Mexico is a growing force on the North American trade scene, and may soon surpass Canada as the biggest trading partner of the United States, according to a new report released today by Scotia Economics.

“Over the past decade, Mexico has been able to build upon its favourable production and cost position to capture a larger share of the important U.S. market,” says Adrienne Warren, senior economist at Scotiabank. “While Canada maintained a stable 19% share of U.S. imports in the 1990s, Mexico’s share has almost doubled to 11%. If current trends persist, within a decade Mexico could surpass Canada as the United States’ largest trading partner.”

According to the report, between 1990 and 2000, world trade volumes rose at an average annual rate of 6.5%. Trade as a share of world GDP rose to a record 20% in 2000, this represents an increase of more than 5% since the mid-1980s. Over the past decade, North America has been a major force behind the acceleration in global trade. However, the pattern of trade within the region has changed significantly.

“One important development behind the rise in North American trade has been the rapid increase in two-way trade in similar products, allowing firms to exploit economies of scale and vertical specialization in production, and build upon traditional commodity strengths,” says Warren. “These intra-industry linkages have become particularly important to producers of office and telecommunications equipment and automotive products.”

The economists predict that over the next few years rising protectionist sentiments and trade frictions will pose a growing challenge for all three NAFTA nations. Looking further ahead, however, they expect the importance of trade in North America will continue to grow, the natural consequence of globalization as well as concerted trade liberalization efforts within the region.

“As one of the most trade oriented of the OECD nations, Canada has the potential to benefit immensely,” concludes Warren. “Merchandise exports accounted for 40% of Canada’s GDP in 2000, almost double the G7 average and well above comparable figures for Mexico or the United States. Canada moved up to 6th place in world value of its exports in 1999 and, of the top 10, witnessed the fastest rate of export growth.”

The report also provides an overview and detailed economic and financial outlook for the each of the three NAFTA nations and highlights the cyclical impact of the U.S. slowdown on the region. “Despite a sharp export-led slowdown, the longer-term outlook for the Mexican economy remains quite favourable,” says Pablo Bréard, VP International Research. “Confidence in Mexico’s prospects is underscored by the significant increase in foreign capital inflows attracted by the fundamental policy reforms which have lowered inflation, interest rates and external debt levels.”