Now that the leftwing populist – Andrés Manuel López Obrador (referred to also as AMLO, his initials) – has become Mexico’s next President, his concrete policy proposals will begin to take shape. On the campaign trail, he was frequently criticized for providing few specifics on a variety of his promises, including how to combat corruption, improve public safety, and address economic inequality. One idea that Obrador should seriously contemplate is to threaten to leave NAFTA. This threat, which Obrador can credibly make given certain features of the Mexican economy, will potentially improve the value of Mexico’s exports.
Such an abrasive, even confrontational move, is unlike the more conciliatory tone that Obrador is currently striking. For instance, his victory speech on July 1stwas restrained, calling for stability and harmony until his government takes power on December 1st. When asked about his approach to the United States in general, Obrador has said he hopes to build a relationship based on mutual respect and cooperation. Threats of any sort seem far from the style of governance that AMLO would conduct.
Yet, as Obrador tries to make good on his promise to improve the Mexican economy, it’s hard to believe that the United States will simply help Mexico grow. It may take coercion and threats to get better terms in trade deals, with the most critical for Mexico being NAFTA. Furthermore, there is a sound economic rationale to threaten leaving NAFTA, one that Obrador can appeal to if the US would “call his bluff.” Basically, Mexico can turn its exports away from the United States and to a variety of other countries.
Mexico is a middle-income country, which means that most of its economy is devoted to producing industrialized goods and services. Yes, Mexico exports various kinds of agricultural goods to the United States. According to the United States Trade Representative, in 2017, Mexican fruits and vegetables amounted to over US $10 billion in export sales. Far outpacing agriculture, however, are cars, machinery, and electronics. Respectively, each of these areas is responsible for US $84, US $62, and US $54 billion of sales. Mexico is where many Ford and General Motors cars are made, as well as where Dell, Hewlett-Packard, and Lenovo manufacture a variety of their electrical inputs.
This is part of the reason why trade deals with China have never really materialized between the two countries. Last year, as the Trump administration threatened to pull the United States from NAFTA, there was some talk of Mexico forging deals with China. The problem is Mexico and China are competitors for the consumer markets of high income countries, such as the United States.
This brings us Mexico’s place in NAFTA. Economically, it is in Mexico’s self-interest to seek out new, additional export markets. Currently, about 80% of the country’s exports are destined for the United States. Meanwhile, some economists, such as Paul Krugman, have voiced concern over a coming US recession. The question is not if an economic downturn will happen, but when and to what effect. Central to Obrador’s promises are strengthening agriculture and manufacturing, both of which would benefit from playing the field and searching out better deals. Basically, Mexico’s economy would suffer if its exports decline as consumer demand in the US shrinks. Domestically, diversifying export markets to countries other than the United States makes sense for Mexico.
There also has been some real movement on changing the country’s export markets. Mexico inked a trade deal with the European Union in April of this year, focusing on pharmaceuticals, machinery, and transport equipment. In early June, Mexican and Japanese officials met to negotiate terms for a trade deal that could potentially benefit the former country’s automobile manufacturers. In effect, Mexico is moving away from General Motors, and more towards Nissan, Mitsubishi, and Toyota. Furthermore, Mexico has been in discussions with the South American trade bloc– Mercosur (composed of Brazil, Argentina, Uruguay, and Paraguay) – concerning agricultural exports. Michoacan’s avocados, instead of going north, may now go south, to Brazil or Argentina.
Perhaps Mexico will stay in NAFTA, maybe it won’t. If Obrador threatens to leave the agreement, then he could negotiate better terms. Other deals, with Europe and Japan, are also in development, just in case negotiations fail or Mexico does not like the terms. For too long, Mexico has been made subordinate to the United States. Donald Trump has simply taken such a position to extremes, evoking racist stereotypes to depict Mexican immigrants and believing that he can boss the country into funding his border wall project. Obrador has a chance to strongly take a stand against the United States, not only for political gain, but also for the economic well-being of Mexico.