NAFTA 2.0 gets complicated.
With the fifth round of NAFTA negotiations scheduled to begin next week, Mexico finds itself facing a very uncertain future. The free trade agreement upon which its entire national economic model was built is now looking precariously fragile. Ildefonso Guajardo, Mexico’s economy minister, told the Mexican Congress last week that the way things stand, an end to NAFTA “cannot sanely be ruled out.”
In such an event, the resulting economic pain for Mexico could be considerable, according to calculations from Banco Santander. It forecasts a 15% drop in exports and a 16% fall in imports if the US declared a full trade war rather than reverting to World Trade Organization tariff rules. Moody’s Investors Service estimates Mexico’s economy could shrink as much as 4%.
The biggest problem for Mexico’s economy is the sheer scale of its dependence on trade with the US: 81% of its exports go to the U.S., and about half of its imports come from there. Mexico is so deeply integrated into US supply chains, particularly manufacturing production that the IMF describes Mexican and American industrial production as “co-integrated.” Increases in American economic output are transmitted one-for-one to Mexican output.
Now, with the future of NAFTA increasingly in doubt, Mexico has begun diversifying its import and export markets away from the U.S., as we warned would happen in January…