 percent in the United States or 9 percent in Germany. Many economists attributethe dramatic contraction in Mexico’s economy to the low level of stimulus spending.
The lack of stimulus has been made worse by nationalistic policies that discourage the kind of investment that helps economies grow. Lopez Obrador has focused on returning state-owned oil and power companies to near-monopoly positions, despite laws passed to encourage new investment and competition and commitments made to private companies, including many from Texas.
These decisions have worsened the economic outlook, according to Rosanety Barrios, a former senior energy official in the administration of Loof pez Obrador’s predecessor, Enrique Pena Nieto.
“There is no new investment the energy sector and this, in turn, is impacting the economic health of other sectors,” Barrios said. “What I see here is that Mexico is facing its most important economic crisis in modern history.”
The Mexico effect
This downturn is also expected to have ripple effects on Texas.
The biggest economic hit for Texas will come in border towns, where restrictions on travel between Texas and Mexico have hurt both economies. The land border crossings between Mexico and the U.S. were closed for nonessential travel on March 21 and will remain closed until at least December 21, according to the U.S. Department of Homeland Security.
Typically, more than 8 million Mexicans visit Texas each year. The virus and related travel restrictions have hurt Mexican tourism and shopping in Texas border communities and the jobs they support.
In El Paso, for example, retailers count on Mexican customers from Juarez and other nearby communites for up to 14 percent of all sales, which in 2020 was expected to reach as much as $1.75 billion. The border restrictions have contributed to an estimated 50 percent decrease in this revenue, according to Tom Fullerton, a trade economics professor at the University
of Texas at El Paso, who has written extensively on border economics.
Laredo is also reeling from the loss of Mexican visitors.
“It has hit us pretty hard,” said Miguel Conchas, the president of the Laredo Chamber of Commerce, who estimates that sales have dropped at least 25 percent since the beginning of the year for the city’s retailers. “The majority of the shoppers are not coming over from Mexico.”
Especially hard hit are restaurants, hotels and retailers, Conchas said. Hospitality jobs in Laredo initially fell by half from 11,300 positions to 5,700 in the first months of the pandemic. Six months later, employment in the sectors was still down 25 percent at 8,300, according to the U.S. Labor Department.
Casa Raul Western Wear in downtown Laredo, which carries denim shirts, fashion jeans and a range of western dress boots, is one such retailer that has felt the economic blow.
“There is no traffic,” said Moses Goldberg, owner of Casa Raul, who estimates that sales have dropped about 90 percent since early March. “Business has been so bad that I just opened up the store three weeks ago. We have had a sign outside and just let in a few people on request.”
Mexican peso
The struggling Mexican economy has weakened the peso. It tumbled from 18.5 pesos to the dollar in late February to 25 pesos by mid-March. It’s now trading at about 21 pesos to the dollar. This has further weighed on activity in Texas borders towns by making visits more expensive for Mexicans.
U.S. banks along the border have benefited as Mexicans put more of their money into dollardenominated accounts over concerns the peso will weaken further, according to Gerald Schwebel, an executive vice president at IBC Bank in Laredo. That extra business, however, has been offset by the drop in lending, Schwebel said.
Schwebel said he believes it will take a long time for activity to return to normal. Mexico’s central bank forecasts it could be the mid-2020s before Mexico’s economy rebounds to pre-pandemic levels.
“The sad part is that even when the recovery comes, we are still wondering, is it going to look the way it did before, on both sides of the border?” asked Schwebel. “The purchasing power for Mexicans is not there.”