NS4540 Winter Term 2017 Trump and the Mexican Economy Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview I Robert Looney, “Can Mexico Cope With Trump? Foreign Policy” December 7, 2016 In presidential campaign Trump promised: Building massive border wall Deporting millions of undocumented Mexican workers Renegotiating NAFTA and Imposing high tariffs/border tax on Mexican exports to the US Most are unlikely Wall may never be built – funding, environmental challenges Large scale deportations unlikely – costs and blocked by advocacy groups Tariffs unlikely – will be overturned by the WTO

Overview II In short run however little to stop Trump from renegotiating or withdrawing from NAFTA and Imposing crippling trade restrictions on Mexico Mexico’s ability to cope with the resulting shocks will largely depend whether it can implement urgently needed structural reforms in areas such as Education Labor Energy Telecommunications Fiscal area Unfortunately, progress to date has been slow and likely to remain so unless country can address its problematic governance – especially rule of law and corruption

Structural Reforms I President Pena Nieto’s reforms were intended to create a virtuous circle in which rising public trust and improved efficiency would boost economic growth and create momentum for additional reforms To date only telecommunication reforms can be judged a success President’s approval rating only around 20% In addition to problems in dealing with Trump, much of problem due to allegations of corruption in both his administration and the PRI in general Mishandling of disappearance of 43 students at hands of corrupt policy First lady and finance minister received favors from government contractor Several governors facing fraud charges

Structural Reforms II Education reforms have prompted series of strikes by teachers and students Claim the new teaching standards and teacher competency exams infringe on labor rights Education fiasco can be directly linked to public’s lack of trust in government Gave teacher’s union an opportunity to mobilize against reforms Unfortunately failure in this area will hinder Mexico's transition to higher value-added exports Until Mexico’s education system capable of producing these critical skilled labor inputs on a large scale, country’s ability to shift from the U.S. market to participate in rapidly growing Asia-Pacific markets will be very limited.

Structural Reforms III Energy reforms also not living up to expectations. In part due to drop in oil price in 2014 After 75 years of state monopoly of oil through PEMEX, nearly all levels of energy production open to domestic and foreign private investment While it was hoped that exposing PEMEX to completion would force company to become less corrupt, more efficient and increasingly transparent – not occurring Firms reluctant to getting into oil business because of reputational risk posed by collaboration with PEMEX Despite recent successful bidding round for offshore exploration, significant increase in production at least five years away

Structural Reforms IV Delays in the energy area will prolong government revenue shortfalls In turn slow down infrastructure investment needed to increase country’s competitiveness In late 2016 Moody’s lowered Mexico’s outlook from stable to negative S&P warned that the country had a one-in-three chance of a rating cut within the next two years due to substandard growth and rising sovereign borrowing Attributed problems to weak governance, corruption and a rebound in organized crime and violence

Structural Reforms V Mexico’s best and perhaps only hope for coping with increased threat of increased protectionism is to speed up governance reform As matters now stand inefficiencies associated with corruption and patronage add to cost of Mexican exports By addressing these problems Mexico could gain flexibility it needs to compete in non-US markets