312. Airgram From the Embassy in Mexico to the Department of State1
G–170
Mexico
City, May 21,
1958.
REF
- Deptel Circr 1070, May 13, 19582
SUB
- Economic Impact of U.S. Recession on Mexico
- 1.
- Actual impact on Mexico mainly psychological. Mexican economy continues to grow although apparently at slower rate than 1957 which already had shown some slowdown compared with 1956 near-sensational rate of growth. Certain segments of Mexican economy suffer from lack of demand and certain areas are in economic straits due to 1957 drought. However, only industry directly hurt by U.S. recession seems to be lead, zinc, copper mining and secondary effects on economy as a whole appear to be not very great. Difficulties in specific industries are caused by local factors such as reduced agricultural [Page 826] purchasing power in drought areas, excess capacity in textile or television industries and slowing down of public construction before elections. Current slowdown of overall growth could be explained adequately by reference to wearing off of the inflationary impetus of the 1954 peso devaluation, decline in export proceeds from cotton and recently also coffee after the spectacular expansion in 1955 and 1956, while decline of proceeds from metal exports has only contributory effect. Slowdown of course is accentuated by psychological effects of U.S. recession and fear of greater actual impact in future.
- 2.
- If recovery does not develop, U.S. recession might affect Mexican economy by reducing Mexico’s export proceeds from sales to U.S. and from sales to Europe, Japan and Canada; by reducing earnings from tourist trade; by increasing competition of U.S. cotton and so affecting Mexico’s export markets in third countries; and by reducing new U.S. investment in Mexico.
- 3.
- We assume that prolonged U.S. recession would have damaging effects on economic situation in other countries and would reduce Europe’s and Japan’s ability to purchase Mexico’s export products, especially cotton, metals, coffee. These effects would cumulate the direct impact on Mexico of a reduction in U.S. market for Mexico’s products whether caused by recession directly or by U.S. Government action. Further fall in world market prices for cotton, metals, coffee would perhaps be even more damaging than lesser U.S. demand for Mexico’s products. Mexico sells to U.S. many commodities of daily consumption (fruit, vegetables, shrimp, sugar) which most likely would be less affected by continuing recession than world markets for industrial raw materials.
- 4.
- Major element for Mexico’s economic well-being is U.S. tourist traffic but general belief here is U.S. recession, unless becoming much more severe or very protracted, will not seriously affect U.S. travel to Mexico.
- 5.
- Direct investment of American enterprises constitutes an important part of private industrial investment in Mexico. Under impact of recession, U.S. enterprises might cut down their new investments. This would not only affect Mexico’s economic growth but put strain on peso since American enterprises’ annual earnings in Mexico reach 100 million dollar figure which currently is offset by new investments but if actually paid abroad would cause substantial drain on reserves.
- 6.
- It may be assumed that Mexico would effectively protect its own industry against direct competition of U.S. goods within Mexico but any substantial fall in U.S. prices would revive basic problem of price discrepancy since Mexican prices more likely to continue rising, and this would also threaten peso.
- 7.
- To sum up, economic impact of continued U.S. recession could be very substantial, depending mainly on whether U.S., Europe and Japan continue buying Mexican raw materials at current volume and prices, to what extent tourist traffic from U.S. will be affected, what U.S. will do to protect its own mining, agriculture, and whether U.S. enterprises will reduce direct investments in Mexico. The effects would be felt first in the balance of payments and the general economic situation, and secondly, in the budget. Most of these effects would be accentuated by the counter-action which the Mexican Government would be likely to take in order to prevent the country from falling into serious depression. Such counter-action, involving mainly increased public investments and reduced export tax rates, would at once result in large budget deficit, increase the inflationary momentum and, coupled with balance of payments deficit, within not too long a time lead to peso devaluation. It is generally agreed that a new devaluation would not yield many of the favorable effects which are variously ascribed to the 1954 step but Mexico would not be able to avoid it if a prolonged U.S. recession further accentuated a slump in world market prices for raw materials.
Evaluation of political impact follows in separate airgram.
Gray