Trade relations check with second biggest trading partner - Mexico
Several issues overhang trade relations with Mexico, the United States' second largest trading partner.
Nathan Kauffman: You know, I think the strength and not to overuse that word resilience. But the strength really does come by nature of how the economy has unfolded here, the last couple of years following the pandemic, consumers have been in a pretty good position to continue to spend despite the inflationary pressures, I think that are being felt not just in the US, but elsewhere. And so as we talk about supply chains that are, yes, globally integrated, and following some disruptions of the past couple of years more linked than ever, I think, to what you would see with respect to Mexico.
Paul Yeager: From an economic standpoint, how do you see the growers of the corn shifting? Do the United States? Does the US farmers say, Okay, I need to lean into this or do they hold firm? And what does that mean, policy wise, and you try to make sense of it economically?
Nathan Kauffman: What are the challenging things about answering that question is that we have to start by recognizing that this is very much a global market. You know, corn can be produced, it is produced in lots of places, South America has a growing presence, of course, both Brazil and Argentina. And so we'd have to better understand what the global market is in terms of demand for those products alongside you know, the more conventional or traditional products. Because if it's possible that for example, some amount of production is just shifted elsewhere, and then the original product that was always grown in the US ends up somewhere else, then we haven't really done much other than just shuffle the duck.
Paul Yeager: So will a change in policy with Mexico matter then?
Nathan Kauffman: I think that it could matter as you talk about some specific products. And certainly it would matter if ultimately, what a change in that policy would lead to is a universal reduction in demand for United States corn as an example. But if what happens is, you know, Brazil or Argentina fills that gap. You know, neither Brazil nor Argentina can supply the rest of the world, then, you know, the global nature of that market would suggest that there would be other market opportunities elsewhere.
Paul Yeager: What are we sending to Mexico the most besides corn?
Nathan Kauffman: Well, from the US economy perspective, a lot of the market back and forth between the US and Mexico does have to do with transportation and vehicles, there's a there's been a pretty well established supply chain where a number of parts, for example, produced out of the US manufacturing parts would would go to Mexico, for production as it relates to vehicles and then sent back this direction. So that's, that's a big industry, there's a number of others electrical equipment, and you know, petroleum products. Of course, as you think about Texas, and places further south. It's been a pretty broad trading relationship, but food and ag, of course, important for the Midwest and the region that we cover.
Paul Yeager: Do you see a certain sector of Food and Ag that's changed? I think the last time we talked was early pandemic time did now that we're a little bit away from that, did we see, are we accepting more Mexican grown fruits and vegetables in this country than maybe we used to?
Nathan Kauffman: You know, generally, what I would say is that we've seen a pretty noticeable increase both in exports from the US to Mexico, but then also when reverse importing products from from Mexico to the US, some of that's fruits and vegetables, some of it is, is processed products, that could be food and beverages as part of that, as well. So yeah, there has been an increase in both places. We've actually been exporting more corn to Mexico in the last few years, in addition to some other things, poultry products, of course, soy beans, there's more that's connected to I think energy, also than what we've seen in the past, more pork is going to Mexico, I think than what we were, you know, before the pandemic. So, you know, there's a number of opportunities, there are both directions that we've seen an increase here lately.
Paul Yeager: What's the biggest storyline between the US and Mexico when it comes to trade in the next two to five years?
Nathan Kauffman: You know, I think a big part of its going to come down to prospects for economic growth to continue to support that trade. Again, going back to what I mentioned earlier, the strengthen economic growth in 2021, and really, even through 2022. And now this year, has been pretty good. And it may be even in some places stronger than what might have been expected. So that that is supportive them that of an environment that that has export activity in either direction. If we were to see, for whatever reason, a more significant economic slowdown, whether it's in Mexico or the United States. Some of that ties back to how we at the Fed think about monetary policy and interest rates, we know that effects associated with increase in interest rates don't happen immediately. It can take some time for those effects to play out. So if we were to see a more substantial, you know, macro economic slowdown that would have certain implications for trade And I think Mexico would feel it in terms of their own economy. It's It's an economy that's dependent to some extent on remittances from the United States. The strength of their economy is I think, tied pretty closely to what happens in the US.
Paul Yeager: The full discussion will be part of the MtoM release on Tuesday.