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2017-18 Issue V Editors' Picks World

Much Ado About NAFTA

In July, Mexican voters will elect a new president, Senate, and Chamber of Deputies to helm the large North American nation. On voters’ minds will be issues ranging from anti-corruption efforts to indigenous rights. But one issue—trade—carries implications that may ripple through the global economy at a moment of heightened geopolitical tension.

In late November 2017, Mexican, Canadian, and U.S. diplomats concluded the fifth round of the North American Free Trade Agreement (NAFTA) renegotiations. The agreement eliminated most tariffs and reduced many technical barriers to trade among the United States, Canada, and Mexico. Though NAFTA has been in force since 1994, it has always been a source of disagreement for U.S. politicians. Renegotiating NAFTA was one of President Donald Trump’s principal campaign promises. Throughout his campaign, he described the deal as “a disaster” and “the worst trade deal in history.” Trump blamed NAFTA for pushing U.S. manufacturing jobs and the auto industry to Mexico. In May, his administration formally notified Congress that it had commenced these negotiations—branded by the American government as a “modernization” of the 24 year old treaty—with several goals, including trade deficit reduction and stricter rules of origin.

Trump has regularly criticized the growth of the trade deficit, the amount by which the value of imports exceeds the value of exports. The U.S. last ran a slight trade surplus with Mexico in 1994, the year NAFTA was implemented. Since then, Americans have imported far more from Mexico than they have exported. In 2016, the trade deficit exceeded $60 billion. Experts note, however, that the implications of a trade deficit are more complex than Trump acknowledges. Trade deficits are associated with increased foreign investment in the U.S. and lower prices for consumers as a result of a stronger dollar.

If American trade negotiators want to extract concessions from Mexico on these issues, they will need to take advantage of Mexico’s fear that the Trump administration will actually make good on the threat to withdraw from NAFTA. For example, U.S. negotiators have pushed for much stricter automobile rules of origin to determine which products quality for tariff-free import to NAFTA countries. Under the current deal, 62.5% of the parts in a car must have originated from a NAFTA member in order for the finished car to be imported without a tariff. In October, the U.S. reportedly proposed raising the threshold to 85% with an additional requirement that 50% of the auto parts originate in the United States. These proposals were met with backlash from car manufacturers.

“In any negotiation, if you have one party that is not prepared to walk away…that party’s going to lose,” U.S. Secretary of Commerce Wilbur Ross said at a Wall Street Journal panel in November. But there is a flaw in the American negotiation strategy: in the long run, Mexico may have little to lose.

According to some experts, Mexico’s economy could see some benefits if the U.S. chooses to walk away.

“There’s more to the Mexican economy than meets the eye,” explained Manuel Molano, director of the Mexican Institute for Competitiveness, in an interview with The Politic.

By ending the outsized dependence on trade with the U.S., Mexico may be forced to strengthen its relationships with a wider set of partners, a move that could yield many benefits for their economy. And increasing anti-Trump sentiment in Mexico may soften the domestic political shock of a U.S. withdrawal from NAFTA.

Will Mexico be pushed to pivot?

In 2016, the U.S. imported $303 billion of Mexican goods—more than 80% of Mexico’s total exports—and in return sent $179 billion in exports to Mexico, according to a Michigan State University database. American withdrawal from NAFTA could substantially decrease those numbers, as Mexican businesses would no longer benefit from generally duty-free exports to the U.S. This, American officials say, is where the White House has leverage: without NAFTA, Mexico would lose preferred access to its largest market. But, according to Molano, American withdrawal from NAFTA could push Mexico to pursue closer trade relations with other nations.

Currently, Mexico does very little trade with its neighbors in Latin America. Despite steps like the formation of the Pacific Alliance trade bloc in 2012, Colombia, the largest Latin trade partner, accounts for a paltry 0.82% of Mexico’s exports and 0.28% of its imports. And Guatemala, Mexico’s southern neighbor, has half as much trade activity as Colombia. However, many economists agree that U.S. withdrawal from NAFTA would encourage Mexico to turn to countries in the region and across the world to make up for the loss in American trade. Already, Mexico is involved in efforts to revive the Trans-Pacific Partnership, which would expand access to critical Asian and Oceanian markets. The U.S. withdrew from that pact after President Trump’s inauguration. Leaders in South America, including the presidents of Argentina and Brazil, have openly sought closer ties with Mexico because of the NAFTA renegotiation. And the two main trade blocs in the region, the Pacific Alliance, which includes Mexico, and the Southern Common Market, seem to be overcoming ideological barriers and testing the waters for further integration.

The diversification of Mexico’s trade relationships would yield long-term benefits for the country. The Mexican economy would become more resilient to political and economic shocks that could occur from a single trading partner. Molano says that trade diversification could help increase competition in Mexico’s high-growth but oligopolistic telecommunications and financial services sectors. And, the Oxford Business Group explains, infrastructure development would flourish around port zones and other locations important for exporting to countries besides the U.S., resulting in economic benefits for citizens outside northern Mexico.

A coming showdown?

A turbulent political environment, on top of these economic prospects, narrows the path to a deal.

Mexican consumers and officials have little appetite for the White House’s withdrawal threat. “There is no anti-NAFTA coalition [in Mexico]  right now,” says Molano. This, many economists believe, is largely because the trade pact has had net positive effects on manufacturing and consumer prices in Mexico. But despite the support for NAFTA, increasing anti-Trump sentiment in Mexico means that officials may be less willing to concede to U.S. demands. In June, the Pew Research Center reported that only 5% of Mexicans had confidence in President Trump. And Mexicans have been clamoring for their government to assert itself against the increasingly antagonistic Trump administration. Presidential frontrunner Andres Manuel Lopez Obrador, a leftist, has consistently called for President Enrique Peña Nieto to suspend the negotiations until a new president is sworn in, claiming that Peña Nieto is too weak and unwilling to fully represent Mexican interests.

Lopez Obrador, the National Regeneration Movement nominee, had an 11-point polling lead in December. He argues that Mexico must assert its sovereignty and offers measured but real support for NAFTA. If Lopez Obrador should become president—a likely possibility, as his main competitor, former finance minister Jose Antonio Meade, risks being tainted by association with the scandal-plagued Peña Nieto administration—he will find himself in difficult political terrain. Though he has recently softened his comments, Lopez Obrador has fiercely criticized President Trump and his policies.

“You must not unleash hate against migrant workers. [Trump] is very authoritarian,” he told Bloomberg in March.

If Lopez Obrador wants both domestic and international success, he will have to please his anti-Trump constituents while keeping Trump himself engaged at the negotiating table.

The landscape for the NAFTA renegotiations is shifting rapidly. With an election looming, an angry populace, and economic factors suggesting that withdrawal could yield its own benefits, the window for Mexican acquiescence is rapidly closing. It remains to be seen how aggressive U.S. negotiators will continue to be. For now, at least, the administration says that Mexico isn’t “willing to seriously engage.”

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