Arizona merchandise exports to Mexico declined 9.2% in 2016. This is key because Mexico is by far Arizona’s most important export destination. Mexico accounted for 37.8% of Arizona merchandise exports in 2016. Canada was the next largest destination, accounting for 9.4% of state exports. Thus, state exports to NAFTA countries accounted for 47.2% of the total. Arizona exports go all over the world, with 29.8% going to Asia, 17.7% to Europe, and 5.3% to all other countries combined. State exports to Canada, Europe, and the rest of the world also fell last year. Asia was the only export destination to post growth, driven largely by a surge in exports to South Korea.
One key reason why Arizona’s exports to Mexico fell last year was the major appreciation of the U.S. dollar versus the Mexican peso. Indeed, from June 2014 to December 2016, the dollar rose by 57.8% against the peso. In contrast, the U.S. dollar increased 23.2% against the Canadian dollar. With the major rise of the dollar versus the peso, it makes sense that state exports would be adversely affected. However, state export performance was uneven across industries. Exports of computers and electronic components, as well as transportation equipment, increased. These are the state’s two largest export sectors. Playing an important role in the overall decline was a major drop in mineral and ore exports (down 30.9%). Exports of non-electrical machinery and chemicals also declined last year.
Recent political events have put further upward pressure on the U.S. dollar versus the Mexican peso. Indeed, in the immediate aftermath of the election, the exchange rate hovered between 20.0 and 22.0 pesos per dollar (it has recently begun to descend). The impact of recent statements by the new administration on NAFTA, immigration, and trade policy in general have increased uncertainty on both sides of the border. While the imposition of a unilateral tariff on Mexican goods crossing the border would hurt Arizona exports (due to likely tariff retaliation or boycotts), this differs from proposals to impose a border adjustment. The border adjustment is part of a proposed overhaul of the U.S. tax system that would also affect U.S. export performance and the value of the U.S. dollar. Some economists expect the overall plan to have little impact on the trade deficit. The devil is in the details, however, and we will have to keep a close eye on how federal tax and trade policy evolve in coming months and years.