‘Challenging’ is not a strong enough word to describe my last two annual visits to Mexico. Oh, I always look forward to catching up on the latest Mexican-Canadian business forays, discussing the local economy with analysts and officials, the warm hospitality, not to mention the warm weather (right now, Canada is in a deep freeze!). But lately, January hasn’t been this country’s best month. Last year, it was Week 1 of the new US Administration, complete with the announcement (and immediate withdrawal) of a border adjustment tax. This year, NAFTA hangs in the balance, and a general election is imminent. Is this just a repeat of last year’s fiasco, or is this a more serious Mexico moment?
NAFTA rounds continue to threaten freer trade in Mexico
The current US Administration’s about-face on trade policy is nothing if not dramatic. When NAFTA was agreed, the border became more fluid, the Maquiladoras were set up, and so on. It was an intentional policy that recognized that higher trade and investment deficits – for a season – were a worthy price for the US to pay to lower illegal immigration, illicit business activity and corruption. Freer trade and cross-border investment has given hope to a new generation of Mexicans who no longer have to flee to succeed. Current US policy threatens to undo that, with potentially serious consequences.
So far, the political bluster hasn’t blitzed Mexico’s economy. 2017 growth is set to reach 2.2 per cent. Exports have managed to post a respectable 2.8 per cent increase. Moreover, foreign direct investment into Mexico will easily surpass $20 billion, which is shy of record territory, but still an impressive number. As in Canada, Mexican business has barreled on, capitalizing on the upsurge of global growth.
Maintaining the status quo is becoming increasingly difficult. With the US upping its threats to cancel NAFTA, businesses face serious real-life decisions. Supply-chain risk is at the very least causing businesses to develop risk plans for sourcing. The prospect of new content rules is affecting location decisions. Foreign multinationals are more reticent about being under the White House’s microscope regarding current or prospective Mexican operations.
This was excerpted from a 1 February 2018 commentary by Peter G Hall, EDC Vice President and Chief Economist.