Judging by President Trump’s latest Twitter storm about Mexico, it would seem that no one has informed him about the forthcoming Mexican presidential election. Nor does he seem to have been informed that a troubled Mexican economy is hardly in the United States’ long-term economic interest.
Had he been so informed, the president would not be going out of his way to weaken the current Mexican government and thereby increase the chances of a populist leader coming to office south of the border.
{mosads}The truth of the matter is that Mexico’s July 1 presidential election could result in a significant deterioration in both U.S.-Mexican relations and Mexico’s economic performance.
This would seem to be especially the case considering that the left-leaning populist candidate, Andrés Manuel López Obrador, has a commanding 18-point lead in the polls. As Trump’s anti-Mexico rhetoric intensifies, it is only likely to strengthen support for Lopez Obrador.
One would think that Lopez Obrador’s ascension to the Mexican presidency would be bad for the Mexican economy, which is highly dependent on its trade with the United States.
Lopez Obrador is running his campaign on a nationalist platform that is highly critical of the current government’s handling of U.S.-Mexican relations in general and the North American Free Trade Agreement (NAFTA) negotiations in particular.
He also remains committed to rolling back much-needed economic reforms, especially in the country’s energy sector, which is at the center of the current Mexican government’s economic policy agenda. A less market-friendly and confrontational Mexican president must be expected to deal a body blow to both domestic and foreign investor confidence in the Mexican economy.
Seemingly oblivious to Mexican electoral risk, President Trump is now hardening his stance on the NAFTA negotiations. He is doing so by explicitly threatening to pull out of NAFTA should Mexico not show greater commitment to stopping the flow of people and drugs across the border.
The hardening of President Trump’s stance is heightening the chances that López Obrador will win the forthcoming Mexican election. It is doing so by adding grist to his mill that Mexico needs a president who will stand up to United States’ bullying.
Even without the NAFTA issue, the Mexican elections are taking place against the backdrop of an anemic Mexican economy that is being adversely impacted by U.S. economic developments. The recent U.S. tax reform has created strong incentives for investors to relocate from Mexico to the U.S.
The U.S. government has done so by cutting the federal corporate income tax rate to 21 percent, which is now well below the 30-percent rate in Mexico. At the same time, the Federal Reserve’s efforts to normalize U.S. interest rates is creating incentives for capital to return from Mexico to the United States.
The last thing that Mexico now needs is increased doubts about NAFTA, which is of critical importance to the country’s economy.
This is not simply because exports are the lifeblood of the Mexican economy, accounting for more than one-third of GDP. It is also because the U.S. is by far Mexico’s largest trade partner, accounting for around three-quarters of Mexico’s export market.
Because of Mexico’s reliance on NAFTA and the close links between Mexican and U.S. supply chains, ending NAFTA would most likely destroy millions of Mexican jobs as well as jeopardize the country’s economic future.
A weakened Mexican economy would not be in the U.S. interest, especially at a time that the threat of a world trade war is already undermining global economic confidence. This is not simply because that country remains our third-largest export market and is a vital part of the U.S. automobile supply chain.
Rather, it is because a weakened Mexican economy is bound to add fuel to populist forces already far too much in evidence south of our border. That in turn is almost sure to further weaken U.S.-Mexican cooperation in limiting the flow of drugs and people across our border.
Sadly, it is very likely too much to expect that President Trump will have the insight to grasp that the same sort of nationalist sentiment and economic resentment that brought him to power might propel a bellicose populist from assuming power south of the border.
For this reason, we should brace ourselves for yet another potential source of disruption to the U.S. and global economic recoveries.
Desmond Lachman is a resident fellow at the American Enterprise Institute. Ryan Nabil is a global macro-economy researcher with AEI’s Economic Policy Studies department.