Will Mexico Say Adios to NAFTA?

(Photo: AP/Marco Ugarte)

Mexican President Enrique Peña Nieto speaks at a press conference in Mexico City on January 4, 2017.

Now that Mexico has signaled the beginning of a 90-day period for domestic consultations before beginning negotiations with the United States over the North American Free Trade Agreement (NAFTA), the question facing Mexican leaders is whether they should even expect to reach a new agreement.

A few weeks ago, the suggestion that Mexico would walk away from NAFTA would have seemed outlandish; for the last two decades, most Mexican political leaders have been fully committed to the agreement. But a number of influential figures, including former president Ernesto Zedillo, have recently argued that Mexico has no hope of reaching a balanced agreement with Donald Trump and would be better off relying on the rules of the World Trade Organization (WTO) to regulate trade with the United States.

Ever since Trump won the Republican nomination, the government of President Enrique Peña Nieto has been unable to formulate a coherent and forceful response to Trump’s demands. Last August, Peña Nieto invited Trump to meet in Mexico apparently without any clear idea of what he was going to accomplish. When the visit failed to produce any softening of Trump’s position, it was interpreted in Mexico as a national humiliation and sparked such public outrage that it forced the resignation of Luis Videgaray, the finance minister who had brokered the meeting. The fiasco further damaged a government that was already in dire trouble. Peña Nieto’s popularity has been in the single digits, and both he and his party are widely seen as corrupt, incompetent, and incapable of leadership at a time of crisis.

The inability of Peña Nieto to grasp what Trump represents is typical of a wider failure among Mexican elites. They expected Trump to be a populist in the usual Latin American style; in other words, they thought he would use fiery rhetoric during the campaign to serve short-term domestic goals but not that he would act on that rhetoric after gaining power. Once “economic reality” set in, Mexican elites expected, Trump would back down from his extreme proposals.

Unprepared for a confrontation, the Mexican government has therefore avoided broaching, much less detailing, any plans for responding to Trump’s policies regarding NAFTA and the border wall. Mexico’s official position is that the new U.S. administration wants to have a close and mutually beneficial relationship. The government seems willing to turn a blind eye to Trump’s aggressive policy against migrants and the border wall as long as he keeps commercial ties intact.

While most U.S. media interpreted the recent cancellation of Peña Nieto’s visit to meet Trump in Washington as an act of defiance, that is not the view in Mexico. Mexicans saw the cancellation as inevitable because the meeting had no point in light of Trump’s declared aims.

The government’s weakness is not only due to Peña Nieto’s failings, but also to larger structural problems in the Mexican political system. Mexico’s transition to democracy in the mid-1990s was not accompanied by a renewal of civil society and political representation. The old unions, business groups, and party organizations were left standing even though they represented ever fewer people. During crises, furthermore, the Peña Nieto government has isolated itself from media scrutiny; for example, the president and his cabinet members rarely allow questions from the press even at the few press conferences they have.

Before it was ousted in 2000, Peña Nieto’s Institutional Revolutionary Party (PRI) had ruled Mexico for 70 years without any accountability, and it has reverted to its old habits since returning to power in 2012. In actions reminiscent of the PRI’s authoritarian past, it has attempted to bolster support with calls to patriotism and public events in support of the president. No consistent government plan, however, has emerged from these exhortations for national unity. Now back in the government as foreign minister, Videgaray has offered measures to please Trump—Mexican commitment to the “drug war” and to hardening policies in Mexico’s southern border—without getting anything in return.

Political leaders from Mexico’s main opposition parties have also not presented a clear-headed alternative. The leftist opposition leader, Andrés Manuel López Obrador, though leading the polls for the 2018 elections, has been vague about renegotiating NAFTA. Many see him as representing a populist tradition that opposes neoliberal policies and regards the United States as the source of Mexico’s troubles. But López Obrador has so far avoided addressing Trump directly or criticizing the effects of NAFTA as he did in the past. Instead, he has insisted that Mexico should take its case against U.S. policies to multilateral institutions such as the United Nations.

In the last week, however, some Mexican leaders have begun to say that Mexico should get ready to leave NAFTA and fall back on trade rules from the WTO. What is surprising is that former civil servants and political leaders who were involved in the original trade negotiations in the 1990s have reached this judgment. Zedillo, who was Mexico’s president from 1994 to 2000 and is currently the head of the Center for Globalization Studies at Yale University, has made this argument forcefully. “It would be a waste of time for the Mexican government to play a NAFTA-tweaking game with the Trump administration,” he wrote recently in The Washington Post. “The prudent thing would be to assume that President Trump will kill NAFTA”.

The former foreign minister, Luis Ernesto Derbez, has taken the same position: “Mexico should make clear that it is prepared to operate under the norms established by the WTO.” Enrique Cárdenas, head of a think-tank linked to the Mexican private sector, echoed President Zedillo, “Better to be under WTO rules than stay clasped by force to the U.S.”

This reaction is the product of Trump’s threat that the United States would impose a 20 percent tariff on Mexican imports. Jaime Serra Puche, one of the lead negotiators of NAFTA in the 1990s, argues that if Mexico were to fall back on WTO rules, “the effect would not be mortal” since “Mexico would pay on average a 2.8% tariff.”  Furthermore, if the United States went ahead and defied the WTO, the conflict would have global implications, and Mexico would be in a stronger position.  

Make no mistake: The end of NAFTA would have serious consequences for Mexico. The biggest impact would be on investment and unemployment in Mexico’s northern states, which are the ones more directly linked to the U.S. economy. These are also the states that contribute the most to the country’s economic growth. In an optimistic scenario, however, the impact would be gradual since it would take some time for U.S. manufacturing firms with Mexican suppliers to move those operations back to the United States if they decided to do so. Mexico might then adapt by finding other export markets.

Many Mexicans have long been critical of NAFTA, particularly because of adverse effects on the agricultural sector. Mexican growth rates since the signing of the agreement have also not fulfilled the expectations that were originally held out. With the current crisis, old arguments about Mexican economic policy have returned. Trump’s threats highlight Mexico’s failure to develop its domestic market and its trade relationships with countries outside North America. Needs for new infrastructure and an explicit industrial policy have until now mostly been barred from policy debate.

But if a close relationship with the United States cannot be taken for granted, Mexico will need to rethink its basic policies. It is looking to strengthen its ties with the European Union and developing bilateral deals with countries such as Argentina and Australia. Trump may be pushing Mexico not only out of NAFTA but into a new economic era.

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