U.S. Trade Gap With Mexico Widens Amid Weak Peso -- Update

U.S. President Donald Trump's tough talk on trade with Mexico may have had an unintended effect: Fear of a trade war pushed down the value of the Mexican peso, increased the U.S.'s appetite for now-cheaper Mexican goods, and widened the U.S. trade deficit with its southern neighbor, the opposite of Mr. Trump's objectives.

The U.S. posted a $7 billion trade deficit in goods with Mexico in March, the highest since November 2007, the Commerce Department said Thursday. The $28.1 billion in Mexican products shipped across the border -- including cars, avocados and other products marked an all-time high.

The trade deficit with Mexico leapt 14% in the first quarter this year compared with the first quarter of 2016. That is due at least in part to a drop in the peso, which is down more than 8% against the dollar this year.

The peso fell after Mr. Trump's election victory in November and tumbled again starting in January, as his tough rhetoric appeared to rattle investors. Mr. Trump pledged during his campaign to make Mexico pay for a border wall, and he has repeatedly threatened to revamp or even cancel the North American Free Trade Agreement as part of broader plans to reinvigorate U.S. factories. The 1994 pact among the U.S., Mexico and Canada lowered tariffs and other barriers on a host of goods.

Revamping the treaty could ultimately hurt Mexican exports, roughly 80% of which go to the U.S. But in the near term, the peso's drop has made it cheaper for American firms to buy Mexican goods in dollars.

The strong dollar, meanwhile, has curbed demand for U.S. exports, said Eduardo González, an economist at Citibanamex in Mexico City.

The rise in the deficit could be temporary. The peso has stabilized in recent weeks. Mr. Trump recently backed off a threat to pull out of Nafta, indicating the administration would seek mostly modest changes to the deal in talks with Mexico and Canada.

Mexico is the U.S.'s third-largest trading partner in goods, and the factories of the two nations are closely intertwined. Among the biggest buyers of Mexican goods in the U.S. are manufacturers importing parts for their products. Likewise, parts exported from the U.S. make up about 40% of the value of Mexico's manufactured exports.

In this way, improving health of U.S. factories, who are benefiting from steady demand domestically and abroad, is another factor likely driving up the deficit with Mexico. The top Mexican exports to the U.S. are cars, machinery, and medical equipment, according to the U.S. trade representative.

In Mexico, manufactured exports, which make up 90% of the country's total exports, were up 9.2% in the first quarter from the year-earlier period at $83.6 billion. More than a third of that was autos and auto parts, although exports of processed food and electronics goods have also seen strong growth.

Overall, the U.S. trade gap with other countries has widened this year compared with a year earlier in a sign of a steadier global economy.

The U.S. trade deficit in goods and services grew 7.5% in the first quarter compared with the same period in 2016, as exports and imports each climbed about 7%, the Commerce Department said.

Anthony Harrup in Mexico City contributed to this article

Write to Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

May 04, 2017 15:07 ET (19:07 GMT)