In Interesting Times: Reviewing Tennessee’s Trade with Mexico 3rd Quarter 2016

Tables and Graphs

Mexico is the state’s second-largest export destination.

With all the controversy surrounding the new administration’s plans for NAFTA and Mexico, it may be worthwhile to look at Tennessee’s trade with what is today its second largest market. How sizable is the state’s trade with Mexico? And how is it evolving?

Mexico is a large part of Tennessee’s economy. In 2015, the state exported almost $5 billion to Mexico, and imported more than $7 billion. Combined, that equals about 5% of all the productive activity in the state. It is larger than the entire economy of the Clarksville or Kingsport areas. Only eight American states export more to Mexico, and only four import more. In 2015, 15% of Tennessee’s foreign shipments went to Mexico, while 9% of its imports came from Mexico. It may seem odd that while the state imports much more than it exports the relative size of its exports is larger, but this is just a reflection of the U.S. trade imbalance. In all, according to a recent WalletHub analysis, Tennessee would be the sixth most heavily affected state should a trade war with Mexico occur.

Indeed, more imports to Tennessee come from Mexico than from any other country. Its $7.2 billion is substantially larger than either Canada ($5.7 billion) or China ($2.7 billion), the state’s next two largest sources of imports. These imports are growing substantially. They have nearly doubled in the past five years. On the flip side of the picture, Mexico is the state’s second-largest export destination, behind only Canada. Exports too are growing rapidly. They have increased more than 60% since 2010.

All of this trade is heavily concentrated in the automotive sector: 35% of exports and 44% of imports involve trucks, cars, or equipment for them. In 2015, Mexico shipped about $165 million in trucks and cars to Tennessee along with tractors valued at $473 million. This was vastly outweighed by the shipments of auto parts and equipment, which amounted to over $3 billion. In return, Tennessee sent Mexico $200 million in trucks and cars and just over $1 billion in auto parts and equipment. In addition, a very sizable part of the trade in electrical machinery, the second-largest import and the fifth-largest export sector, involves products used in automotive production. In a nutshell, about half of Tennessee-Mexico trade involves building a car or truck. For what it’s worth, this dominance has faded a bit from 20 years ago, when three-quarters or more of the state’s trade with Mexico was in this sector.

The other significant traded goods also tend to be industrial rather than consumer goods. Various plastics account for nearly $500 million of state exports to and $70 million in imports from Mexico. The pie charts
give a picture of the major products going between the two areas. (The automotive sector is colored in greens.)

The trade with Mexico is evidently very much a part of industry supply chains. We can grasp this by looking at a map of the state’s shipments to Mexico. Over two-thirds of Tennessee exports go to just four Mexican states. Trade clusters south of the Texas border in the areas where many maquiladoras are located. Generally, the heaviest exporting goes to states where the Mexican auto industry is centered (Nuevo Leon and Guanajuato) or where the state’s auto manufacturers have Mexican plants. (For GM that’s Nuevo Leon and San Luis Potosi, for VW it’s Puebla, and for Nissan, Aguascalientes and Estado de México. We might also add the Toyota plant in Baja California.) Just as with the product mix, the geography of Tennessee-Mexico trade is quite concentrated.

Lack of data prevent us from saying too much about the geography of Mexican trade within Tennessee. We can say that the lion’s share involves the Memphis and Nashville MSAs. Together they account for just about two-thirds of all the state’s shipments to Mexico. However, five years ago, the two were responsible for 78% of those shipments, so there appears to be a steady diversification within the state of its exports south of the border. Given the concentration of trade in the transportation sector, it would not be going too far out on a limb to project that the large majority of state trade outside the two large urban areas occurs in the “auto belt” that stretches south from Nashville to Chattanooga and then along I75 up to and above Knoxville.

It would be reckless to speculate at this point how American trade policy toward Mexico might change and what its effects would be. What we can say is that the state economy is quite imbricated with Mexico. For the most part, it’s not a matter of exchanging products but of sharing supply chains. Policies that aim to change that would certainly have a significant impact on the Tennessee economy and in ways that would be difficult to predict. Should this change come we would indeed be living, as the supposed Chinese curse has it, “in interesting times.”