In Mexico, a Trying Year for Trade

5 MINS READNov 29, 2016 | 09:45 GMT
In Mexico, a Trying Year for Trade
Though negotiations over NAFTA could strain political relations between the United States and Mexico, the countries' deep trade ties are here to stay.
(OMAR TORRES/AFP/Getty Images)
Forecast Highlights

  • The United States and Mexico will most likely begin renegotiating aspects of NAFTA in 2017.
  • The deep trade ties between the two countries will remain in place despite the negotiations, although the pace of foreign investment into Mexico could slow.
  • Mexico will try to maintain as much of its current trade relationship with the United States as possible in the discussions. 

Despite its checkered reputation in the United States, NAFTA has been an unequivocal boon for Mexico. Since the agreement took effect in 1994, NAFTA's lowered tariff barriers have spurred investment in Mexico, giving rise to manufacturing clusters in its northern states and central Bajio region. Total exports from Mexico to the United States grew more than sixfold in the deal's first 20 years, nearing $308 billion in 2014. For more than two decades, Mexico City has embraced free trade with its fellow bloc members — and especially the United States — crafting deep, complex trade relations with its northern neighbor. But that could change in 2017.

Having built his campaign, at least in part, on vows to overturn or amend NAFTA, U.S. President-elect Donald Trump is now in the process of assembling a Cabinet and defining his administration's security and trade stance toward Mexico. Many of these policies will probably come into focus over the next year as the Trump administration decides, for instance, which areas of NAFTA to renegotiate and begins the process of hashing out a new arrangement. Given the extent of the trade ties that bind the United States to Mexico, the new president will likely take a more measured approach to the agreement than he promised throughout the race for the White House. In the meantime, however, the uncertainty surrounding NAFTA's fate will weigh heavy on Mexico.

Deep Connections

Trump's renunciations of NAFTA notwithstanding, Mexico's deep connections to the United States are here to stay. Even if a revised version of NAFTA were to reinstate some trade barriers, they would not undo most existing links but would only raise the cost of trading between the United States and Mexico and slow trade growth. The Mexican and U.S. supply chains are so intertwined — particularly in the assembly of complex manufactured goods, such as cars — that the political and economic costs of unraveling them would be prohibitive for the next president. Whatever happens to NAFTA, manufactured goods — which currently account for 74 percent of Mexico's exports — will keep traveling north to the United States, while U.S. capital and natural gas will keep flowing south.

Nevertheless, the process of renegotiating NAFTA under the Trump administration may test the trade relationship that has defined Mexico and the United States' political and economic positions since 1994. When the next administration heads to the negotiating table, it will likely do so with the intent to keep as much manufacturing in the United States — or at least in North America — as possible. To that end, Washington may steer the discussions toward enforcing rules of origin or environmental standards more stringently, thereby keeping more manufacturing in the trade bloc, if not in the United States. Mexico, meanwhile, will have a more modest goal: to preserve the status quo that has so benefited it.

Finding a resolution agreeable to all involved is bound to take a while, increasing investor uncertainty in the short term. Until they have a better idea of the trade environment that they will be dealing with, companies will probably be reluctant to commit to new investments in Mexico. Even so, foreign direct investment will not likely take too great a hit, barring an especially contentious or prolonged negotiation process. Regardless of the agreement's new terms, Mexico's attractive location — next to the largest single consumer market in the world — will almost certainly keep drawing foreign investment and driving economic growth, albeit perhaps at a slower pace.

At the Negotiating Table

For Mexico's government, however, the stakes will be higher. Throughout the coming year, the incumbent Institutional Revolutionary Party (PRI) administration will try to embark on renegotiations with an eye to protecting Mexico's interests. But changes to other areas of Washington's policy toward Mexico City — for example, attempts to deport more Mexican citizens from the United States — could influence the NAFTA talks. Mexican President Enrique Pena Nieto's administration, however much it may want to preserve the status quo, will be loath to appear to acquiesce to new deportation efforts ahead of the 2018 presidential vote. Although Pena Nieto cannot run for office again, the actions his administration takes in 2017 could color voters' perception of the PRI and divert support from the party.

To turn the discussions to its advantage, the Mexican government has a few options. It could, for instance, threaten to reduce or rescind its cooperation with the United States in sharing intelligence. Because U.S. law enforcement authorities depend on Mexican intelligence in investigating cross-border organized criminal activities such as drug trafficking, it could be an effective tool in shaping NAFTA negotiations. But resorting to such threats would introduce new complications into the discussion, and the Mexican government is unlikely to do so unless it feels its interests are at risk.

As the NAFTA negotiations kick off — and as other policy issues take shape — political relations between the two countries could deteriorate. Much of 2017 will also bring increased uncertainty, and perhaps decreased investment, to Mexico's economy. Still, the coming year probably will not bring a meaningful shift in the trade patterns between the two countries. After all, the Mexican and U.S. economies are deeply integrated even beyond the confines of the free trade agreement that brought them together.

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