Mexico after the US elections

Mexico after the US elections

The Trump victory: Mexico absorbs the aftershocks,

by Alejandro Aurrecoechea.

The repeated chants of ‘Build the wall! Build the wall!’ at US president-elect Donald Trump’s rallies were a headline-grabbing feature of the presidential campaign. But this was only one of the elements that thrust Mexico into unprecedented focus during the election. Never before in modern history had Mexico played such a prominent role in a US presidential campaign. As well as his proposals to build a border wall – and threats to make Mexico pay for it – Trump promised to deport 11m illegal migrants from the US, of which 5.7m were estimated to be Mexican. Trump also committed to renegotiate or even pull out of the North American Free Trade Agreement (NAFTA), which binds Mexico, the US and Canada, calling it ‘the worst free-trade agreement in history’. In addition, he threatened tariffs of up to 35% on goods manufactured in Mexico by US companies.

Trade fears

The combined effect of all this attention has been deeply unsettling for Mexico, but nothing comes close to the concern elicited by the threat to NAFTA. Mexican exports to the US have risen by 600% since the treaty took effect in 1994, to a total of USD 320bn in 2015. Almost 80% of Mexican exports head north of the border. North American economic integration has been at the heart of Mexico’s export-led development model for the past 22 years.

PrintSo it is not surprising that since the election the peso has depreciated more than 15%. Meanwhile, Mexican GDP growth for 2017 has been revised downwards by the International Monetary Fund (IMF) from 2.5% to 2.18%.

Trump’s critics note that the US would face dangers from a ruptured NAFTA: Mexico is the second biggest consumer of US exports, and the most important market for California, Texas and Arizona. According to the US Chamber of Commerce, 6m jobs in the US depend on trade with Mexico.

Rhetoric and reality

So the key question for 2017 is: will the new administration deliver on the rhetoric or tone it down when the realities of mutual economic dependence start to sink in? Early signals by the transition team indicate a willingness to moderate the scope of campaign commitments. Statements on deportations, for example, are now focusing mainly on convicted felons while the president-elect has accepted that fences could be used instead of a wall along the border.

That said, the incoming administration will try to at least partly implement all the proposals relating to Mexico, given their centrality to the campaign and resonance with Trump’s electorate. This could affect the business environment in Mexico in two main ways:

  • Trade: US tariff rises and/or a protracted renegotiation of NAFTA will hamper investment plans. This is particularly the case in sectors such as manufacturing and automotive production, because they are largely focused on exports to the US market. In turn, any retaliatory trade measures by Mexico would increase the cost of imports needed for these industries to operate. A deceleration of economic growth would lower tax collection and lead to additional budget cuts that hamper reform efforts.
  • Security: A disorderly influx of deportees would fill the ranks of organised criminal groups along the northern border. Tighter border security would disrupt routes for drug and human smuggling, leading to a spike in infighting among cartels. In a closely related matter, bilateral co-operation between intelligence and security agencies is likely to suffer under the new administration, reducing the significant progress achieved in this respect since the 2008 signing of the Merida Initiative, a bilateral security initiative through which the US provides financial and intelligence support.

Mexico’s response

To confront this scenario, Mexico will try to accelerate the implementation of reforms to strengthen the domestic market. These measures will include telecoms and energy reform, as well as the special economic zones (SEZs) approved at the beginning of the year, which include tax incentives for investors in the ten poorest states (the first SEZ should start operations by the end of 2017).

Deterioration of the terms of trade with the US could finally unite the political class behind the reforms necessary to drive long-needed measures to improve the security environment to foster foreign investment. However, a worsening of relations with the US also threatens to unsettle Mexico’s domestic politics. An economic downturn and a rise in anti-US sentiment would strengthen populist candidates in the 2018 presidential election. Watch closely left-wing candidate Andrés Manuel López Obrador, who was runner-up in the previous two elections and is staunchly opposed to energy reform. A surprise victory by López Obrador could see this reform threatened, further undermining Mexico’s attractiveness to investors.

Publicly, the Mexican government has adopted an optimistic tone. Privately, it is hoping for the best while expecting the worst. In 2017, Mexico will continue to do all in its power to manage relations with the new administration and avoid a major rupture.

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Image accreditation: Press Association - Protest against Donald Trump on his visit to Mexico City, Aug 2016.
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