Between a Wall and a Hard Place: Mexico-U.S. Relations

Written by Aldo Aragon

Regardless of whether President Trump carries out his contentious policies, Mexico faces a tough 2017. Economic analysts project that the Mexican economy will grow at a 1.7 percent rate. A couple of key factors encumbering growth are interest rate hikes, reduced borrowing and consumer spending, and plunging oil prices in 2016.

Earlier this year, Mexico’s 20 percent gas price hike set off a firestorm of shortages and looting as protesters prevented Pemex refueling trucks from leaving refineries. Syphoning and flat tires aside, this event was indicative of deeper structural issues with the economy such as stagnant wages and rising inflation, which at 4.86, was higher than the central bank’s 4% target rate.

Meanwhile, the peso’s value continues to diminish in relation to the value of the American dollar. Since Nieto took office, the peso has lost 50 percent of value contributing to the deterioration of Mexicans’ purchasing power and rising inflation. This is the economic reality facing Mexico.President Trump sitting in the Oval Office with a verified Twitter account only exacerbates the prospects of further volatility in the peso. Such volatility deters investors, something Mexico yearns for as an emerging market and a country suffering from lackluster economic growth. When factoring in the sensitivity of currency investors and Trump’s affinity for the uncertain, it is fair to predict that the peso will only sink further, leading to higher levels of inflation, and causing further damage to the Mexican economy.

At this juncture, it is difficult to quantify the effects of a border wall and NAFTA renegotiation. Even a border-adjustment tax is riddled with uncertainty. For Mexico, these are long-term concerns signaling instability. But Mexico’s critical short-term dilemma lies in American investment exiting the country, aggravating stagnant wages and lethargic economic growth.

Mexico realizes this danger as the economy minister, Luis Videgaray, spent time lobbying Ford and GM in Detroit early in March. Videgaray’s visit marks a remarkable departure from established protocol between the United States and Mexico. Rather than acting through federal diplomatic channels, relying on a friendly American government to encourage foreign investment in Mexico, Mexico’s restructured strategy targets vital relationships with countries and American states. The very real threat of foreign investment outflows has spread a sense of fear amongst Mexicans. Companies like Ford and GM don’t want to be caught in the sights of Trump’s Twitter barrages. If that means opening a factory in the United States then these companies will play the game. Mexico cannot afford to see that game play out. More than 50 percent of Mexico’s $30 billion in foreign investment comes from the United States alone. As an omen of the impending trouble, CitiGroup projects that foreign investment in Mexico will decrease to $25 billion from $35.8 billion.

Looking at these factors it is understandable why President Enrique Peña Nieto’s effigy is burned at least once a week somewhere in Mexico. His approval rating stood at a depressing 12 percent as the New Year’s ball lowered in Mexico City. As Trump entered the White House, calling for the wall to be paid by Mexico, Nieto saw an opportunity to save his legacy and distract Mexicans from economic tribulation by focusing on a common antagonist. The Nieto administration cancelled a visit to the White House which boosted Peña Nieto’s popularity. It is uncertain whether relations will return to the status quo after this bump on the road. One reason for this uncertainty is the political risk facing Nieto and his party in the 2018 Mexican presidential elections. Andrés Manuel López Obrador is already considered the frontrunner under the banner of the Party of the Democratic Revolution, employing a “Mexico First” approach with a hardline against President Trump. Nieto could continue to stand against the Trump administration to give his party a fighting chance in 2018 against Obrador.

But taking a step away from the political dynamic created by this new relationship, it is, unequivocally, in the interest of both countries to ameliorate relations. Currently, Mexico is the US’s third largest goods-trading partner with $531 billion worth of total goods traded in 2015. In addition, Mexico was the second largest goods export market for the United States in 2015 with $236 billion worth of goods. Alternatively, Mexico exported $295 billion worth of goods to the United States, creating jobs in transportation, travel, and technical industries while crafting a Mexican middle-class.

As President Trump pursues his legislative agenda which includes a border wall and border security initiatives, it is important to keep an eye on Mexico’s economy as this will determine not only the Mexican election in 2018, but it will pose a pragmatic challenge for Trump’s border measures as Mexican immigration increases.