With the Dow Jones Industrial Average Index finally breaking through the 20,000 barrier last week to a record high, the state of US-Mexico relations sank to the lowest level in living memory, some say since the Mexican-American War of 1846-48 that followed the US annexation of Texas. US-Mexico relations boiled over late last week, pushing the countries closer to a trade war that threatens to spoil decades of friendship and economic cooperation. The feud grew increasingly hostile as Mexican President Enrique Pena Nieto scrapped his trip to Washington after President Trump followed through on campaign pledges to renegotiate the North American Free Trade Agreement (NAFTA) and send Mexico the bill for the cost of building a border wall. The Trump Administration retaliated against President Pena Nieto’s cancellation by floating the idea of imposing a 20% tax on all Mexican imports.
The Mexican peso plunged and the clash slowed gains in the US stock market amid growing concerns that one of the world’s largest trading relationships was on the rocks. Mexico is America’s third-largest trading partner in terms of total bilateral trade (exports plus imports), behind Canada (the other NAFTA member) and China.
President Trump had placed President Pena Nieto in an impossible position with his decision, and with his comments on social media which complicated diplomacy. It is not just trade, but national pride at stake for both nations.
Before pulling out, President Pena Nieto was expected to begin talks in Washington this week on NAFTA, which President Trump has threatened to abandon if he cannot strike a better bargain for the US. “It has been a one-sided deal from the beginning,” Trump said Thursday on Twitter. While the Mexican leader has expressed a willingness to negotiate portions of the agreement, he has remained steadfast in refusing Trump’s demands that his country foot the bill for a border wall.
President Trump signed a directive last week to start the process of constructing the wall, saying he would find a way to charge Mexico for it. President Trump’s uncompromising negotiating style has shown no signs of softening since the campaign.
A border tax, which would require congressional approval, would be a clear violation of NAFTA, which allows the duty-free movement of goods between Mexico, the US and Canada. President Trump could impose 15% duties temporarily on Mexican imports, claiming a “balance of payments emergency,” but that would fall short of the threatened 20% punitive tariff.
Any new tax – and ultimately a trade war, if it came to that – would be unpopular with some members of Trump’s own party given the potential to inflict economic damage on both sides of the border. Mexico is among the biggest importers of US agricultural products and assemblers of parts that are used to make American cars. Senator Lindsey Graham, a Republican from South Carolina, said on Twitter that “any tariff we can levy, they can levy,” calling such a move a “huge barrier” to economic growth. Critics say such a tax would see American consumers pay the price rather than Mexico. In the first 11 months of 2016, the US imported more than US$270 billion of goods from Mexico, meaning such a tax would have drawn in more than US$54 billion over that period.
For all of President Trump’s complaints about Mexico, the two countries’ economies are deeply intertwined, especially in the border states – so much so that it might be nearly impossible to pull them apart without serious political or economic unrest. Cars, auto parts, farm goods, textiles and food all flow freely back and forth – and any move to disrupt that could cause economic harm on both sides of the border, including in the Rust Belt industrial states that propelled Mr Trump to the presidency.
If Trump does decide to withdraw from the 23-year-old trade agreement, industries in all three countries would suffer. Over the last two decades commercial relations between the three countries have deepened. The interdependence is most evident in manufacturing supply chains, where parts coming from the US or Canada are often assembled in Mexico, where the cost of labor is cheaper.
This has led to a blurring of economic lines between the three countries. About 40% of the content of Mexican exports to the US actually originates in the US, according to a National Bureau of Economic Research working paper. Roughly 5 million American jobs depend on trade with Mexico, according to the Mexico Institute at the Woodrow Wilson International Center for Scholars. The positions are spread across many states and industries, from car-parts factories that supply Mexican auto plants, to US farms that grow the barley that goes into Mexican beer such as Corona, a brand that is popular internationally and owned by Anheuser-Busch InBev.
Carmakers would be the hardest hit in the event of a trade war, as Ford, General Motors and Fiat Chrysler have assembly plants in Mexico. Several foreign carmakers also have Mexican factories that export vehicles to the US, including Honda, Volkswagen and Mazda. The flow of Mexico-made passenger cars and light trucks into the US reached more than 2 million vehicles in 2015, when Mexico became the largest source of imported cars, according to the US Department of Commerce. Some 1.58 million Mexican-made passenger vehicles worth US$29.4 billion were imported in the first nine months of 2016. Other American companies that benefit from NAFTA include General Electric and Whirlpool.
In the words of one of the original drafters of NAFTA, “The US and Mexico are inter-dependent countries. If they cooperate they are both better off. If they don’t cooperate, they are both worse off.”
Responsible for identifying domestic and international equity investment opportunities. 25 years of financial markets experience as an equity strategist, economist, analyst, portfolio manager and consultant.