How could Mexico inflict the most damage on the United States?
In normal times this question would not be top of mind for Mexican policy makers. Mexican governments over the last quarter-century have consistently pushed back against the nation’s historical resentment toward the United States, hoping to build a more cooperative relationship with its overbearing northern neighbor.
But these aren’t normal times. As President Trump prepares the opening gambit in his project to either renegotiate the North American Free Trade Agreement or pull out, Mexico’s most important strategic goal is narrowing to one word: deterrence.
It must convince Mr. Trump that if he blows up the trade agreement on which Mexico has staked its hopes of development, by weaving its economy ever more closely into that of the United States, the United States will suffer, too.
The critical question is whether Mexico’s threat will be convincing.
Mexico’s main challenge as it confronts a hostile Trump administration is the enormous asymmetry of the bilateral relationship. Ending Nafta would hurt the United States: Six million American jobs depend on exports to Mexico, according to Mexican officials. But to Mexico, it could prove devastating.
Mexico
has relied on the pact to draw foreign capital into the country, not
only ensuring multinational companies stable access to the largest
consumer market in the world but also guaranteeing that their investment
is safe, noted Luis Rubio, who heads the Center of Research for
Development in Mexico City.
The makings of a Mexican strategy for defending its interests started coming into focus on Monday, when President Enrique Peña Nieto declared that negotiations for a future relationship with the United States would not be limited to trade.
“We
will bring to the table all themes,” he said in a speech. “Trade, yes,
but also migration and the themes of security, including border
security, terrorist threats and the traffic of illegal drugs, weapons
and cash.”
His
hope is that by introducing broader uncertainty about the bilateral
relationship — Will Mexico still cooperate in the fight against drug
trafficking? Will it stop foreign terrorists from using Mexico as a way
station into the United States? — Mexico can raise the stakes enough for
Mr. Trump to reconsider his “America first” approach to commerce.
“Mexico has a lot of chips to play,” said Jorge Castañeda, a former foreign secretary who has staked out a combative approach.
Let
Mr. Trump pull the United States out of Nafta, he argues. Instead of
stopping Central American migrants at its southern border, Mexico should
let them through on their way to the United States. “And let’s see if
his wall keeps the terrorists out, because we won’t,” Mr. Castañeda
added.
The
view from Mexico City is not uniformly bleak. Some analysts believe
there is a potential for a situation in which a new Nafta benefits all.
“I have always believed one should never let a good crisis go to waste,”
said Arturo Sarukhán, a former Mexican ambassador to the United States.
“There is an opportunity that we could end up modernizing and improving
Nafta.”
The
view that there is a potential silver lining to Mr. Trump’s hostility
toward Nafta is also popular in some Washington circles. The
quarter-century-old agreement is due for some modernization anyway, if
only to deal with things like data protection, online crime and
e-commerce — which were not around in the early 1990s. Nafta’s weak
provisions on labor and environmental standards could also be improved.
Many
aspects of Nafta could be upgraded, trade experts say. It could do with
new rules to open up government projects to bidders from all three
Nafta partners. Allowing long-haul trucking companies from Mexico and
the United States into each other’s markets could make trade between the
two more efficient. What’s more, the Mexican-American border could
benefit from more infrastructure investments to integrate energy
networks, reduce clogged lines at border crossings and the like.
Now
that Mr. Trump has formally nixed the Trans-Pacific Partnership, which
would have tied North America and nine other nations from the Pacific
Rim into one large trade bloc, some of its provisions could be drafted
into a new North American deal.
Gary
Hufbauer of the pro-trade Peterson Institute for International
Economics in Washington suggests that the name “Nafta” be retired — it
has a bad reputation. But a lot of its substance could remain, perhaps
in the form of separate bilateral agreements with Canada and Mexico.
“Trump
wants some easy victories,” Mr. Hufbauer pointed out. If he can score
political points using his Twitter feed to persuade a few companies to
keep jobs in the United States, why risk hurting the American economy by
abandoning the North American trade deal? “Maybe that’s the
reconciliation,” Mr. Hufbauer said.
Still,
it’s hard to reconcile the proposal for an improved, more effective
trading pact in North America with Mr. Trump’s frequent portrayal of
trade as a zero-sum game that inevitably shortchanges the United States.
In
Mr. Trump’s eyes, improving Nafta seems to mean eliminating Mexico’s
trade surplus with the United States and limiting investment by American
multinationals in Mexico. But one can’t quickly eliminate a $60 billion
trade surplus with a new Nafta — not unless it has some incredibly
draconian limits on imports or local content requirements that could be
as damaging to Mexico as abandoning the pact altogether.
Many
Mexican officials fear that it is precisely this kind of draconian
change that Mr. Trump has in mind. It would be politically profitable,
at least in the short term. And it would signal toughness to China — a
more formidable rival that is next on Mr. Trump’s list. If Canada stays
out of the fray, cutting a separate deal with the United States to
replace Nafta, Mexico would be left alone in an existential fight for
its future.
In
this case, Mexico may have no choice but to raise the stakes and hope
to arrive at the negotiating table with a threat at least as credible as
Mr. Trump’s promise to pull out of the deal.
Mr.
Trump’s negotiating position does have some soft spots. For one, said
Mickey Kantor, the American trade negotiator who concluded the Nafta
negotiations during the Clinton administration, “he is under pressure to
deliver a deal.”
If
Mexico stands its ground and even allows Nafta to dissolve, it would
send its own signal to China: Resistance is not futile. And Mr. Trump’s
threat to raise tariffs against Mexico to 35 percent could easily be
challenged under the rules of the World Trade Organization.
This
is, of course, a hugely risky strategy for Mexico. When Mr. Trump
entered the presidential race in June 2015, a dollar was worth about 15
pesos. Now it’s worth about 22. A frontal confrontation with the United
States might send it to 40, Mexican officials fear, fueling capital
flight.
And yet that may be Mexico’s strongest card.
As
noted by C. Fred Bergsten, director emeritus of the Peterson Institute,
an irony of Mr. Trump’s approach to Mexico is that by weakening the
peso so much, he is going to increase the bilateral trade deficit,
increase Mexico’s competitiveness and make it more attractive for
American companies to invest there. “That is going to swamp anything he
achieves with his company-by-company efforts,” he added.
That’s
if Mexico manages to hold on. The more ominous situation is one in
which the United States pushes too hard and Mexico — its economy, its
unpopular government, its public order and political stability —
buckles. The United States has enjoyed a peaceful southern border for
100 years, since Pancho Villa made his marauding raids into the
Southwest during the Mexican Revolution. “That is worth pure gold in
this and any other world,” Mr. Castañeda said. “Mexico’s best argument
is ‘Don’t mess with that.’”
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