Deal or No Deal: Mexico’s Future in Trade

Richard Williams IV // 24 July 2018

In a landslide victory 1 July, Mexico voted in its first third-party president. According to exit poll data, Andrés Manuel López Obrador gained more than 53 percent of the votes against the ruling Institutional Revolutionary Party (PRI); big news in politics given that the PRI dominated the Mexican political arena for the last 89 years.

Although a defeat for outgoing Mexican president Enrique Peña Nieto, it is a win for the new leftist-populist government. Due to take office on 1 December 2018, the world’s newest president-elect’s agenda highlights potential economic and political endeavors for the country amid increasing hostility from the country’s northern neighbor – the United States.

United States President, Donald Trump, has openly criticized Mexico since the start of his presidential campaign. US-Mexico trade policy is a subject receiving close review by the Trump administration. In the past year of his presidency, Trump has argued for a renegotiation of NAFTA – a trilateral trade agreement among Canada, Mexico, and the United States.

A new NAFTA agreement would, in traditional protectionist fashion, better serve US interests. Eighty percent of Mexican goods, mostly automobiles and auto parts, are exported to the United States, which means a large percentage of Mexico’s GDP is dependent on the US economy. In response, Mexican President-elect, López Obrador, pledged to reduce the country’s reliance on the United States.

Mexico’s response begs the question: What does this pledge mean, not only for Mexico, but for the European Union?

In April, Mexico reached an ‘agreement in principle’ with the EU to diversify its markets and to decrease its dependence on an increasingly antagonistic northern neighbor.

Politicians in Brussels welcome trade agreements with Mexico, citing further benefits to EU industry. The deal struck in April is an ‘upgrade’ of an original deal from the year 2000 between the EU and Mexico. This new deal covers more than the imports and exports of basic goods and machinery. The pact also includes e-commerce and finance, two sectors unaddressed in both NAFTA and the EU-Mexico Global Agreement (2000).

A modern trade agreement ensures that EU and Mexican companies are provided equal footing along with access to government contracts. Immediate benefits will be felt by the EU’s farming community, many of whom will gain market access to Mexico’s 128 million consumers. Additional benefits for both entities include the removal of trade tariffs and barriers together with a commitment to tackling corruption in the public and private sectors.

However, to garner maximum benefit of such a deal, Brussel policy makers must acknowledge some of the most important trade and investment issues facing the two entities since the year 2000. In turn, Mexican policy makers should simultaneously overhaul their current corporate and labor laws to allow for streamlined processes. An awareness of these shortcomings exposes untapped potential for further trade and investment opportunities.

Flaws aside, an EU-Mexico trade deal sends a powerful message to the world that both the European Union and Mexico reject protectionism.

The agreement further confirms Mexico as a priority for the European Union, one of the most important economic zones in the western hemisphere. Mexico made a ‘plan B’ for itself should President Trump decide to opt out from NAFTA entirely. However, at face value, an agreement with the EU seems more inclusive and fruitful than a trade deal with the United States could ever be, at least for now.

Trump’s protectionism does not quite represent the free and fair-trade nature of NAFTA, which the EU contrastingly chooses to highlight and build upon. Given this dilemma, Mexico should consider a free trade deal with the EU as a priority.

The ‘April deal’ was an agreement in principle and requires more specificity over the next few months. Consequently, the deal is still malleable both by European and Mexican parties. The two entities are expected to finalize an agreement by the end of 2018.

This brings López Obrador’s future negotiations as Mexican president into question. The April deal was negotiated by the Mexican centrist PRI party, and there is no telling what the leftist-populist president-elect will do. Current NAFTA negotiations could sway the administration either way.

During his campaign, López Obrador pledged to renegotiate NAFTA – a pledge that seems to contradict his agreement to decrease Mexican dependency on the United States. Trump seems unlikely to budge in trade negotiations with Mexico. Someone will need to budge, and it does not look as though it will be the United States.

Regardless, Mexico still has a free trade deal to develop with the European Union. Mexico should continue a realignment of its trade enterprises toward the EU amid uncertain US trade policy.

All opinions expressed in this article belong to the author only and are not necessarily endorsed by EPICENTER. 

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).