Emerging Markets: Analyzing Mexico's GDP

Mexico is a classic example of a two-sided economy. While one part shines bright with a trillion-dollar gross domestic product (GDP), the other part is overshadowed by the fact that approximately 44% of its population lives below the poverty line. Mexico has the third-highest degree of income inequality amongst the 39 member nations of the Organisation for Economic Co-operation and Development (OECD).

In this article, we review the primary sectors that contribute to Mexico's gross domestic product and how they impact the nation's economy as a whole.

Mexico's GDP

The country has managed to move ahead despite poverty, corruption, income disparity, and the presence of a large informal economic sector. The World Bank categorizes Mexico as an “upper middle income” nation. Mexico’s $1.076 trillion gross domestic product (GDP), as of 2020, made it the fifteenth-largest economy in the world in terms of nominal gross domestic product while placing it on the thirteenth spot in terms of purchasing power parity (using constant 2017 international dollars).

Mexico is the second-largest economy in Latin America after Brazil and is also an oil-exporting nation. The graph below, from the World Bank, shows the annual percentage growth rate of GDP at market prices based on constant local currency.

As you can see in the graph above showing annual GDP growth in Mexico from 1980 to 2020, the Mexican economy has weathered many challenges over the years. In 2009, the GDP took a massive negative dip. This was synchronized with the financial crisis of 2008-09 that affected almost all global economies.

Mexico recovered and between 2010 and 2018 showed positive growth. However, the modest growth during these years—ranging from a high of 5.12% to a low of 1.35%—showed that the economy was struggling through some issues. Chief among these is the end of the so-called commodity super-cycle—the period from the late 1990s until the financial crisis of 2008.

During this time, most commodities experienced double-digit annual real price growth fueled by rising demand from Brazil, Russia, India, and China (sometimes called the BRIC economies), the United States, and Eastern Europe.

In 2019, Mexico's growth rate went negative for the first time in a decade, dipping to -0.05%. According to the World Bank, compared to similar economies, Mexico underperformed in terms of poverty reduction, growth, and inclusion. The economy contracted by 8.24% in 2020, experiencing demand and supply shocks caused by the impact of the COVID-19 pandemic.

GDP Composition

The composition of the gross domestic product is broadly split into the primary sector (agriculture), the secondary sector (industry), and the tertiary sector (services). According to 2020 data by the World Bank, agriculture, forestry, and fishing accounted for 3.9% of the GDP, while industry and services accounted for 29.6% and 60% of the GDP, respectively.

Agriculture a Small Part of the GDP

Agriculture, which includes forestry, fishing, hunting, livestock production, and cultivation of crops, contributes a mere 3.9% to Mexico’s GDP. The share has remained below 4% for over 20 years. Nevertheless, agriculture, or the primary sector, plays a crucial role in indirect ways for the Mexican economy. The primary sector has helped in strengthening trade ties with the United States as well as in alleviating poverty and creating jobs. Agriculture provides employment to about 12% of the nation’s labor force. However, in rural areas, more than half of the population might be involved in agricultural activities.

Mexico’s agricultural sector can be split into two parts:

1. Subsistence farming dependent on unskilled laborers in the rural areas
2. Highly-competitive export-oriented farming

While farms focused on agricultural exports have helped lift the earnings and standard of living of some workers, they have also intensified the income inequality among agricultural workers. The World Bank graph below shows the contribution of the agricultural sector since 1980 to Mexico's gross domestic product.

Agricultural Imports and Exports

Mexico's agricultural imports in 2020 totaled approximately $28.1 billion, while its exports amounted to approximately $40.3 billion. Mexico's biggest trading partner is the United States, which purchased 82% of the nation's agricultural exports.

Mexico and the U.S. have a complementary trade relationship, which refers to the fact that the two countries tend to export different agricultural products to one another. For example, Mexico does not produce enough grains and oilseeds to meet its domestic demand, so it imports large amounts of these products from the United States. Beer, fruit, and vegetables comprise about 63% of U.S. agricultural imports from Mexico.

Industry Sector

The industrial sector, which includes manufacturing, mining, oil, and gas, has contributed approximately 25% to 35% of Mexico’s GDP. The numbers have hovered around the same percentage for the past 35 years. From 2000 to 2020, industry averaged about 34% of Mexico’s GDP. Industry employs 26% of the nation’s labor force. The graph below shows the contribution of the industrial sector since 1980 to Mexico's gross domestic product based on World Bank data. 

The most well-known and developed industries in Mexico are the automotive, electronics, and oil industries.

Automotive

Although it serves mainly as an assembly manufacturer, in recent years the automotive industry has advanced to conducting independent research and development. Some of the most well-known car manufacturers like General Motors Co (GM), Ford Motor Co (F), Toyota Motor Corp (TM), Mercedes Benz (a subsidiary of Daimler AG), Honda Motor LTD (HMC), and Volkswagen Group have set up operations in Mexico. 

Oil

Mexico also has the oil to power these cars. In 2020, the nation ranked 13th in the world for crude oil production with 1.9 million barrels produced daily. Oil industry earnings amounted to about 58% of total government revenues. A key component of Mexico's economy is its trading partnership in oil products with the U.S. In 2020, the U.S. imported over 240 million barrels of Mexico's heavy crude oil.

Starting in 1938, the state-owned Petroleos Mexicanos (PEMEX) had been solely responsible for exploration, research, and sale of oil in Mexico. Inefficient infrastructure, corruption, and bureaucracy were cited as reasons for the underperformance of PEMEX. This led the Mexican government to open up the sector to foreign players in 2013 through an auction that encouraged private investment to revive its oil and gas production.

Between 2013 and 2018, the government awarded 107 contracts to private oil and gas contractors as part of the nation's energy reform mandates. However, the López Obrador administration has expressed reluctance to continue private sector investment in the oil industry, preferring instead to focus its efforts on strengthening PEMEX. Starting in December 2018, the Mexican government announced it would halt the private investment auction process.

Electronics

The electronics industry has grown tremendously, especially with the Mexican government’s initiatives designed to promote the nation's competitiveness in electronics and technology. The goal is to make Mexico a top exporter of electronic goods. Other than manufacturing, mining is also an important component of industrial activity. Mexico is the leading producer of silver in the world and is rich in minerals like fluorspar, graphite, and strontium.

Manufacturing

In manufacturing, Mexico has the advantage of high labor productivity and free trade agreements with multiple nations. Rising wages in China also make Mexico a more attractive destination for manufacturing. And natural gas prices (tied to the U.S.) are helping the country boost its manufacturing. Manufacturing contributes 17.2% to the country’s GDP.

Services Sector

Through the twentieth century, Mexico transformed from an agrarian to an industrial economy. By the 1960s, manufacturing was at the center stage and had become the engine of growth. However, the services sector slowly started to assume a more important role and has now become a dominant force for the Mexican economy.

The services sector, or tertiary sector, employs 62% of the nation’s labor force and contributes a significant 60% to the GDP. The graph below shows the contribution of the services sector since 1980 to Mexico's gross domestic product based on the World Bank data.

Financial service is one of the major components of Mexico’s services sector and has attracted a significant amount of foreign investment. The financial sector in Mexico is largely foreign-owned. For example, Banamex is a part of Citigroup Inc. (C), Bancomer is a unit of Spain’s BBVA, SERFIN is part of Santander, Canada’s Scotiabank owns Inverlat, and Bital operates as part of HSBC (HSBC).

Other than financial services, tourism is another important segment of the service industry. Mexico has a huge scope for its tourism industry with 35 sites on UNESCO’s list of cultural or natural world heritage.

The Bottom Line

Mexico has greatly benefited from its international treaties of free trade, most notably the North American Free Trade Agreement (NAFTA). The treaty not only created the largest free trade zone in the world, but also laid a foundation for the growth and prosperity of the United States, Mexico, and Canada. Since its introduction in 1994, the U.S. and Mexican economy has become increasingly integrated with strong trade and supply chain links. In 2018, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA).

Today, Mexico has a large, diversified, and strong economy with its oil sector, remittances from the United States, exports, agriculture, mining, tourism, and industrial activity playing the most significant roles in its growth. However, the country also suffers from problems like corruption, a huge informal economy, drug cartels, and income inequality which need to be tackled to ensure sustainable growth.

Correction—December 2, 2021: A previous version of this article included incorrect data in the "Industry, Value Added (% of GDP) in Mexico" chart.