It is hard to argue with the obvious: A trade war, or even a lesser dispute within NAFTA, would hurt Mexico more than it would hurt the United States. The United States accounts for about 80 percent of Mexican exports, and its departure from NAFTA would immediately expose the risks of Mexico's dependence on the U.S. market. Even a bilateral trade agreement outside of NAFTA would not fully mitigate those risks. Exports would likely plateau, inflation would increase as the peso depreciated, and capital would flee the country. Supply chain disruptions could lead to lower foreign investment — something that could slow Mexican economic growth for years to come. Aware of all these potential outcomes, Mexico City will try to defend its interests as best it can while bending to as many of Trump's demands as possible.
But even partial agreement to U.S. demands puts Mexico's ruling Institutional Revolutionary Party (PRI) on the defensive. With a presidential election scheduled for 2018, the PRI's opponents will use the negotiations against Mexican President Enrique Pena Nieto, whom they will characterize as weak or ineffective. (This is an especially potent accusation given how offensive much of the Mexican populace considers Trump's proposals.) Put simply, the PRI will be fending off its rivals even as it fends off Trump.
Then there is the issue of social stability, which is far more tenuous than it may seem. In fact, there is a general dissatisfaction with Pena Nieto — a dissatisfaction that came to a head Jan. 1, when a government-ordered fuel price hike triggered weeks of protests. Even in the best of circumstances it's hard to imagine the Mexican people accepting a deal that hurts them more than it hurts their U.S. counterparts. But these are not ideal circumstances: Capitulating to the United States makes the PRI look weak, but giving up too little will only hurt the Mexican economy — and either of these outcomes will only galvanize the public against the president.
Perhaps the only good news for Mexico is that these kinds of negotiations take time to design. In the coming months, Mexico City and Washington will continue to engage each other to determine what their trade relationship will be. Mexico, operating as it is from a weaker position, will try to keep the focus on economic issues — it would rather avoid security issues such as undocumented immigrants, on whose behalf Mexico City will continue to lobby.
The Mexican government will also try to mitigate the economic fallout from lower U.S. trade by courting other potential export markets. To that end, it has already announced its intention to improve trade ties with China and Japan. But in the short term, even better ties with Asia will do little to reduce the economic pain of a trade fallout with the United States.
