Mexico’s Incurable Case of Pneumonia

There is an old saying in my country that goes, “when the United States sneezes, Mexico gets pneumonia.” So what happens when our neighbor to the North contracts a rare case of anti-immigrant, anti-trade, and anti-Mexico populist rhetoric? 

By Arturo Franco, Nonresident Senior Fellow, Adrienne Arsht Latin America Center

These days —and almost every single day— we hear the Republican Presidential Nominee, Donald Trump, saying that the United States will revisit its NAFTA agreement, because Mexico is “killing us on trade.” Even when he briefly softened his war-like stance during an unexpected half-day visit to see Mexico’s Enrique Peña Nieto a couple of weeks ago, he quickly got back on message.

And while many in Mexico would prefer to minimize the catastrophic effects that a Trump presidency could have for our country, the markets are beginning to address the risk. According to Bloomberg, “over the past four months, Mexico’s currency has repeatedly declined when Trump’s election outlook improves, and rallied when his odds of winning slump.”

As to Trump’s Democratic rival, Hillary Clinton, who recently canceled a two-day trip to California because of her own case of pneumonia, her views on Mexico are not positive either. As her campaign was launched, and partly as a response to political pressure from the Bernie Sanders revolt within her party, Hillary Clinton has slowly distanced herself from one of her husband’s signature White House achievements: The North American Free-Trade Agreement.

Without any doubt, NAFTA was groundbreaking. It was the first comprehensive free trade arrangement between advanced countries and a developing economy, and it created the largest free trade area in the world in terms of total GDP and the second largest in terms of total trade volume. The agreement also gave Mexico a head start in entering the coveted U.S. consumer market. As a result, Mexico’s trade as a percentage of GDP increased sharply, from about 27 percent of GDP in 1980 to over 60 percent in 2012. The average tariff rate on NAFTA imports was reduced from 12 percent in 1993 to less than 2 percent in 2001, while the rate of effective protection was projected to continue to decline as integration with North American markets continued.

But today, twenty years on, both major political parties in the United States have said NAFTA should be revised and any new free trade agreements postponed. “I think we do need to take a deep breath and figure out how we can make it work for the greatest numbers of people,” Clinton was quoted saying last week.

In other words, regardless of what the outcome of the November election ends up being, there is a strong sense that the special relationship between Mexico and the United States will be up for review. The golden years of our coveted North American economic integration, which saw trilateral trade multiply by four, and Mexico-U.S. trade grow sixfold, are coming to an end.

Yet, we can’t really blame the Americans for Mexico’s over reliance on exports going up, and remittances coming back down, can we? Mexico has been actively pursuing an export-driven model of economic development for the last three decades. But with a balance of trade that has averaged -$275 million between 1980 and 2016, and little to show in terms of increased productivity, competitiveness, market diversification, or economic growth, the pain seems self-inflicted.

As I have written before in this space, “if there were an award for the nation most devoted to international trade, Mexico would surely grab it.” Mexico has signed free trade agreements with more than forty countries and can access a potential market of over 1 billion consumers. Beyond its intimate relationship with the world’s largest export market, the United States, Mexico prides itself for being one of the most connected commercial players globally, reaching over 60 percent of the world’s GDP.

Thanks to this outward orientation, Mexico has become the largest producer of smartphones and the fourth-largest exporter of mobile phones, accounting for 65 percent of Blackberry’s worldwide production. It is also the ninth-leading producer and the sixth-leading exporter of motor vehicles in the world. Furthermore, Mexico is the largest recipient of investment in aerospace projects in the world, with over 200 aerospace companies based in Mexico. Some of the engineers that participated in designing the engine for the Airbus 380, which is the world’s largest mass-produced aircraft, were based in Mexico.

However, in spite of this ongoing commitment to openness and trade liberalization, something seems to be missing. The expansion of Mexican products into new markets in the last decade has been modest, if not absent. According to data from Mexico’s Central Bank, the share of total exports to the United States decreased from 90 percent in 2000 to 82 percent in 2012, with a slight increase in exports during the last decade to South America and Asia.

Last year, once again, Mexico held roughly the same fraction of exports to the U.S. (81%). So, why has Mexico not taken full advantage of its impressive trade platform? We might have to find out very soon.

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