The Accidental Superpower

by Peter Zeihan

  No country lost out to China’s emergence onto the international scene as much as Mexico. Prior to China’s joining the WTO in 2001, Mexico was the primary source of textiles and low-end manufactured goods to the United States. Despite China’s (many) internal weaknesses, its ability to subsidize its inputs and outputs and marry them to low-cost labor in an environment of centralized political control allowed it to undercut countries like Mexico that relied on mid-cost labor and proximity.

  But those days are over. Leaving aside the issues of China’s political stability (or lack thereof), ability to continue subsidizing its output (or lack thereof), and ability to manipulate the international economic system (or lack thereof), it has simply run out of cheap labor. Since 2002, Chinese labor has increased in cost by a factor of six to about $3 per hour. In relative terms Chinese labor has increased from being one-quarter as expensive as Mexican labor to one-quarter more expensive. Considering that Mexico already has far superior transport access to the United States, and that there is a decades-old tradition of collaboration between American management and Mexican oligarchs, the numbers certainly are positioned for a labor-cost-driven onshoring to Mexico.

  2. American Shale Is Supercharging the Mexican Electricity System

  Due to shale, the Americans have a massive glut in their natural gas system. Unlike crude oil, natural gas is, well, a gas, and the transportation of gases is difficult. There are only two means of getting it out of a supersaturated market. The first is to cool it into a liquid (about minus 260 degrees Fahrenheit) and then ship it to someone who has the infrastructure capacity to safely return it to gaseous form. This liquefied natural gas (LNG) process is the only way to ship the stuff across an ocean. However, there are also many regulatory steps involved, and as recent energy politics in the United States have amply demonstrated, gaining national approval for a transnational energy infrastructure project is somewhat difficult—not to mention that freezing natural gas into liquid form is as expensive as it sounds. While dozens of projects have applied for regulatory approval, only a small handful have achieved the necessary permits at the local, state, and national levels, and construction has only begun on one.4 That leaves a lot of shale natural gas stranded in the American interior, practically begging for a market.

  But one of the great open secrets of the American energy complex is that it is already legal to export natural gas, so long as it is by pipe and so long as it goes to Mexico. As of the beginning of the shale boom, there were already nine natural gas pipelines crossing the border, supplying Mexico with nearly one-quarter of its natural gas needs, about 1 billion cubic feet per day (Bcf/d). Since the shale boom, however, work has begun on three major corridors as well as expansions throughout the export system in order to marry the ultra-cheap American natural gas to the Mexican power network and labor market. Exports doubled to 2 Bcf/d between 2010 and 2013, but the real growth will come in 2016. At that point several new trunk lines will begin operation, allowing the export of U.S. energy to heretofore unreached Mexican regions up to and including the Mexico City core. Mexican imports from the United States are expected to hit ten times their 2010 levels.

  Nearly all of that natural gas is planned to be used for electricity generation. Chinese competition aside, the biggest hurdle that has faced Mexican industry in recent years is reliable power supplies. The surge in shale gas into Mexico has already greatly mitigated that problem, and within a (very) few short years Mexico’s chronic rolling power outages will be a thing of the past. For manufacturers, whether Mexican or American, that removes one of Mexico’s chronic limitations on industrial development.

  3. Mexican Demography Generates a Large Market and a Larger Labor Pool

  Mexico also has a young population. Normally this would be somewhat of a problem for a country at Mexico’s stage of development: A capital-shy demographic combined with a capital-shy geography could forever trap Mexico in underdevelopment. In fact, that has been the trap Mexico has lived in ever since independence. But the positive aspects of a young population still apply. Mexico’s young adults are hungry for goods and property. They just need paychecks. Luckily, their large number proportional to the overall population keeps their labor costs low and keeps foreign entities eager to invest in Mexico for goods production. While those investors may have initially been interested in selling those goods into the American market, there is every reason to service the local population as well—doubly so since Mexico’s lack of ability to self-industrialize means that internal goods supplies are so limited.5

  If anything, Mexican demographics are even more favorable toward consumption than they look at first glance. Mexico’s current demographic profile also shows a characteristic somewhat different from the normal pyramid. About twenty-five years ago, coinciding with higher labor participation rates brought upon by NAFTA, Mexican families started to shrink in size—not so much that Mexico started to undergo the demographic collapse we are seeing in Europe, or even the tightening that the Americans are experiencing, but enough to turn the bottom portion of Mexico’s population pyramid into a chimney.

  Population chimneys certainly pose long-term challenges as they will in time lead to smaller (and much older) populations. But even if the rate of decline in Mexican birth rates continues unabated for another three decades, this will not be a financial problem for the Mexicans until 2050. Until then, the country has an ever larger proportion of its population in the critical twenty-to-thirty-nine-year-old age group—that’s the people who are most likely to move around Mexico in order to secure work, who are most likely to attract foreign investment to generate exports for the American market, who are most likely to attract foreign investment seeking to satisfy the local market, and the cohort who are most likely to consume and so generate local growth. The mere existence of this group is sure to generate strong, sustained consumption-and foreign-direct-investment-led growth across Mexico.

  The clipping of the pyramid’s base, which means that Mexico has fewer children than in years past, has one other impact. It means that Mexico’s young adults have greater amounts of disposable income (they are not raising as many kids), freeing up Mexico’s young adults to spend just like the Europeans did during the 1990s and 2000s. However, since the inward investment reaching Mexico is foreign-directed and pouring into infrastructure and industrial plant rather than simple credit, the Mexicans will walk out on the other side of this process being richer and not being in debt rather than simply feeling richer and being in debt like the Southern Europeans. Collectively this makes Mexico one of only a handful of countries in an increasingly demographically inverted world that can still rely upon domestically driven growth and channel foreign capital in a productive manner.

  4. The Drug War Has Improved Mexico’s Economic Prospects

  It is something of a grim irony that the drug war is perhaps the best thing that has happened to Mexico from an economic point of view. Now, that requires a bit of explanation.

  Bear in mind that it is the differential between Mexican and American labor costs that provides Mexico with economic opportunities that its geography would otherwise deny it. That differential is the Mexican economy’s lifeblood. Nothing pushes down Mexican labor costs—increasing the differential—like a drug war raging throughout the country. In fact, the more violent the war, the lower Mexican labor costs, and so the greater the Mexican/American differential and the more attractive Mexico becomes to foreign direct investment seeking an advantage in the American market.

  Obviously the war’s security challenges pose any number of problems, but the drug war is not raging everywhere. Mexican drug violence is deep and endemic, but it follows the conflicts of the politics of the cartel wars. Violence is only the rule where the cartels find themselves competing for the same transport routes and choke points, such as the plazas where they can smuggle drugs across the border into the United States. Outside of those danger zones, Mexico is just another developing country, and far from being random, its
dangers can be planned for and mitigated. So long as the drug war rages, the economics of integration with the American market only improve.

  Taken together, this mix of local and regional geographies and local and global demographics turns Mexico from a basket case to a near-best case. Because of Mexico’s proximity to the United States, it is typically one of the world’s top destinations for foreign direct investment (FDI),6 enabling Mexico to sidestep the very capital problem that will soon be gutting the vast bulk of the developing world. Put together, Mexico is poised to be the fastest-growing economy in the world for the next generation.

  The Nature of the Border

  Americans think of the border with Mexico as wild, untamed, lawless—a drug-ridden, post-apocalyptic wasteland. Considering the inability of the Mexican government to patrol, much less control, its borderland, there is some truth to American concerns. But that image of the border ignores the depth of the economic and cultural relationship between the two countries. Even before one considers that Mexico is about to experience economic breakout, Mexico’s proximity to the United States has not only landed it with the status of one of the world’s major economies, but is about to make it America’s greatest ever economic partner.

  Consider the following:

  • As of 2014, the United States exports to Mexico over 2 billion cubic feet of natural gas and nearly 1 million bpd of refined fuels, while Mexico ships 1 million bpd of crude north. By 2020, American shipments of natural gas will at least quadruple, making it the largest bilateral energy relationship in human history.

  • As of 2013, some $510 billion in goods were exchanged across the border, making Mexico the Americans’ third largest trading partner (second largest with services included). Bilateral trade will likely increase to $650 billion by 2020, making it rival U.S.-Canada trade for the largest bilateral economic relationship in human history.

  • As of 2014, some 350 million legal border crossings were made. This already makes the border the most crossed border in human history, before considering illegal crossings. Projections indicate that legal crossings will hit a half billion annually by 2020.

  • Mexican failure leads to integration with the United States. Poverty, government corruption, drug-related violence, environmental catastrophe, and weak infrastructure all increase internal Mexican labor mobility and decrease Mexican labor costs. The bigger the labor cost differential with the United States, the more economic integration between Mexico and the United States.

  • American success leads to integration with Mexico. Wealth, transparent government, improved local security, higher labor and health standards, and strong infrastructure all increase American consumption and American labor costs. Again, the bigger the labor cost differential with Mexico, the more economic integration between Mexico and the United States.

  Acceptance of these facts changes the nature of the internal American debates about Mexico. The problem isn’t so much that the Americans can’t decide if they want to integrate with Mexico or not. The Americans are already integrated with Mexico. The issue is that they haven’t decided how to manage the relationship. Side effects of that as yet unsettled relationship are an illegal immigrant community of about 7 million Mexicans and another 1.5 million Central Americans,7 plus the tens of billions of dollars of drugs that are smuggled into the United States. With issues of this size it is worth spending a little time discussing the nature of the border, mostly because most of the mooted solutions that exist in the American political arena are at best doomed to fail, with most of them being counterproductive.

  Let’s leave aside the above arguments about robust economic interaction and the fact that cultural integration is already well under way with roughly one-ninth to one-sixth of U.S. citizens (it depends who is doing the math) identifying themselves as having roots in Mexico. Let’s ignore all the economic arguments about how Mexican immigrants (legal or otherwise) do jobs that Americans don’t want, limit inflation, and serve very real and positive roles in the American labor market. Let’s ignore the moral and legal implications of expunging the United States’ illegal communities. Let’s focus on the border itself. I’ve already said that Mexico—even in the best of times—cannot secure the border.

  Well, neither can the United States. The U.S.-Mexico border is roughly two thousand miles long. Two thousand miles sounds like a significant distance. It isn’t significant. It’s massive. That is double the length of the European Cold War border—a border that could only be sealed by turning the broader region into a national security zone under military rule.

  There has also been no small amount of talk of being tougher on immigration. This ignores basic human nature. The U.S. government is far more capable than Mexico’s. Somewhat ironically, the American capacity to deport large volumes of people is part of the structural and organizational strength that so draws immigrants (although I think it is obvious that the specific act of deportation isn’t something that would-be immigrants are all that fond of). Even stronger illegal migration penalties would not have much of an impact. Mexicans and Central Americans are fleeing not just poverty, but also the insecurity of the drug war and various Central American juntas. So unless U.S. policy is going to be to shoot people on sight in the border zone, the Departments of Immigration and Homeland Security just aren’t capable of counterintimidation of anything like the environments the would-be immigrants are running from.

  So if the border cannot be sealed, if the allure of the United States cannot be dampened, and if policy failures in Mexico will only enhance integration, the United States is simply stuck with a large illegal Mexican and Central American community. Considering the lack of viable options in American public discourse, what does the presence of 8.5 million illegal Hispanic immigrants mean?

  The North American Drug War

  Most have probably heard about the horrors of the Mexican drug wars, where kidnappings, assassinations, mass murders, public body dumpings, and beheadings are regrettably all too common. Many have heard the names of the various cartels vying for supremacy—the Zetas, the Sinaloa, the Knights Templar, and the Gulf (among others). The Mexican government’s own estimate for drug-war-related deaths has now topped fifty thousand.

  What is less understood is the link between illegal narcotics and illegal immigration. It is probably not what you think.

  Because illegal immigrants are undocumented, they have difficulty gaining access to the basic pieces of modern society, including identification such as driver’s licenses and financial access such as bank accounts. That has a far more damning impact than it may seem at first blush. With limited access to the banking system, illegals operate in the cash economy—they are far more likely to have significant quantities of cash on their person or in their home at any given time. Since illegals fear being discovered and deported, they often do not contact law enforcement when such inevitable attacks happen. In the modern age of credit cards and PayPal, that makes illegals a far more lucrative target for robbers and muggers than even rich Caucasians. There is a term for areas where people who live outside of normal social support networks exist: ghettos. Unique among American immigrant communities, Mexican and Central American illegals live in ghettos. This would be a serious social problem in need of addressing under any circumstance, but new circumstances have pushed it from the serious to the critical.

  The drug war of 2014 is considerably different from the drug war of the twentieth century. Moving products is cheaper by water, regardless of whether the product is legal or not. As such, most interstate trade in illegal narcotics—just like interstate trade in any other product—originally traveled by water. In the United States, this made the port city of Miami the premier entry point for illegal narcotics. Small fleets of vessels would swarm from Colombia and Venezuela to Miami, and from there the drugs would percolate throughout the country. The 1980s hit TV show Miami Vice wasn’t just a gripping drama, but was a little bit of geopolitics distilled into televised form: local law enforc
ement attempting to stem a transcontinental smuggling effort backed by untold billions of dollars on both ends.

  As a maritime power, however, maritime interception is something that the Americans are very good at. Once the Americans figured out what to look for, they were able to improve everything from port security to Coast Guard patrols, sharply limiting maritime (and airborne) shipments first into Miami, then all of Florida, and in time all coastal approaches. By the year 2000, maritime smuggling routes may not have been severed, but they had become so fraught with danger that there were no longer viable methods for transporting the bulk of the illicit narcotics the Americans so craved.8

  But one of the quirks of narcotic economics is that addicts at the point of sale are not particularly price-sensitive. The Americans’ success at blocking maritime and air routes forced the drug flows into more expensive land routes. The sonar and low-elevation radar that proved so effective at monitoring featureless water and keeping illicit shipments away from American shores proved largely useless at sealing the two-thousand-mile-long U.S.-Mexican border, and so the drug flow shifted from Miami Vice to something… else.

  One of the (many) reasons that water transport is so much cheaper is that it is so much less complicated. There are no middlemen in the ocean. No towns to navigate. No regulatory agencies that make their homes on the waves. You leave port. You sail. You can sail around anything you don’t like the look of. You enter port. And that is it. On land there are physical borders to cross. You must follow existing infrastructure. You must deal with local regulations, customs, and law enforcement at a plethora of stops along the way. But all this adds more than simply cost. It also ensures that the shippers become intimately involved in every aspect of their transport routes. And should shippers using two different routes find themselves operating at the same bottleneck—say a mountain valley where their routes merge, or an international border crossing—competition erupts.