America’s new president could be a disaster for its southern neighbor
AMERICA’S allies and trading partners await Donald Trump’s arrival in the White House on January 20th with trepidation. None is more anxious than Mexico. Mr Trump began his election campaign by damning Mexicans as rapists and killers of American jobs. He has repeatedly threatened carmakers that invest in Mexico with import tariffs. Ford cancelled plans to build a $1.6bn plant there. He renewed his vow to make Mexico pay for his border wall at a press conference on January 11th. “Mexico has taken advantage of the United States,” he declared.
If Mr Trump matches his aggressive words with actions, the consequences will be grave. Mexico’s economy is closely entwined with that of the United States and Canada under the North American Free-Trade Agreement (NAFTA). The value of bilateral trade with its northern neighbour is equivalent to nearly half of its GDP. America buys three-quarters of Mexico’s exports. The 35m people of Mexican origin living in the United States send back $25bn a year in remittances. Mr Trump puts all that in jeopardy.
Already, Mexico is feeling the effects (see article). The peso has dropped to a record low against the dollar, weakening Mexico’s wan economy. If Mr Trump, who has called NAFTA “the worst trade deal maybe ever signed anywhere”, launches a trade war, Mexico will probably fall into a recession. That would worsen a political environment that is already poisonous. Mexico’s president, Enrique Peña Nieto, has the lowest approval ratings of any recent leader. He is reviled for failing to control corruption and for allowing crime to surge. On January 1st the government raised petrol prices by up to 20%. Enraged drivers blocked roads, looted shops and occupied petrol stations; six people died in the unrest.
Mexico is due to hold its next presidential election in 2018. The nationalism and misery provoked by Mr Trump could bring to power Andrés Manuel López Obrador, a left-wing populist. Mr Peña’s weakness threatens to discredit vital reforms he enacted early in his tenure, including liberalisation of energy and telecoms. A dismantling of NAFTA, which helped create the right conditions for reforms, would doom them.
America would suffer, too. Its trade with Mexico is worth just 3% of its GDP, but some 5m American jobs depend on it. The design, manufacture and servicing of everything from appliances to medical equipment is spread across both borders. Cars made in Mexico are stuffed with parts manufactured in America; some 40% of the value of Mexican exports consists of inputs bought from the United States. If Mexico is not allowed to sell cars, aerospace equipment and fruit to America, it is likely to send more immigrants and drugs.
Accentuate the positive
How should Mexico respond to Mr Trump? First of all, by reminding his administration that the relationship is mutually beneficial. Alongside trade, Mexico has been a partner in controlling illegal immigration. It stops many of the 200,000-300,000 Central Americans and others who try every year to sneak across Mexico into the United States. And Mexico has paid a price to keep relations warm: some 100,000 Mexicans have died since Mexico joined America’s war on drugs.
Mexico should also seize on Mr Trump’s occasional hints that he is open to renegotiating NAFTA rather than ripping it up. The 23-year-old agreement could usefully be updated to cover new sectors, such as digital commerce and energy.
If Mr Trump is really determined to start a trade war, Mexico has few good options. A broad strategy of fighting tariffs with tariffs will hurt its own consumers most, while inflicting only modest damage on America’s vast economy. There is scope for artful use of targeted measures within the rules of NAFTA and the World Trade Organisation, an approach that Mexico has wielded adroitly before. In 2009, after America blocked Mexican lorries from operating north of the border—to protect the jobs of American drivers—Mexico imposed tariffs on nearly 100 American products, from Christmas trees to felt-tipped pens, choosing industries with clout in congressional districts whose representatives had a say in the dispute. The American block was eventually lifted.
Mexico’s best defence against a bullying neighbour, however, will be to seek freer trade elsewhere and to strengthen its own economy. It needs to build more infrastructure: whereas northern Mexico has good transport links to America and the coasts, the poor south is largely cut off. Most Mexican workers have unproductive informal jobs. Shifting firms into the formal economy will be hard so long as the government fails to curb corruption; many Mexicans are loth to pay taxes they assume will be stolen. Mr Trump’s anti-Mexican populism threatens to help usher in a leftist government that will abandon reforms. But it makes those modernising policies more necessary than ever.