Menckens Ghost

More About: Mexican United States Relations

Two Interesting Articles on the Mexican Economy

The first describes how Trump's comments about trade with Mexico and NAFTA have shrunk investments in Mexico, lowered forecasts for growth of the Mexican economy, and weakened the peso, thus making Mexican exports cheaper and pushing Mexico to increase trade with other countries (and probably increasing emigration and maybe bringing a leftist government to power).  The longer second piece gives a fascinating history of the Mexican economy before and after it was opened to competition.  One consequence of a more open economy was that a lot of uncompetitive, state-protected Mexican companies went under.

Incidentally, I'm currently reading a book that details how pro-slavery interests in the U.S. were behind the Republic of Texas' fight for independence from Mexico and the U.S.-Mexican war, due to Mexico not being a slave nation and being on the side of abolitionists. 

Regards,
Mencken's Ghost

Trump's Harder Line on Mexico Casts Shadow on Long-Term Growth Picture

Investment slowdown, peso weakening and higher interest rates

By 

ROBBIE WHELAN

Wall Street Journal, Updated Feb. 12, 2017 11:46 a.m. ET

President Donald Trump's threats to rewrite the North American Free Trade Agreement and build a wall at the U.S. southern border are causing a reckoning for the Mexican economy before a single cinder block has been set or trade negotiation scheduled.

Mexican output growth is projected to slow to a near halt in 2017; inward investment has tumbled; the peso is down; interest rates and inflation are rising; and the nation's business and political leaders are asking whether they need a new economic model less dependent upon their northern neighbor.

Before the U.S. presidential election in November, Citibanamex forecast that Mexico's gross domestic product would grow by 2.3% in 2017. Since then the bank has twice lowered growth expectations, first to 1.8% and more recently to a paltry 1.2%, in part because of uncertainty over trade and investment relations with the U.S.

Surveys show rising pessimism among businesses. Citibanamex predicts gross fixed investment in Mexico will contract by 0.8% this year, after rising 4.6% in 2015. In the first nine months of 2016, foreign direct investment fell by 24% compared with a year earlier, according to the Bank of Mexico, as businesses that rely on cross-border commerce grew spooked by campaign criticism of free-trade deals even before the U.S. election. Since 1999, the U.S. has accounted for 46% of all foreign direct investment in Mexico, with Spain as the next largest single country investor at 3%, according to Mexico's Economy Ministry.

"The key word for 2017 is uncertainty," said Sergio Luna, chief economist for Citibanamex. "Manufacturers are going to prefer to have more clarity before they make any investments."

Another drag on growth has been higher interest rates: Mexico's central bank has raised interest rates six times over the last year in response to a weakening peso and concerns that the currency's decline is pushing inflation higher. Economists at PNC Financial Services Group warn that recession is likely in 2017.

Angst over the longer-term is tied to Mexico's dependence on exports, which account for a third of its economic activity. Some 80% of those exports go to the U.S.

"Any economy, in order to be healthy, has to be based on two engines of growth: the domestic market and the external market," said Economy Minister Ildefonso Guajardo in an interview in his Mexico City office Tuesday. "What do you do to strengthen the external engine? You have to diversify trade."

To that end, Mexico's leaders have recently sped up negotiations to secure expanded trade deals with the European Union and opened talks with Argentina and Brazil about the possibility of buying corn, wheat and soybeans from South American producers. That would ease their dependence on U.S. grain—especially advantageous in case of a trade war.

Some in Mexico's export industries see a silver lining in the decline of the peso, which has lost 16% of its value against the dollar since the beginning of May. Any border tax imposed by the U.S., the thinking goes, will be met with a devaluation that will be more than enough to keep Mexican goods competitive.

"Whatever tariff Trump puts on Mexican products, the peso is going to devalue enough to accommodate it," says Doug Donahue, who runs Entrada Group, a San Antonio-based company that offers business services and rents industrial parks to Mexican exporters, 40% of whom are automotive suppliers.

But the weak currency has a downside: Annual inflation jumped to 4.72% last month, the highest level in more than four years. Rising inflation is likely to prompt the central bank to keep raising interest rates, which crimps domestic demand.

One school of thought holds that Mr. Trump's protectionist stance might be the reality check Mexico needs to turn inward and invest in bolstering the domestic economy.

Nafta's critics south of the border point to the fact that Mexico's annual GDP growth since the deal took effect has averaged 2.6%, compared with 4.2% during the previous two decades. Poverty levels have remained roughly the same as before the free-trade era.

And despite recent reforms that opened up the energy and telecommunications industry and successfully attracted billions in foreign investment, Mexico faces significant barriers and risks associated with relying more on its domestic market, including high rates of organized crime, weak rule of law, a lackluster education system and political corruption.

In order to focus on internal growth, "there's a stronger need than ever for Mexico to keep at it with domestic reforms," says Christopher Wilson, a Mexico expert at the Wilson Center, a policy think tank in Washington.

Monica DeBolle of the Peterson Institute for International Economics points out that 60% of Mexican workers still work in the underground economy—where workers avoid taxes—despite government programs aimed at helping them access banking services and the social safety net.

"Mexico's consumers are very hand-to-mouth," Ms. DeBolle said. "Going from an economy that is export-led to a domestic-led economy would be really hard."

Others, including many of Mexico's top industrialists, believe the country's best chance is to divert Mr. Trump's attention to China, with which the U.S. ran a trade deficit of $347 billion in goods alone last year.

Eduardo Garza T. Fernández, president of Grupo Frisa Industrias, a steel manufacturer that exported roughly half of its $500 million in sales last year to the U.S., says Mexican producers should buy more of their supplies from within North America, rather than Asia, to reduce the deficit and sidestep Mr. Trump's ire. The idea is central to Mexico's approach to renegotiating Nafta.

"Things are going to be more expensive for Mexican companies," Mr. Garza said, "but there has to be more integration."

Write to Robbie Whelan at robbie.whelan@wsj.com

Biggest Threat to Mexico's Economic Well-Being Isn't Trump, Say Some of the Country's Economists

The U.S.-educated Mexican economists who negotiated the trade pact in the 1980s are worried more about their own country's protectionist tendencies than about Donald Trump

By 

DAVID LUHNOW

Wall Street Journal, Updated Feb. 11, 2017 7:00 p.m. ET

As a high-school student in northern Mexico in the 1970s, Ildefonso Guajardo marked the start of each new academic year with a ritual. His family would drive three hours to a J.C. Penney store in Texas, and his father would give him $300 to spend on a new wardrobe—clothing that was far cheaper and of better quality than what he could find in Mexico's closed economy.

"Four shirts, four pants, underwear and socks for the whole school term, all in a day of shopping in Laredo," recalls Mr. Guajardo, who is now Mexico's economy minister.

Shopping in Mexico was a lousy experience in those days. The country was emerging from four decades as an economy closed to imports, and most items were still proudly—if poorly—Made in Mexico. A running joke was that Mexican TVs made for great radios—because the image was so terrible.

Partly because of that experience, Mr. Guajardo went on to study economics at the University of Pennsylvania and eventually joined the team of highflying economists who negotiated the North American Free Trade Agreement—the first time in modern history that a poor country and a rich one did away with all trade barriers to compete on even terms.

Nowadays, Mr. Guajardo and the other members of Mexico's Nafta generation find themselves defending the legacy of the pact at a time when its future is uncertain under the new U.S. administration of Donald Trump. Mr. Trump has assailed the treaty as the "worst trade deal ever" and blames it for enticing some American firms to move factories south of the border. He has vowed to renegotiate it or tear it up.

Despite the threats from the new U.S. president, Mexico's Nafta team all agree on a somewhat surprising idea: Mr. Trump is not the most serious threat to Mexico's economic well being. The bigger threat is Mexico itself, with its long history of nationalism and Mexico-first economics.

"What worries many of us is not what Trump will do, but what Mexico will do in response," says Jaime Serra, who as Mexico's commerce minister in the early 1990s oversaw the negotiation for Mexico. "We can't go eye for an eye. We need to stay open and stay committed to our economic path," he says.

While many Mexicans feel hurt and betrayed by a country they had begun to view as a friend and ally, a trade war is going to take a far bigger toll on Mexico's export-driven economy than it will on a far larger U.S. economy. "It would be shooting ourselves in the foot," says Jaime Zabludovsky, a former deputy trade minister on Mexico's Nafta negotiating team.

Before Nafta, developing countries were told by most economists that they needed to protect their local industry against advanced economies by keeping tariffs higher than in rich countries. Even today, the World Trade Organization allows poorer countries higher tariffs (which is why, if Mr. Trump tears up Nafta, the U.S. is likely to face higher tariffs going into Mexico than vice versa).

After more than two decades under Nafta, it hasn't all been easy for Mexico. Confronted by efficient American firms, thousands of Mexican companies closed their doors, and millions of farmers abandoned their small plots to head to cities or to migrate to the U.S.

But the pact has helped to transform the Mexican economy, lifting millions into higher-paying factory jobs. It has also forced Mexican firms to raise their quality. Mexico is now the world's largest exporter of flat-screen TVs. Mr. Guajardo now buys his wardrobe almost entirely in Mexico.

"I buy it not because of a nationalistic pride, but because it's a good product and it's price competitive," he said.

The backlash against globalization in parts of the developed world and Mr. Trump's rise to the U.S. presidency have stunned the generation of economists who convinced Mexico to become one of the most open economies in the world, with duty-free access for 46 countries around the world.

Even now, the Mexican team that negotiated the Nafta deal stands out for its economic credentials. It included more than a dozen Ph.D.s from top U.S. schools such as the University of Chicago, Yale, the Massachusetts Institute of Technology and Stanford—the cathedrals of free-market thought. Their boss was the country's Harvard-trained president, Carlos Salinas.

For them, the challenge to the pact from the U.S. has upended the world as they knew it and threatens to undo their life's work. "It never crossed my mind we'd be arguing with the U.S. government about free trade," says Mr. Serra, who got his Ph.D. in economics from Yale. Alarmed, many of those in the team who negotiated Nafta now find themselves back in the trenches, advising either President Enrique Peña Nieto or Mexican industry on how to respond.

So far, the Mexican government looks to be sticking with its free-trade principles. The country's leaders hope to finalize an expanded trade deal with the European Union this year, and they are seeking to lower trade barriers with markets like Argentina to buy grains that are normally sourced in the U.S., in case of a trade war with their northern neighbor.

Mexico is eyeing free trade talks with Australia, New Zealand, Malaysia and Singapore—all countries that were in the now defunct Trans-Pacific Partnership trade deal killed off by the new U.S. administration, a senior Mexican official said. Mexico is also considering asking its fellow members of the Pacific Alliance—a free-trade pact that includes Colombia, Peru and Chile—to expand the group to Asian nations.

If Nafta is scrapped, tariffs would revert to WTO levels, with U.S. industrial products paying higher levies to enter Mexico than vice versa—about 5% versus 2.5%. A far bigger hit would come for pickup trucks assembled in Mexico and for U.S. agricultural products entering Mexico, both of which would face tariffs of about 25%. And those are not small flows of goods: Mexico sent $18.5 billion worth of pickups north last year and bought some $18 billion in U.S. agricultural products (Mexico is the U.S.'s top buyer of corn and pork).

Even without the agreement, the architects of Nafta say that Mexico should consider keeping its tariffs with the U.S. at zero to keep import costs down and remain globally competitive. They argue that Mexico's export competitiveness is explained less by the decline in U.S. tariffs than by the decrease in Mexican tariffs, which made imports more affordable as key inputs and increased the competition faced by Mexican companies.

"Imagine a world where Mexico—the poor country—is the one staying open and teaching the world a lesson even as the U.S. closes," says Luis de la Calle, who helped to negotiate the pact and got his Ph.D. from the University of Virginia.

Even if Mr. Trump passes some kind of 25% border tax on Mexican products, much of that has already been offset by a 20% decline in the peso since last May, when Mr. Trump surged in the polls. A new tax would likely cause the peso to fall further, making Mexico's exports more affordable and making U.S. imports to Mexico more expensive.

Herminio Blanco, who led the negotiating team and got his Ph.D. from the University of Chicago, tells a story about going to an event at Stanford University to celebrate the passage of Nafta in 1993. He got a standing ovation from all the assembled economists except one: the Nobel Laureate and staunch free-market advocate Milton Friedman. Mr. Friedman told Mr. Blanco that he didn't stand because Mexico should have lowered its tariffs without waiting for a reciprocal deal from the U.S. "His point was that we shouldn't lower tariffs only because others are doing it. We should do it because it's the best idea to enhance competitiveness," says Mr. Blanco.

Politically, however, not engaging in a tit-for-tat with Mr. Trump might be difficult. The rise of the U.S. president—who regularly railed against Mexico during the campaign—is fanning the flames of Mexico's nationalism, which has long been a feature of domestic politics, first in opposition to Spain in the struggle for independence and then in opposition to the U.S. after it took about half of Mexico's land during the 1846-48 Mexican-American War.

That nationalistic impulse had waned during the Nafta years, but is staging a comeback. In recent weeks, several consumer groups have launched boycotts of American products. The Twitter hashtag #NoCompresUSA (Don'tBuyUSA) reached more than three million users in the past week. Tens of thousands of Mexicans have heeded a call to put the Mexican flag on their profile pictures on apps like Twitter and WhatsApp.

This Sunday, several hundred thousand demonstrators are expected to take to the streets to "defend Mexico's honor" against Mr. Trump (and also to call for a crackdown on corruption at home). They are planning to end the march by singing Mexico's national anthem. Even Corona, owned by AB InBev, is jumping on the bandwagon, running a new ad campaign that criticizes Mr. Trump's proposed wall.

"If the U.S. raises tariffs on Mexico, I don't see how Mexico can't respond. It would be seen as weakness by the U.S. administration," says Enrique Cardenas, a Mexican economic historian.

The rise of Mr. Trump has lifted the fortunes of Mexico's own firebrand outsider, the leftist Andres Manuel Lopez Obrador. The former Mexico City mayor, who leads the polls ahead of next year's presidential election, is seen by supporters as an outsider crusading against a corrupt political establishment and by critics as a dangerous populist. He is most famous for having refused to accept a narrow defeat in the 2006 election and declaring himself president, complete with a mock swearing-in ceremony.

Mr. Lopez Obrador hasn't attacked Nafta per se, but he has built his career on attacking the "neo-liberal" opening engineered by the Nafta generation. He vows to focus more on domestic projects and was staunchly opposed to Mexico's opening of its oil industry to foreign investment in 2013.

The rise of Mr. Trump also has emboldened voices in Mexico calling for the country to shift its economic focus from exports to the domestic economy—to promote Made in Mexico again. Just last week, Mr. Peña Nieto relaunched the "Made in Mexico" brand for high-quality Mexican products, complete with an Aztec eagle logo that was first launched in 1978, during the closed economy. "Today we have to consume what is Mexican," he said. "Not only because we are [Mexican] but because they are quality products," he said.

A group of Mexican economists recently penned a draft of an action plan called "In the National Interest." It calls for a greater role for the state in pushing domestic investment, including rules that would force foreign companies to transfer technology and use local suppliers and a bigger role for development banks.

"We forgot about the role of the state and fell into the historical naiveté that growing competition would lead to greater productivity and growth," says Rolando Cordera, an economist at UNAM, Mexico's largest public university. "Under the threat of Trump, we must begin a new path of development that emphasizes investment in the domestic market."

Such arguments worry the trade pact's architects. "This is perhaps the greatest challenge of a world without Nafta," says Mr. Zabludovsky, the former deputy trade minister. "All the phantoms of the past will come crawling back: for intervention, deficit spending, protectionism, import substitution and all the things we thought were behind us. Scary, indeed."

Mexico has done such an economic about-face before. In the late 19th century, dictatorPorfirio Díaz opened the country to foreign investment. By the turn of the century, there was more U.S. investment in Mexico than in the rest of the world put together, according to Enrique Krauze, a prominent Mexican historian. But after the Mexican Revolution of 1910-1917, the country began closing its doors, culminating in the nationalization of the oil industry in 1938. The U.S. helped to create the General Agreement on Tariffs and Trade in 1946 to set rules for postwar global trade, but it took Mexico 40 years to join GATT, the precursor to the WTO.

Mexico's closed economy ushered in a period of remarkable growth called the Mexican Miracle, bringing millions from the farms to the cities. But economists say that Mexico stayed closed for too long, helping to create a bloated state that eventually ran into repeated financial crises, including the 1982 debt default that eventually forced Mexico to open up.

"Nafta was a great step forward. It went against the grain of Mexico's history and the historic instinct of nationalism, protectionism, jealousy of the outside world and anti-Americanism," says Mr. Krauze. He also, however, criticizes the Nafta generation—and Mexico's recent governments more broadly—for relying on manufacturing exports as a cure-all, neglecting the country's deeper challenges, from a weak judicial system to a backward-looking, largely forgotten rural south.

"A little bit of economic nationalism is fine, without renouncing Nafta or an open economy. Let's find ways to develop the other Mexico," he says. "But if we use this to return to an era of economic populism, then it will be a disaster for Mexico."

—José de Córdoba and Robbie Whelan contributed to this article.

Write to David Luhnow at david.luhnow@wsj.com

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