Question

An article in the Wall Street Journal in mid-2017 noted, "Mexico's economy kept up steady growth in the first quarter, expanding for a 15 th consecutive period despite concerns that strained trade and investment relations with the U.S. will bring about a sharp slowdown." During this period, why were some observers concerned about Mexico's economic relations with the United States? Why are these relations particularly important if the Mexican economy is to experience sustained growth?

Short answer

Concerns about Mexico's economic relations with the U.S. were due to potential negative impacts like reduced market access and foreign investment. These relations are important for sustained growth as they provide opportunities for economic expansion and development.

Step-by-step solution

Understanding the Economic Context

Consider the geopolitical and economic context described. In the exercise, it highlights that Mexico had consistent growth for a prolonged period. However, the stability of this growth was perceived to be threatened due to strained relations with the U.S.

Impact of Economic Relations

Assess the potential impacts of strained trade and investment relations on a national economy. Among the negative impacts, it can limit the country's access to markets, reduce foreign direct investment, and hamper employment rates. This understanding gives a sense of why there were concerns about Mexico's economic relations with the U.S.

Importance of Economic Relations for Sustained Growth

Identify the role of trade and investment relations in sustained growth. It's crucial to realize that these relations can provide opportunities for market expansion, job creation, technological transfer, and more, which are key components for an economy to sustain its growth.

Key concepts

Foreign Direct Investment

Foreign Direct Investment (FDI) is when investors from one country put money into business operations in another country. It often involves more than just putting in capital; it may also include management, technology, and expertise. This type of investment is important because it can lead to job creation,
boosts in productivity, and access to new markets. When a country like Mexico experiences high levels of FDI from the U.S., it benefits from new jobs and advanced technology from these investments.
But FDI can be a double-edged sword. If trade relationships between two countries become strained, as was the concern with the U.S. and Mexico in 2017, new investments may slow down. Investors might hesitate,
or they could even withdraw their investments looking for more stable or promising environments elsewhere. This fluctuation can lead to instability in the job market where certain sectors may suffer more than others,
undermining economic confidence and potentially stunting overall economic growth.

Economic Growth

Economic growth refers to the increase in the production of economic goods and services from one period to another. It is measured by the increase in Gross Domestic Product (GDP) and is usually driven by improvements in productivity, technological advancements, and increases in physical and human capital.

• Productivity: More output can be produced with the same amount of input.
• Technological Advancements: New technologies can make processes more efficient.
• Capital: Financial, physical, and human capital investments drive increased production.

In the context of Mexico in 2017, consistent economic growth was remarkable despite potential troubles in trade and investment.
Growth is crucial for the economy as it leads to higher income levels, better living standards, and improved economic stability. Yet, such growth is heavily reliant on interactions with other countries,
especially through exports and foreign investments. If these are threatened, as with Mexico's situation with the U.S., the risks to continued growth can be significant.

Geopolitical Context

Geopolitical context examines how geographic and political factors influence international trade relations. For Mexico, its geographic proximity to the United States makes their economic relationship highly significant. Such proximity facilitates easy trade exchanges and border operations,
supporting robust economic interactions. However, geopolitical tensions can affect these relations. In 2017, there were concerns about potential policy changes in the U.S., which could pose challenges for trade agreements like NAFTA. Changes in policies or political climates can lead to uncertainties,
impacting businesses and investor confidence. This context focuses on the delicate balance between maintaining strong trade partnerships while navigating political landscapes. Developing strategies to mitigate geopolitical risks, such as diversifying trade partners or investing in national industries, can be vital for countries like Mexico to ensure sustained economic interactions and growth. Stability in these international relations is essential for maintaining healthy trade flows and investments.