One of the few issues about which the new President of the United States has been consistent is his approach towards Mexico.
Ever since his extraordinary electoral campaign first began, he has made his intention clear. He would build a wall to stop Mexican and other illegal migrants crossing the US’ southern border; would renegotiate the North American Free Trade Agreement (NAFTA) with both Mexico and Canada; and place punitive tariffs on US and other companies using low cost labour to manufacture in Mexico for export into the US.
What is now apparent is that as President, he will rapidly authorise the steps required to introduce each measure, in order to demonstrate some of the main themes of his presidency.
Just days before taking office, Mr Trump confirmed to the London Times and Bild Zeitung that there will be “a very substantial border tax” on corporations that manufacture in Mexico and sell into the US paying no tax. In other statements, he suggested that the level at which this would be set would be punitive – possibly as high as 35 per cent – and that more generally he will introduce incentives aimed at encouraging US corporations to repatriate capital, and in some cases investments, held overseas.
On the subject of border security, he told the world’s media at a press conference in New York: “we are going to build a wall. Negotiations will start immediately with Mexico, but I don’t feel like waiting a year or a year and a half… Mexico will reimburse us, a tax, less likely a payment, it will happen.”
And on January 18, Toronto’s The Globe and Mail reported that Canadian officials had informed the publication that Wilbur Ross, President Trump’s nominee as Secretary of Commerce, had informed Mexico and Canada that a formal request for negotiations on NAFTA will be sent within days of the inauguration.
These are all measures that have political, economic and commercial implications for every country in the Americas. They go far beyond the short term domestic political advantage that Mr Trump hopes for, with implications and consequences that are worrying.
By way of background, NAFTA came into force in January 1994, eventually eliminating almost all tariffs between the US and Mexico. The consequence, as intended, has been a dramatic increase in bilateral trade, with it reaching in total US$583.6 billion in goods and services in 2015, and the US Department of Commerce says, the creation of some 1.1m US jobs. Although there is a balance of trade deficit in goods of US$58 billion in Mexico’s favour, according to United States Trade Representative’s office, this is partly offset by a balance in favour of the US of US$9.2 billion when it comes to trade in services.
However, since his electoral campaign began, President Trump’s approach has been destabilising.
It has driven down dramatically the value of the Mexican Peso, causing the price of goods from the US, the country’s second largest import market, to rise, bringing with it inflation and higher interest
rates. The consequence, as many analysts observe, will be to cause the country to fall into a recession just as elections are due in 2018.
There is already increasing internal unrest over everything from the price of gasoline to foodstuffs; implying that the country’s increasingly unpopular President, Enrique Peña Nieto – his approval ratings now stands at a record low of 12 per cent – could be succeeded by the nationalist, leftleaning populist, Andres Manuel Lopez Obrador, whose ratings are being buoyed by the growing anti-Trump sentiment among Mexican voters.
How Mexico responds remains to be seen, but it is not impossible to imagine a trade war involving tariffs on US goods, threats in relation to the present high level of co-operation on the many aspects of cross border security that are critical to the US national interest, and substantial consequences for US exporters.
Unfortunately, this is a scenario that does not bode well for the Caribbean and Central America.
Apart from the danger of unintended consequences arising from bilateral policies being introduced in isolation from any new US hemispheric economic and security strategy, what is about to happen to Mexico may well create a new cause in the Americas. The most likely effect will be to set aside the huge steps forward in hemispheric relations achieved following President Obama’s 2014 decision to end the US policy of isolating Cuba, and to diminish US influence.
If, as seems likely, President Trump also adopts a transactional approach towards Cuba, the divisions then created might not only see Mexico and Canada seek a larger hemispheric role, but lead other players, including China and Europe, which have a mechanism for political and economic dialogue with the countries of the Americas through the Community of Latin American and Caribbean States, to develop a stronger and alternative role.
Moreover, if a new bilaterally delivered US policy approach and reshoring were also to be applied to other neighbours, including the countries of the Caribbean, it would rapidly have negative consequences, becoming a disincentive to investors wishing to manufacture or assemble, or use Caribbean offshore services or financial centres to facilitate trade or other forms of access to the US.
Last year Mr Trump appeared to indicate an interest in an economic agenda for the Americas.
In prepared remarks in Mexico City at the end of an August 2016, after he had met with the Mexican President, he said that one of the goals he wishes to share will be to “keep manufacturing wealth in our hemisphere”. What he meant, and whether this reflects a yet to be developed policy, remains to be seen.
Worryingly however, his planned actions in relation to Mexico may mark the start of US isolationism and an economic chill that spreads across the hemisphere. If it does, it will have significant consequences for the Caribbean, coming at a time when every government in the region, including Cuba, has recognised that only external investment can finance the drive for future economic growth.
January 22nd, 2017