Uncertainty Hits American Farmers and Mexican Consumers
Uncertainty Hits American Farmers and Mexican Consumers from Wolf Street
NAFTA 2.0 gets complicated.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
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 describesMexican 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 warnedwould happen in January.
Mexico bought 100,800 tonnes of yellow corn from Brazil in September and 41,000 tonnes from Argentina — a drop in the ocean compared to the 10.5 million tonnes bought from the US. But as the FT reports, by October this year, it had bought 11% more of the commodity from the two South American countries than in all of 2016.
“It’s important because it shows Mexico has other countries where it can substitute grain imports,” said Juan Carlos Anaya, director-general of CGMA, a consultancy.