The Risk of Contagion of a full-blown Mexican crisis is far greater today than it was during the Tequila Crisis 22 years ago.
Things are rapidly going from bad to worse in Mexico. Hundreds of people were arrested and a handful of people killed over the past week as peaceful protests against the government’s hike of gasoline prices (by as much as 20% in some states) descended into widespread looting and rioting. The mood on the street was hardly helped when Mexico’s deeply unpopular president, Enrique Peña Nieto, tried to defend his actions by asking the public, “What would you have done?”
For a lot of people, the answer’s clear: a lot of things, very differently. Right at the top of the list would be launching an all-out war against the endemic culture of corruption plaguing virtually all levels of government. But now, time is fast running out as Mexico faces a hideous constellation of threats and challenges, all at the same time.
There are few bigger threats to Mexico right now than the President Elect Donald Trump, who last week announced the appointment of Robert Lighthizer as the United States’ new Trade Representative. Lighthizer, a trade lawyer and vocal supporter of protectionist policies, is expected to play a leading role in the renegotiation of NAFTA, which helped transform Mexico into a low-cost industrial powerhouse while also shackling its economic fate to its northern neighbor:
The U.S. accounts for 80% of Mexico’s exports, 49% of its imports, and 60% of all its foreign direct investment.
Now that is all at risk. In the extreme event that NAFTA were cancelled, imports between Mexico and the U.S would be governed, at least on paper, by World Trade Organization rules. To access the U.S. market, Mexico would have to pay a tariff of up to 2.5% on all the vehicles it exported and as much as 6.4% on all its agricultural exports. As for the U.S. it would have to pay tariffs of 7.7% and 38.4%, respectively, in order for its industrial and agricultural products to reach the Mexican market.
The ramifications of such a sea change in trade relations are almost unimaginable…