The Great Wall of Mexico

11.09.2017 Graham Crozier

Ever since the beginning of 2016, when Donald Trump started to gain strength in the US presidential race, Mexico has been faced with protectionist threats. Among the most divisive promises of the now US president, is his engagement to build a wall along the US Mexican border and to make its Southern neighbour pay for the bill. This has triggered a wave of concerns over the potential impacts on the Mexican economy.

To justify his threats of protectionism, Trump claims that this will help protect the jobs in the manufacturing sector shifting the blame to the unemployment rates on the NAFTA agreement and as a result has repeatedly threatened to leave the organisation. Rounds of NAFTA renegotiations between the three members (Mexico, United States and Canada) began in mid-August 2017. Since then, Trump has revived his previous extremist standpoint.

On 27th August, he tweeted that the two trade partners were being very difficult and threatened to pull out of NAFTA. The US president has also suggested that he might shut down the government if Congress does not agree to fund the border wall. Despite this recent escalation in protectionist rhetoric, the Mexican peso and the 5- year CDS has remained on track (see chart). This sound behaviour has been supported by resilient economic activity and the general lack of belief in the US president´s ability to move forward with his divisive plans.

What Risks does this pose?

So far, Trump´s recent threat to withdraw from NAFTA has been seen as a poor attempt to try to reach a better deal. A move to pull out from the agreement is likely to face legal challenges in the US – for example from affected companies, States and or even Congress members. There is also an understanding among some US legal experts that the president does not have the authority to leave the agreement purely at his own behest. The idea endorsed is that commerce and trade are under the remit of Congress and thus a possible withdrawal from NAFTA would require their approval. Trump already faces low approval ratings and difficulties in passing his economic reforms. So he may not have the required political strength to move forward with his threat.

In parallel, trade representatives of the three countries are continuing talks in a more cordial tone, although the second round of talks is nearing conclusion without any major progress. There are rising doubts in the market over whether a deal can be reached by the target date of December 2017. This is not good news for the Mexican government, which hopes to complete the negotiations before entering its election year.
The major risks for the Mexican economy are that it takes too long to reach an agreement and/or that the NAFTA revision is unbalanced. Re-election is not permitted in Mexico and the country will hold new presidential elections in July 2018. President Peña Nieto is faced with collapsing approval ratings, following the end of gasolinazo (subsidies on gasoline prices) earlier this year, escalating violence in the country and his weakness in confronting Trump. It is still too early to predict a winner as the parties have not yet announced their official candidates. Nevertheless, the strong rejection of the Peña Nieto centre PRI (60 %) party is increasing the chances of a populist candidate gaining strength in the race. Politician Andrés Manuel Lopez Obrador (Morena party) is capitalising on the anti-Trump, anti-austerity and antireform rhetoric. He is now close to the PRI and centre-right PAN in the election polls.

Download the latest Coface Panorama report – “How Could “TRUMPONOMICS” affect Latin America’s economies?” HERE
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