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Donald Trump

In a trade war with Trump, Mexico’s president has a few weapons at his disposal

Top economic officials have said that Mexico would ‘mirror’ any additional taxes or tariffs that the United States imposes

PUBLISHED : Sunday, 29 January, 2017, 6:14pm
UPDATED : Sunday, 29 January, 2017, 9:01pm

If the trade war with the United States is coming, how would Mexico fare?

That is the question that has preoccupied politicians and business leaders here since US President Donald Trump won the election and began pursuing his agenda to impose tariffs on goods made in Mexico and to build a wall across the border.

Trump has made clear his disdain for the North American Free Trade Agreement (Nafta), which has governed commerce on the continent since 1994, and Mexican leaders have said that if the terms of the renegotiation did not further their interests, they might walk away as well.

A trade dispute could have painful repercussions here in Mexico. The country relies heavily on the US market: 80 per cent of its exports are sold there, and some economists predict a trade war could lead to a recession and spur more migration north. Others note that unrest might break out as the country is already tightly wound amid sharp increases in gas prices, the peso devaluation and the unpopularity of its president, Enrique Peña Nieto.

Watch: Mexico’s President Enrique Pena Nieto responds to Trump’s border measures

But before that happens, Mexico will sit at the negotiating table with the Trump administration. While the United States is the stronger power, Mexico is not without leverage if this dispute escalates. Top economic officials have already said that Mexico would “mirror” any additional taxes or tariffs that the United States imposes. Former officials have said that Mexico could also tax corporate profits from the many American companies with operations in Mexico.

Outside of the economic realm, Mexico also has plenty of cards to play in negotiations with Trump. Last year, Mexico deported nearly 150,000 migrants bound for the United States, most of them from Central America. Without this cooperation, officials predict that the number of migrants turning up at the US border could double.

“He has the Central American card, which he has mentioned, and it’s a very powerful card,” former foreign minister Jorge Castañeda said of Peña Nieto.

After a slow start, Peña Nieto’s administration has ramped up drug war cooperation with the United States over the past four years. His administration has arrested many high-ranking cartel leaders, including twice capturing Joaquín “El Chapo” Guzmán, the head of the Sinaloa cartel, who was extradited last week to New York. Mexican authorities help fight the heroin epidemic in the United States by going after local producers.

At the border, Mexican officials have been important partners on a variety of tasks, including gathering intelligence on drug cartels and facilitating food inspections, often working side by side with their US counterparts. Mexico has also apprehended foreigners from other countries that pose a potential national security threat and has allowed US authorities access to them. That cooperation could change.

If the United States begins mass deportations of Mexican immigrants, Mexico could also respond by checking the documents of the large populations of Americans who live in cities such as Ajijic or San Miguel de Allende.

“It’s evident that Mr Trump wants vassals, not neighbours,” said Sergio Aguayo, a political analyst and professor at the College of Mexico.

“What’s surprising is that he doesn’t understand that Mexico has a good number of measures at its disposal.”

He added: “We depend on each other in many ways. More than Trump imagines.”

Many in Mexico seem to fear that foreign investment will dry up if the trade tensions escalate. Trump’s warnings to US companies not to ship jobs to Mexico already prompted Ford to cancel plans for a plant in Mexico and for Carrier, the Indiana-based company that makes heaters and air conditioners, to shift some jobs away from Mexico.

The auto industry in particular has been a bright spot for Mexico, and disruption in that manufacturing base could spell serious trouble.

“The big dilemma is a lack of certainty or stability,” said one person involved in the auto industry who spoke on the condition of anonymity to speak candidly. “If the US places tariffs on auto imports, then it is a real game-changer.”

The person added: “It seems as though we are now in a waiting game to see just how severe the situation becomes.”

Without Nafta, economists said, Mexico could lose some of the advantages that come with its lower-cost labour. With new tariffs on Mexican exports, “we just become less attractive to foreign investors because that margin is too small,” said Federico Estevez, political science professor at the Autonomous Technological Institute of Mexico.

“On top of that, you have [Trump] bad-mouthing us all the time,” he said.

Economists have noted that the steep devaluation of the Mexican currency makes its exports more competitive around the world. And imposing tariffs on Mexican goods will raise the prices in US stores. Mexico has free-trade agreements with dozens of other countries and could look to expand its relationships outside of the United States if that market turns inward.

“It’s very curious that he would want to punish the American consumer,” Luis Foncerrada, the director of an economic studies institute in Mexico City.

“Mexico can compensate with exports to other countries, deepening those agreements.”

That Trump seems not to be considering the ramifications of a trade war with Mexico might be the most worrisome aspect of the current crisis, said Fernando Turner Dávila, secretary of the economy in the industrial state of Nuevo Leon.

“This is worrying not only for Mexico, but for the entire world,” he said. “They should be scared that there is no contemplation in the president of the most powerful country in the world.”