As North America celebrates new trade deal, Mexico’s slow recovery casts shadow

Business News | 6 Jul |

Mexico’s president, Andrés Manuel López Obrador (AMLO), is under heavy fire for his delayed and shaky response to the coronavirus and his failure to provide significant stimulus funding to shore up the private sector.

Add in rising violence and tanking oil prices and the economic outlook for this year is gloomy: Mexico’s economy is projected to contract by 10.5 percent, according to the International Monetary Bank (IMF).

“Mexico under AMLO appears to be entering a dark period of economic decline and spiraling violence,” said Ryan Berg, a research fellow for the American Enterprise Institute (AEI), who studies Latin American foreign policy and development issues.

As many as 20 million Mexicans could slip into poverty, said Berg, who spoke to Chamber Business News about the implications for Arizona and North America.

Headlines attack “indifferent fiscal response”

A rash of articles and editorials critical of AMLO appeared in Bloomberg, Forbes, the Washington Post, Aljazeera and other major news outlets this week to mark the official opening of the new trade agreement, the United States-Mexico-Canada Agreement (USMCA).

“Lopez Obrador Is making Mexico’s tragedy worse,” blared a headline from Bloomberg’s editorial board Wednesday. “The government’s indifferent fiscal response is inexcusable.”

Some of his actions have been labeled irresponsible. He has downplayed the need for mass testing. And until recently, AMLO continued to hold large public rallies, shaking hands and kissing people.

Business groups calling on AMLO to aid private sector

As AMLO prepares to meet with President Trump in Washington D.C. July 8, business leaders and advocates are urging U.S. officials to press AMLO to follow the lead of other countries that have rushed financial aid to help businesses survive the pandemic.

The meeting is meant to celebrate the USMCA, the successor accord to NAFTA that has fueled the three economies to become the largest free trade group in the world for more than two decades.

But Mexico’s response and missteps in reacting to the virus are producing challenges that could hurt the recovery of supply chains and economies on both sides of the border, Berg said.

Here are a few takeaways from Berg:

Missteps and misguided policies 

Mexico is the least poised of the three partner nations to take advantage of the new trade deal, he said.

The rapid spread of COVID-19 cases is wearing on the country’s already fragile health system, and continues to cripple the main pillars of the Mexican economy — tourism, energy production, and manufacturing.

Meanwhile, AMLO continues to reopen the economy as cases are skyrocketing. And as  Mexican officials have downplayed mass testing, it had 231,770 confirmed cases and 28,510 deaths as of today, according to the John Hopkins Coronavirus Resource Center.

“For a successful reopening, tests need to come back positive at a rate of around 5 percent,” Berg said. “Ten percent is dangerous. Twenty percent is crazy. Mexico is returning coronavirus tests with a 50 percent positive rate, which is way too high for a successful reopening. It would seem as though USMCA is coinciding with a massive surge in cases.”

Contentious relationship with private sector 

AMLO also “has indulged his contentious relationship with the private sector” instead of bolstering the economic model that has brought Mexico tremendous growth over the past 25 years under NAFTA, Berg said.

In April, AMLO yielded to pressure to help businesses and informal workers, who make up more than 50 percent of the economy, approving a $25.6 billion stimulus package.

But it was too little, too late.

“Mexico has spent less than any country in the region as a percentage of its GDP, save for the Bahamas, to support its industrial base,” Berg said.

Meanwhile, AMLO continues to focus on “pet projects” like the new airport in Mexico State that has been plagued by cost overruns and delays, the Mayan train project in the Yucatan Peninsula, and a large new refinery for the heavily indebted state-owned petroleum company, Pemex.

“Many people think these glitzy projects are economically dubious and cost a lot of money. Money that could be better spent shoring up Mexican industry.”

More dialogue needed to define essential businesses

Resuscitating economies in Mexico and the U.S. after the pandemic will depend largely on the renewed productivity of the massive North American manufacturing supply chain, Berg said.

One of the roadblocks has been Mexico’s “haphazard” method for declaring which  industries are essential, he said.

In April, the National Association of Manufacturers sent a letter to AMLO, stating its members’ concerns about losing supply chains that have taken years to fortify. The letter contains 14 pages of signatures from leading manufacturers across America.

In response, AMLO moved to open up more industries. Now, dialogue is needed to create harmonization between the three trading partners, including joint definitions of what is essential.

“Supply chains are so complicated that when we’re talking about the disruption of a supply chain, we could be talking about something as small as a screw or a nail or something that is nevertheless a very critical component that might be going over the border multiple times as it’s assembled,” Berg said.

Opportunity for Mexico to reverse course

Unless Mexico adjusts its domestic policies, it is squandering an opportunity to expand its role in North American trade and production, Berg said.

“At a time when many U.S. and Canadian businesses will be keen to take advantage of the USMCA to “nearshore” their supply chains, Mexico doesn’t seem to be in a position to take full advantage.”

If Mexico can prove that the country is safe for trade and manufacturing, it has many benefits to offer, he said. Mexico is graduating more people every year that are poised to enter high tech manufacturing and other skilled trades. Unlike China, it has managed to keep labor costs relatively low.

“I think Mexico has a huge opportunity here. I think there is going to be a bipartisan consensus or a near bipartisan consensus to rethink some of these supply chains after the pandemic, particularly extracting some of these supply chains from China.”

“With the right policies, Mexico could be a huge beneficiary of that.”

Mexico’s recovery vital to Arizona  

For Arizona, Mexico’s recovery is vital. Here are some of the reasons why:

• Mexico is Arizona’s largest trading partner times four. Arizona’s two-way trade with Mexico was $16.6 billion in 2018: nearly $7.6 billion in exports and $9 billion in imports.

• Arizona’s infrastructure supports international trade and tourism with six international border ports of entry, including one of the nation’s largest commercial ports, the Mariposa Port of Entry in Nogales, Arizona.

• Visitors from Mexico contribute between 60-70 percent of sales tax revenue in Arizona’s border communities.

• Together, Arizona and Mexico are leaders in the automotive industry, importing $968 million and $761 million in auto parts in 2016 – net trade of nearly $1.7 billion annually.

• The automotive industry in Arizona and Sonora produces 1,488 vehicles daily, supporting more than 50,600 employees.

• Nearly 3.6 million people from Mexico choose Arizona as a travel destination annually, representing the largest segment of international tourism to Arizona.

• Tourism from Mexico accounts for the majority of all expenditures in Arizona by international visitors to the state.

• Tourists from Mexico have an annual economic impact of $2.5 billion and support approximately 30,000 jobs throughout Arizona.

(Source: Arizona-Mexico Commission)

 

This story was originally published at Chamber Business News.

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