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Economy, Finance and Trade Mexico: Trump’s Protectionist Administration Will Hurt Mexico

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By: Roshni Wani Thapa

Euromonitor International’s Mexico Economy, Finance and Trade Country Briefing, focuses on one of Latin America’s economies which is heavily reliant on the success of the US economy to drive exports progression and remittance inflows. Donald Trump’s surprising victory in the US elections pushed the Mexican peso to historic lows, summoning dangers instore for Mexico, given the newly elected President’s proposed protectionist measures. During the Presidential campaign, Trump promised to renegotiate or end the North American Free Trade Agreement (NAFTA), stop the Trans-Pacific Partnership trade deal, curb the influx of migrants, block the outflow of remittances and build a wall along the US-Mexico border to cut off trade and immigration between the two nations. Although, the viability of implementing such plans seems uncertain, the start of Trump’s administration haunts Mexico given the nation’s strong link to the US economy. Trump’s victory is expected to deteriorate Mexico’s business as well as consumer sentiments, external balances and trade ties with the USA. This is further expected to reduce Mexico’s real GDP growth forecast from 2.7% (according to the Pre-Trump Scenario in Euromonitor’s Macro Model) to 1.6% in 2017.

SWOT analysis of Mexico. Strengths: manufacturing and services demand contributed to a relatively solid economic performance. Inflation successfully reduced to below the central bank target in 2015. Weaknesses: excessive reliance on the USA for both imports and exports. Opportunities: currency depreciation could be a moon for exporters. Planned spending cuts could result in improved government finances. Threats: Further volatility in the Chinese economy could weigh on Mexican economic development, given its emerging market status. Expected budget cuts could adversely impact scheduled infrastructure upgrades.

Given Mexico’s close economic ties with the USA, Mexico will be the most impacted country from a Trump administration:

  • Mexican total goods imports increased substantially in the 2010-2015 period, growing by 31.1% in US$ terms, owing to relatively strong consumption and the need for inputs into the manufacturing sector. However, its large reliance on US imports poses a risk to the supply of goods, particularly in the event of Mexican currency weakness;
  • With 35.2% of total goods exports, ‘Machinery and Electrical’ was Mexico’s largest exports category in 2015, illustrating that the country has a substantial manufacturing base that makes it vulnerable to global trade flows. Furthermore, its excessive reliance on the USA for a sizeable portion of its exports means that Mexico is highly vulnerable to any weakness in the US economy;
  • Mexico’s current account deficit increased to 2.8% of GDP in 2015, owing to lower oil revenues resulting from a weak global oil price. Remittance inflows are a notable contributor to Mexico’s overall economic health, particularly given that inflows from the USA (home to a large proportion of Mexican migrants) help to fuel consumer expenditure;
  • Given that Mexico is well integrated within the world economy, the global economic slowdown is a major risk to the country’s future output development, as is further weakness in global oil prices, given that Mexico is a notable oil producer. Its considerable reliance on the US economy is another substantial risk.

Trump’s administration could cause large decline in Mexico’s remittance inflows and exports

Mexico’s economic ties with the USA have amplified considerably since NAFTA took effect in 1994, eradicating most tariffs on goods traded between the USA, Canada and Mexico. Hence, the USA became the Latin American country’s largest trade as well as investment partner. By 2015, 81.0% of Mexican goods were exported to the USA. Elimination of NAFTA will have far reaching consequences for the Mexican economy, via high export costs, reduction of US investments and potential capital flight induced by uncertainty.

Furthermore, in 2015, Mexico was the fourth largest recipient of remittance inflows in the world, accounting for 2.2% of its GDP. These inflows are predominantly from the USA and play a major role in increasing household consumption and reducing poverty. Trump’s anti-immigration policies and his plans of restricting migrant’s remittances will certainly affect Mexican household income and expenditure and decrease Mexican firms profit levels. The sharp fall in remittance inflows will also weigh on poverty reduction via reduced income levels.

An additional major impact would also be felt by Mexico’s external balances as a decline in exports and remittances inflows will widen Mexico’s modest current account deficit, which stood at 2.9% of GDP in 2015. All of this will eventually slow down the country’s economic growth.

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