The Mexican government has already triggered the 90-day heads up notice to its congress that it is ready to begin renegotiation of NAFTA.
President Donald Trump would like to have Commerce Secretary Wilbur Ross do likewise, but they have been held up by some procedural processes that are annoying the president. He wants to get going. They did send Congress a letter with a short outline of what they intend to address in NAFTA. That, too, was just precursory and will not limit the scope of the overhaul negotiation. It may well be intended to mislead the Mexicans. Donald does things like that.
The issues of trade and immigration are interrelated with Mexico. NAFTA has been good for both economies but more transforming for the Mexican economy. A lot of Mexican peasants became workers who became consumers as a result of NAFTA.
As Mexico sustained strong economic growth the past couple decades, the net immigration outflow to the U.S. neutralized. There is currently no surge of Mexicans crossing the Rio Grande because they have jobs in Mexico. It may make more sense to build the wall on the southern border of Mexico to control the flow immigrants from Central America who now make up the larger majority of the illegals crossing now.
Under threat of a trade disruption with the U.S., there has already been a negative impact on the Mexican economy where GDP growth rate is slowing. Citibanamex has reduced its forecast for Mexican GDP growth this year from 2.3 percent to 1.2 percent and believes gross direct investment will reverse, contracting 0.8 percent this year.
Trade actions that damage the Mexican economy conflict with efforts to curb illegal immigration from Mexico. A Mexican economic recession would create a new wave of illegal immigrants. I don’t think that is in anyone’s interest, so the result of renegotiating NAFTA needs to let the Mexican economy continue to grow. The tougher the agreement the more border agents that we will need.
Mexico has been re-evaluating its trade strategy. If access to the U.S. market is limited, where else can they go? They are reportedly talking to TPP nations as well as looking to expand free trade agreements to Brazil and Argentina. They bought a cargo of corn from Brazil and rice from Argentina just to try things out. They are exploring where else they can go with trade if forced to.
They are using the TPP model. There are some hotheads on both sides of the border. A bill was introduced into the Mexican Congress to buy corn from Argentina and Brazil instead of from the U.S. That is not logistically sensible or even possible. Protectionism is not going to work for Mexico any better than it will work for us. Eighty percent of Mexican exports go to the U.S., so if we go the trade war route, who wins will be a technicality decided by the weakest loser.
Part of the reason that Mexico is checking out its alternatives is that Donald has taken a very insulting, demeaning approach that has understandably insulted Mexicans, resulting in a setback to what had been much improved bilateral relations. Demanding payment for building a border wall was akin to a declaration of war to most Mexicans.
Trade deficits bother the president, but our trade deficit with Mexico ($63 billion) is small relative to the trade deficit with China ($347 billion). We export $230 billion in goods to Mexico and just $130 billion in goods to Japan. We export $462 billion in goods to China, which is twice as much as with Mexico, but the trade deficit with China is well over five times larger.
Japan sells us goods worth over $2 for every $1 in goods that they buy from us. China sells us $4 worth of trade goods for every $1 that they buy from us. In the case of Mexico, they buy $1 worth of goods for every $1.27 that they sell to us. That ratio is acceptable if graded on the curve. If we are going to get angry over our trade relationship with Mexico, then we should be furious over our trade difference with Japan and livid over the little investment and disproportionate trade that China buys from us, something that I am sure was discussed at the summit in Mar-a-Lago.
In February, the Wall Street Journal wrote its lead op-ed, “Trade Punishment for Trump Voters-Protectionism is already hurting the Farm Belt.” It was similar to what I had already written months sooner.
The ag sector has its neck on the line more than any other on trade. Farmers support Trump and believe that somehow he will protect them. Ag interests have been active in Washington attempting to pass on the recognition of the potential damage that Trump’s trade policy, as outlined on the campaign, could have on the farm economy to make the Trump administration aware.
I think that there is reason to believe that the message has been conveyed at some level, but I doubt that it will make much difference to the team of “America first” protectionists that Trump has appointed as his trade team. They are not farm boys representing an entirely different segment of the U.S. economy well apart from the ag sector. Secretary of the Treasury Steven Mnuchin pulled language from the recent G-20 summit statement opposing protectionism representing a policy shift that no one could miss.
The Trump administration is putting the possibility of protectionism in play.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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