Despite the debilitating effects of the escalating violence between Mexico’s drug gangs, Mexico’s economy expanded for the first time in more than a year, and the its exchange traded fund (ETF) may continue to improve as trade increases between the United States and Mexico.

Mexico’s GDP expanded by 4.3% in the first quarter year-over-year as exports to the United States increase, report Jens Erik Gould and Jonathan J. Levin for BusinessWeek. Manufacturing rose by 9.9% in the first quarter year-over-year, and services increased by 3.8%. Industrial production grew 7.6%, with production of vehicles jumping 69.6% in the month of April year-over-year. The Central Bank estimates that the economy will grow by as much as 5% this year. [Latin America’s ETF Hot Spots.]

While those numbers are good, drug violence could keep them from being much better.

Gabriel Casillas, chief economist at JPMorgan Chase & Co. in Mexico City, believes that Mexico is losing 1.5% growth each year due to drug-related violence. Finance Minister Ernesto Cordero believes that violence tied to the drug cartel cut 1% from economic growth. [ETFs for Strengthening BRICs.]

In a visit to the White House, President Felipe Calderón insisted that America’s demand for illegal drugs is the major source of the fighting and urged Congress to ban the sale of assault weapons that are being shipped back into Mexico.

Relations between the United States and Mexico have often flared up over issues like American protectionism, human-rights abuses by Mexico’s army, drug violence over the border and the flow of guns and cash southward, according to The Economist. But President Calderón says the new law approved in Arizona last month, which requires state police to check immigration status of any “suspicious” individuals, marks a new nadir.

Back in Mexico, Calderón’s party lost some ground in the mid-terms last July and will have to answer to voters again in local elections this summer. It is unlikely that he will obtain the big policy reforms needed to address Mexico’s economic and security troubles. Furthermore, the fighting between the drug cartels is intensifying, with a high profile murder of political figure Mr. Fernández de Cevallos, and the government’s insistence that things are getting better has fallen on deaf ears.

For more information on Mexico, visit our Mexico category.

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Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.