Working With, Not Against Mexico

Perhaps it is a negotiation strategy, perhaps it is all bluster, or perhaps Donald Trump is upset about some development deals that went under south of the border, but his rhetoric from the campaign against Mexico has not relented.  He says he wants NAFTA renegotiated.  He will build a wall on the border, although he has backed off from the “make Mexico pay” proviso to some degree.  He has proposed heavy tariffs on Mexican-manufactured goods entering the US.

All this comes at a precarious time in Mexico.  Although none of these things have happened yet, the Mexican peso has declined 10% since he was elected.  Foreign investment is being scared away for the moment waiting to see what Trump does.  This is important since Mexican President Enrique Pena Nieto has embarked on an economic program designed to lay the seeds for foreign investment.  Considering that 80% of Mexican exports go to the US, this takes on even greater importance.  Nieto has attracted a $1.3 billion Audi plant, and Honeywell has a plant in Mexico City indicating that Mexico will not just be oil and corn.

It is in the best interests for the US and Trump to have a strong economy in Mexico for a few reasons.  In his efforts to reform the energy sector, some decentralization was implemented at the beginning of 2017.  This created a spike in fuel costs.  There were demonstrations and Nieto’s approval rating sank to 12%.  Today, he is viewed as a hapless lame duck president.

For much of Mexico’s recent past, Mexico has elected conservative or center-right presidents and Nieto is no different.  The more Leftist or socialist regimes that tend to dominate Latin American politics at times have not afflicted Mexico.  With dissension within the country and Trump making noises against Mexico, the chances of that succession of center-right leaders could change in 2018.  Furthering the problem, the Mexican economy is expected to grow at a 2.3% rate this year, but the OECD predicts 0.1% growth next year- not good news for Nieto’s party.

A failure by Nieto to successfully renegotiate NAFTA could be the push that moves the people to elect the more Leftist Andres Manuel Lopez Obrador.  He narrowly lost to Nieto last time out and is the presumptive front runner heading into 2018.  He burst onto the political scene with part bombastic protectionist rhetoric, anti-elite and American oratory and some Leftist economic ideas.  In short, it may be in America’s better interests to deal with Nieto and his party rather than Obrador.

Second, the Mexican manufacturing sector mainly imports raw materials and exports assembled goods.  They never followed the model of Japan or South Korea that created their own car companies and tech firms that produced cheap products that undercut domestic ones.  Should Mexico embark on such a manufacturing program (Obrador has suggested such), having such a huge rival on the border could potentially further accelerate the decline of the US manufacturing base.

Trump’s proposals would likely weaken the Mexican economy which is already under stress.  Corruption is a fact of life in Mexico and if history is any indication, it gets worse under economic pressure.  As citizens and officials get more desperate, the state finds itself incapable to combat it.  This desperation leads to spikes in violent crime and drug trafficking.  It is at these times when the population flee a desperate situation and we see spikes in illegal immigration.  To some, even though there may be an economic trade off, more stability north of the border becomes a greater lure.

Nieto’s main reforms are centered in three areas: energy, telecommunications, and education.  In 1938, Mexico nationalized the oil/gas industry and created Pemex.  They provide one-third of Mexico’s revenues but they are notoriously poorly managed and production, despite large reserves, is declining.  The reforms are meant to weaken Pemex’s role in the energy sector and Mexico has opened up shale and offshore fields to foreign investment.  However, Trump’s rhetoric is scaring away that investment given the uncertainties.  In the telecom area, he has also moved to break monopolies causing one firm, which controlled more than 50% of market share, to sell off assets.  More competition should bring lower prices and more reliable telephone, television, and Internet service.  He also discontinued the practice of buying and selling teaching positions while also changing the teacher lifelong pension and benefits systems.  In short, Nieto’s programs have much in common with Teddy Roosevelt’s trust busting and monopoly breaking in the early 20th century.

It is has been suggested that Nieto can improve his standing by embarking on an infrastructure building program.  The country is in need of new and improved natural gas pipelines and an airport in Mexico City.  Again, that is an opportunity for investment.

Another factor is illegal immigration.  With weakened investment in human capital and education south of the border, more people seek it in the US.  Under NAFTA, it is almost universally believed that American agricultural products-especially beef and corn- have hurt that sector of the Mexican economy.  And, in fact, we saw a spike in illegal Mexican immigration to the US as corn production decreased in Mexico.  That horse is so far out of the barn, but there are other areas where a vibrant Mexican economy keeping unskilled labor south of the border would be in our best interests.  In the 1990’s when Mexico had an economic crisis that led to bankruptcy, we saw the largest spike in illegal immigration.  Since then, it has decreased and there may actually be a net outflow of Mexican immigrants back to Mexico, although there are conflicting reports.  Most of the much publicized illegal immigration under the Obama administration involved Central Americans, not Mexicans.

Finally, if the political situation deteriorates and if that dreaded sense of desperation leads to chaos and anarchy, there are nefarious actors ready and willing to exploit that scenario.  Drug cartels come to mind first.  But, there have been well-documented reports of people from Asia, Africa and the Middle East who are on a terrorist watch list crossing the border illegally using known smuggling routes.  The greater the Mexican chaos, the greater the level of illegal immigration and the greater the chances terrorists will slip through undetected.  If the United States hopes to stem the flow of illegal border crossings by keeping illegals out, they will need the cooperation of Mexican authorities to keep people in.

In short, a healthy Mexican economy is the best way to stem the flow of illegal immigrants across the southern border.  Giving them a reason not to leave Mexico is tantamount and that involves a reasonable job/wage in Mexico along with a good educational system.  Nieto has started reforms that were just implemented recently and there are sure to be bumps in the road along the way.  If Trump really wants to deter illegal crossings, he needs to work with Mexico, not against it.