Donald Beware: Renegotiating NAFTA with Mexico will not be Easy

On July 17, the Trump administration released a document outlining its negotiating objectives for the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. The first round of the renegotiations will begin on August 16. While the U.S. administration claims that it has no deadline for the completion of talks, the reality is that the 2018 Mexican presidential election could make the achievement of U.S. goals considerably more difficult. However, renegotiations are very likely to be fraught with difficulties even before the new Mexican administration takes office in late 2018.

Mexico’s Political Pressures

Mexico’s current political leadership, if left to its druthers, might well cave to U.S. pressure, if only because of its decades long stubborn commitment to an economic model that involves foreign investment and close integration with the U.S. economy as the panacea to the country’s persistent economic ills. However, in the months leading up to the 2018 presidential election, the current leadership will have the political left nipping at its heels. As pointed out in an earlier blog post, the frontrunner in the presidential contest is populist left leader, Andrés Manuel López Obrador, a long-time critic of NAFTA and free market ideas. There is also likely to be a much more radical left indigenous presidential candidate, María de Jesús Patricio Martínez, who has promised a campaign to unite all of the country’s poor against neoliberal capitalism. While the Mexican left is deeply divided, it is currently struggling to present a united front against the centre right. Whether or not it succeeds in doing so, there is no question that the fear that it might will push the political leadership to accommodate NAFTA critics. At the very least, the Mexican public cannot see the current administration cave to U.S. demands.

Mexican President Enrique Peña Nieto with Export Executives

Moreover, the failure of NAFTA to lift the country out of poverty, to provide decent and adequate employment generation, and to provide sustained economic growth rates, has led to some profound questioning of free trade thinking not only among Mexican economists but also among domestic business groups—these latter have been pressuring the political leadership to change course. The thrust of the criticisms is that NAFTA (with the exception of the auto industry) has produced a form of economic integration with the U.S. that has largely benefitted the country’s big export firms. The gains, so the argument goes, need to be spread around through having these big firms acquire their inputs not from foreign firms (as they do now), but from domestic firms. Under pressure from its own private sector, in 2015, the Ministers of Economy and Finance agreed that what was needed was an industrial policy that ensured that these big domestic exporters obtained more of their inputs domestically, thereby generating greater domestic employment. Moreover, business has also demanded government policies (such as government support for investment in innovation) that encourage Mexican firms to move up global value chains to enable them to provide better paying jobs for Mexicans. The sorts of measures required to achieve these objectives will not sit well with U.S. negotiators who want to see more jobs in the U.S.

Regional Disparity, Special Economic Zones, and the Political Fallout

The regional polarization, between northern and southern Mexico, as I note in an earlier post, has been deepened by NAFTA. Northern Mexico has experienced economic growth and employment generation (albeit much of it low paid and precarious) while the south, where the indigenous population is concentrated, has remained mired in poverty and deprivation. The government’s policy response has been a new initiative to stimulate economic growth and employment generation in the south. This latest program designates Special Economic Zones in southern Mexico as areas that will receive infrastructural investment, tax reduction, the elimination of tariffs on imported inputs, and other forms of promotion. The objective is to promote growth in manufacturing, agro-industries, and resource extraction. The export ambitions of the program are clearly reflected in the fact that these zones are located in and around southern ports. This program is a replication of the border industrialization program that stimulated investment in northern Mexico with the exception of the additional focus on resource extraction. As such, the program will not sit well with U.S. negotiators who will see it as another attempt to attract investment, particularly foreign multinational investment, through low labor costs. Meanwhile, Mexican officials are committed to the program as the solution for NAFTA induced regional inequality. The initiative is also part of a strategy to expand Mexican exports into South America and Asia Pacific--important to compensate for any loss of access to the U.S. market.

More importantly, however, is the fact that the Special Economic Zones program has already produced unrest among indigenous groups, who claim not to have been consulted. They see the program as a threat to their identity and fear that the megaprojects that the government is contemplating will result in the loss of their lands. Particularly worrisome is the fact that oil and gas exploration companies appear to be involved. Indigenous organizations charge that big corporations will be the major beneficiaries. Growing resistance to this initiative will be combined with indigenous demands for support for traditional farming activities, particularly corn production—an activity that was seriously harmed by NAFTA due to the massive influx of cheap products corn from the United States. With an indigenous presidential candidate, pressure to do more for southern farming activities will be hard to ignore. Mexican demands to protect corn and other southern agricultural products will run up against the U.S. objective of protecting powerful domestic agribusiness interests.

Mexico’s Leverage

Mexican drug lord, “El Chapo,” in Drug Enforcement Agency Custody

With these kinds of political pressures, we can expect that the Mexican political leadership will use every bit of leverage at its disposal to block changes in NAFTA that may be detrimental to its interests and to exact changes that are favorable. The instruments at its disposal are not trivial. They include a refusal to co-operate on drug enforcement, migration, and security. Mexico has helped the U.S. in stopping migrants bound for the United States at its southern border. Now that the net flow of Mexican migrants to the U.S. is negative, stopping Central American migrants will become the U.S. administration’s main concern—Mexico could refuse future co-operation. Mexico could also put an end to the massive presence of the U.S. Drug Enforcement Administration and co-operation in handing over drug traffickers to U.S. authorities. Finally, it could balk at continued close co-operation with U.S. security and intelligence agencies—a move that would be seen by U.S. officials as inhibiting its ability to gage terrorist threats from Mexico.

Mexico not only has some powerful bargaining chips, it also has intense political pressures of its own that will drive the negotiating process. NAFTA was negotiated when Mexico was under the authoritarian control of the Institutionalized Revolutionary Party (PRI) and at a time when a new economic model held the promise of future prosperity. While its electoral democracy is far from perfect, electoral considerations will be a powerful factor in shaping negotiating positions. More importantly, perhaps, is the fact that NAFTA has not delivered on its promises for growth and prosperity and the reasons behind this are increasingly recognized by a broad cross-section of Mexican society.