Trump’s NAFTA Plans Could Destroy Mexico’s Economy
Donald Trump never hid his distaste for the North American Free Trade Agreement (NAFTA) during his presidential election campaign. Now that Trump has won the election, he must address NAFTA one way or another.
Trump’s win has sent shock waves to Mexico and its neighbors. They depend on their exports for economic survival, and now they face major economic risks if Trump should decide to follow through on his threats to alter the United States’ existing free trade agreements.
Advertisement
Mexico, which has become a major production hub for the U.S. market, could feel the most burn. Trump has made Mexico the main target of his protectionist project. But Canada also faces risks because the NAFTA concerns the U.S.’s northern neighbor as well. Trump wants to rewrite the NAFTA, which was signed with Mexico and Canada in 1994, and threatens to withdraw the U.S. from the agreement altogether if the renegotiations do not suit him.
Trump said the NAFTA was “the worst trade treaty ever signed” by Washington. Some 78% of Mexico’s exports head for the United States, while Mexico imports only 49%. The surplus is in Mexico’s favor to the tune of $61.0 billion on car parts alone. (Source: “Donald Trump’s Nafta Plan Would Confront Globalized Auto Industry,” The Wall Street Journal, November 10, 2016.)
Not surprisingly, while the major stock markets have welcomed Trump, the MSCI Emerging Markets Index has plummeted by seven percent since November 8.
During his election campaign, Trump raged against Mexicans, famously promising to build a wall along the entire border between the United States and Mexico in order to stop illegal immigration. He also intends to make several million Mexicans, who are living in an irregular situation in the United States, return to Mexico. Whether he goes through with these more extreme ideas, altering trade agreements might be less controversial.
In the short term, the first effects will be felt by the Mexican peso. It will collapse, as Trump’s vision could prompt a sudden slowdown in the Mexican economy, because the Mexican central bank would raise interest rates as a hedge. It’s no surprise that promptly after Trump won, Mexican President Enrique Pena Nieto spoke to the president-elect on the phone. Nieto assured Trump that he was he was “ready to work” with him. The two leaders planned to meet before Trump takes office on January 20, according to Pena Nieto.
Trump has suggested imposing customs duties of up to 35% on products imported from Mexico.
