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Trump Could Really Mess Up Mexico’s Economy

Rigoberto Valderrama Padilla has been living in San Diego for 30 years. Originally from Acapulco, Mexico, he now works for a construction company and regularly sends remittances for food and other necessities to his family back home. “This income is crucial for them. I want to help however I can,” Valderrama says. He is not the only one.

Every month, U.S. residents like Valderrama send $2 billion across the border to their families in Mexico. More than 6 million Mexicans, or about 7 percent of the adult population, benefit from such remittances, which collectively account for nearly 3 percent of the country’s economy.1

But that steady stream of cross-border cash could soon be in jeopardy. As part of his plan to make Mexico pay for a border wall, Donald Trump has said he will demand the country “make a one-time payment of $5-10 billion” if it wants to protect the flow of remittances. Mexican President Enrique Peña Nieto has said repeatedly that the country won’t pay for the wall, meaning that if Trump follows through on his threats, millions of Mexican families could soon lose out on a vital source of income. (On Wednesday, Trump issued an executive order pushing forward with the wall; on Thursday, Peña Nieto said he was canceling a planned meeting with Trump in Washington.)

“There is fear among Mexican and Central American immigrants in the U.S.,” said Jesús Alejandro Cervantes González, coordinator of the Remittances Forum of Latin America and the Caribbean.2 In the face of possible restrictions, remittances to Mexico reached a historic peak in 2016. In November alone, remittances to Mexico grew by 24.7 percent compared with the same month a year earlier.

Remittances, however, are just the beginning of the risk Trump’s presidency could pose to the Mexican economy. If he follows through on his proposed policies, Trump could change the calculus for doing business in Mexico, and thus endanger the economic prospects of the whole country.

Among his proposed policies, Trump has threatened to renegotiate or completely withdraw from the North American Free Trade Agreement (NAFTA) and impose a 35 percent tax on businesses that ship goods to the U.S. after relocating out of the country. Either policy could be devastating for the Mexican economy.

“If Trump implements all the policies he’s been talking about, the next year to year and a half could be very complicated for Mexico,” said Jesús Peña Gonzalez, an economist and director of a manufacturing firm in Monterrey, Mexico.

Mexico’s economy has long depended on trade with the U.S., and those ties have only deepened since 1994, when the North American Free Trade Agreement lowered trade barriers between the two nations. Mexican exports more than quadrupled since NAFTA went into effect; they accounted for 37.5 percent of Mexico’s gross domestic product in 2015 (they make up just 12.3 percent of the U.S. economy), and more than 80 percent of those exports go to the U.S. Mexico is now the world’s fourth-largest car exporter, and the automobile industry directly employs almost 900,000 workers across the country.

Free trade — along with relatively skilled but cheap labor — has also drawn businesses and their investment dollars into the country. For the past two decades, Mexico has been Latin America’s second-largest recipient, after Brazil, of what economists call foreign direct investment — foreign companies building factories, buying businesses or investing in Mexican companies. In 2015 alone, Mexico received a total of $32 billion dollars in FDI, $17 billion of it from the United States.

What can look to Mexico like investment, however, can look to Americans like outsourcing — and Trump has painted a bright target on the backs of companies that send jobs to Mexico. During the presidential campaign, Trump repeatedly attacked Carrier, an Indiana air-conditioning manufacturer that had announced plans to shift production to Monterrey, Mexico. Shortly after the election, Trump and Carrier announced they had reached a deal, keeping close to 1,000 jobs in Indianapolis (the exact number of jobs saved has been questioned).

Weeks later, Ford announced it was canceling plans for a new $1.6 billion assembly plant in San Luis Potosí, and would instead invest $700 million in a facility in Michigan. The announcement took place the same day Trump threatened General Motors to move production of the Chevy Cruze to the U.S. or face a big border tax. Ford CEO Mark Fields has said the prospects of a “positive business environment under President-elect Trump, particularly manufacturing,” played a role in this decision.

Economists in Mexico see the move as part of a larger threat to the Mexican economy. “Beyond the supposed tariffs or any of his proposed anti-Mexico policies, Mexico is going to suffer the most from the anti-Mexico sentiment that Mr. Trump is promoting among American society and businesses,” said Manuel Molano, general adjunct director at the Mexican Institute for Competitiveness, a think tank. “I’m really concerned that with his art of persuasion, Trump will convince more individuals and companies to do less business with Mexico.”

Economists on both sides of the border see Trump’s threats as shortsighted. Two decades of free trade have left the Mexican, American and Canadian economies deeply entwined. Car parts made in Michigan and Ontario end up on assembly lines in Monterrey, where factories churn out cars destined for drivers across the continent. That interconnectedness has cost jobs for some workers in Detroit and other manufacturing hubs, but it has created jobs elsewhere, and brought down prices for consumers.

“NAFTA has improved the competitiveness of businesses, and it has benefited consumers in the three countries through access to better productivity and lower prices,” said Guillermo Rosales Zárate, general director at the Mexican Association of Automobile Distributors. “We can’t talk about a Mexican, American or Canadian car anymore — it’s a NAFTA car.”

While Trump’s proposed policies have yet to be realized, markets have already reacted to the uncertainty about Mexico’s economic future. Banamex, the Mexican unit of Citibank, has cut its projections for total foreign direct investment in Mexico for 2017 from $35.8 billion dollars to $25 billion. In turn, private sector specialists surveyed by the Bank of Mexico in December estimated GDP growth for 2017 at 1.6 percent — cutting the estimate they had made at the beginning of 2016 (3.18 percent) almost in half.

Currency traders are likewise signaling uncertainty about the future of the Mexican economy. The Mexican peso tumbled about 14.1 percent since Trump won the Republican nomination last July. The currency decreased by 7.7 percent on the day after the election, and hit a record low at $21.91 pesos to the U.S. dollar following Trump’s press conference on Jan. 11, when he again threatened retributions against companies that move to Mexico. (A falling peso generally indicates currency traders expect less investment and slower economic growth.)

The rapid depreciation of the peso could help Mexican exports by making the country’s products cheaper for foreign customers. But it carries its own economic risks, including inflation, which has already started rising. The Bank of Mexico expects an inflation rate of 4.13 percent for 2017 — the highest annual average since 2008. Some economists, among them Molano, estimate it could be more than double that.

The uncertainty of Trump’s policies not only impact foreign investors but also local ones. Caution seems to be the prevailing strategy among Mexican businesses — which could itself harm the economy, as companies and individuals pull back on spending.

“I’m worried about the potential for Mexico to go into a recession,” Peña said. “The expectations are very volatile, so I’ve stopped investing. There’s this negative sentiment among business owners to stand by and expect the worst.”

Footnotes

  1. These figures include all remittances, of which American remittances account for more than 90 percent.

  2. All interviews in this article were conducted in Spanish and translated into English by the author.

Lucia He is a reporter based in Buenos Aires covering Latin America.

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