Mexico seeks stability by diversifying trade links

Mexico is a federal republic constituted by the legislative, executive and judiciary branches of government. The Congress of the Union consists of two chambers: a Chamber of Deputies with 500 members, elected every three years, and a Senate composed of 128 representatives, elected every six years. In both cases, seats are chosen through a combination of direct election and proportional representation. The executive branch is held by the president, who is elected for a single six-year term. The judicial branch is led by the Supreme Court of Justice, with 11 judges or ministers appointed by the president with congressional approval. The judges or ministers may serve for a 15-year term and cannot serve more than once. The country is divided into 32 federal entities, each ruled by a governor, and Mexico City, which is ruled by a mayor, all of which are elected every six years through a first-past-the-post system.

Once described by Peruvian Nobel literature laureate Mario Vargas Llosa as “the perfect dictatorship”, the country was ruled from 1929 to 2000 by the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) until it conceded electoral defeat to Vicente Fox of the right-wing National Action Party (Partido de Acción Nacional, PAN). PAN held onto power in the 2006 election under the candidacy of Felipe Calderón until 2012, when the PRI staged a comeback with the election of Enrique Peña Nieto. Despite the change in government, scandals and violence continued; the murder rate hit an all-time high in 2017 and showed no signs of abating in 2018. This, coupled with sluggish growth, rising inflation and depreciation of the peso, led to a swing in electoral preference away from the ruling party in the general elections of 2018. In a landslide victory, voters elected Andrés Manuel López Obrador, better known by his acronym AMLO, from the National Regeneration Movement (Movimiento Regeneración Nacional, MORENA), as the next president.

Revolution

Mexico was the scene of the first socialist revolution of the 20th century in 1910, when peasant activists in the north and south of the country rose up against what was perceived as the fraudulent electoral victory of Porfirio Díaz, extending his 35-year rule. The violent conflict caused Díaz to flee into exile. Shortly after, in 1911, Francisco I Madero was elected as president; however, his rule ended with his assassination in 1913. The counter-revolutionary Victoriano Huerta was elected president that same year, though he survived in office less than one year before being forced out by a coalition of revolutionaries, as the revolutionary war intensified. In 1915 the forces of wealthy landowner Venustiano Carranza gained support from peasants and undermined the strength of the revolutionary armies of Pancho Villa in the north and Emiliano Zapata in the south. Under Carranza, the 1917 constitution was promulgated, which is still in effect today. Zapata was assassinated by Carranza loyalists in 1919 and Villa surrendered in 1920, effectively bringing the revolution to an end. Álvaro Obregón was elected president in 1920 and served a four-year term during which Villa was assassinated. Obregón was succeeded by Plutarco Elías Calles, who in 1929 founded the party that would later change its name to the PRI.

More Turbulence

A centrist, nationalist party, the PRI ruled unchallenged until the 1988 presidential election, when the party claimed that vote-counting machines malfunctioned, and PRI candidate Carlos Salinas de Gortari was declared the winner. Cuauhtémoc Cárdenas – the left-wing candidate of the National Democratic Front, a coalition of left-wing parties and the son of Lázaro Cárdenas, who served as president from 1934 to 1940 – is widely believed to have won, but protests by supporters failed to sway the result and Salinas became president.

In 1989 Cárdenas founded the Party of the Democratic Revolution (Partido de la Revolución Democrática, PRD), which continues to be a major left-wing party, and for which Cárdenas was elected Mexico City mayor in 1997, when, as a result of legislative changes during the preceding administration, the city government was chosen by election for the first time, having previously been controlled by the federal government, with the mayor, or regent, chosen by the president. The PRD controlled the city until the July 2018 elections, which saw Claudia Sheinbaum, of the MORENA party, elected.

Under Salinas, Mexico signed the North American Free Trade Agreement (NAFTA), which came into effect in January 1994. However, the end of the Salinas presidency ushered in a period of economic crisis due to spiralling debt and a fiscal deficit, which led to a sharp depreciation of the peso. Mexico’s entry into NAFTA also coincided with an uprising in the southern state of Chiapas by the Zapatista Army of National Liberation, which demanded rights and recognition for the country’s indigenous peoples, led by the media-savvy Subcomandante Marcos. The armed conflict ended with the signing of a peace accord, but which the Zapatistas and their sympathisers claim that this did not result in any concessions from the government or an improvement in indigenous rights.

Derided at home due to the economic crisis and currency depreciation, Salinas spent many years in exile in Ireland, which does not have an extradition treaty with Mexico, while his successor, Ernesto Zedillo, led a government under a banner of well being for all. This ended with the election of Fox in 2000, the first non-PRI candidate to win the presidency in 71 years.

Into the 21st Century

In 2006 President Fox was succeeded by fellow PAN member Felipe Calderón after a tight electoral contest that was once again disputed, this time by AMLO, then running as a PRD candidate, who demanded a recount. Months of protests ensued, with AMLO supporters camping out in the streets and blocking major thoroughfares, including Reforma in the capital’s central business district and various streets in the downtown Centro Histórico neighbourhood. AMLO pronounced himself the “legitimate president” despite Calderón having been sworn-in.

Support waned in the face of the new government’s refusal to allow a ballot recount, and AMLO fell out of favour among many for his refusal to accept the result, and due to the inconvenience his street protests and sit-ins were causing commuters. He clinched his party’s candidacy again for the 2012 elections, which he also lost, this time to Peña Nieto of the PRI.

Calderón’s 2006-12 presidency marked a shift in policy towards the country’s continuing problem with organised crime and drug trafficking, and he launched a military offensive against the cartels, chasing and capturing cartel bosses, resulting in tens of thousands of deaths and disappearances. As a result, the cartels splintered into factions and emerged as new cartels, which continue to be a problem today. Violent crime has become a chronic issue in Mexico; 2017 was the worst year on record, with a combined 29,168 homicides recorded across the country, a trend that continued into 2018 as 2156 homicides were reported in January, a record high monthly total. Security, therefore, remains a major concern. Many states, such as Michoacán, Jalisco, Guerrero, Colima, Sinaloa, Chihuahua, Veracruz and Tamaulipas, continue to see high crime rates, and drug cartels are known to have diversified into other illicit activities such as fuel theft, illegal mining and extortion of avocado producers.

Eight state governors, including Tomás Yarrington of Tamaulipas, Javier Duarte of Veracruz, Roberto Borge of Quintana Roo and Guillermo Padrés of Sonora, were arrested during Peña Nieto’s 2012-18 presidency on a diverse array of corruption charges.

Reforms

President Peña Nieto’s government signed a cross-party pact, the Pact for Mexico, paving the way for a series of wide-reaching reforms to the telecommunications, energy and education sectors, as well as a tax reform to widen the fiscal base.

The telecommunications reform opened up the sector to competition, and although América Móvil remains dominant, mobile and internet costs have dropped considerably, increasing access to communications for lower-income households. The energy reform similarly opened up the energy industry to private investment in the upstream segment, and the country is now into its third round of oil and gas auctions, which have tendered onshore and offshore fields to private players. Although the royalties will go to the private investors, the hydrocarbons extracted will remain the property of the state. This agreement is seen as a major step forward in ramping up oil and gas production, which had been in decline since 2004. This, coupled with lower oil prices, led to a severe reduction in government revenues, resulting in budget cuts. The reform also paved the way for more private investment in the midstream segment at a crucial time, as the country ramps up its natural gas imports from the US, builds new gas-fired power stations, and converts older, oil-fired facilities to gas. Investment is also flowing into fuel storage and transportation infrastructure, as the fuel sector was liberalised and private companies can now compete with state oil firm Petróleos Mexicanos in the import and retail of fuel. Reforms have allowed for increased investment, and Mexico held three electric power auctions between 2015 and mid-2018, with another auction planned to take place in November 2018. These have awarded contracts for the generation capacity for solar, wind and gas-fired projects.

Education reforms modified teacher recruitment and assessment, while the tax reform has brought more workers into the formal sector, which has resulted in more opening bank accounts and greater access to credit. As a result, around 3.4m jobs have been created during the current administration, which the Mexican Institute of Social Security (Instituto Mexicano de Seguridad Social, IMSS) reports is twice the number created during the 2006-12 government.

The number of workers affiliated with the IMSS, which makes them eligible for housing subsidies and pensions, has increased accordingly. Prospera, the government’s social development programme to assist households living in extreme poverty, replicates that of previous governments, but with a different name. The programme has more than 20m beneficiaries, providing benefits such as life insurance to women with children under the age of five and full-time female students under the age of 23, ensuring dietary supplements for low-income households, assisting indigenous people whose first language is not Spanish, people with disabilities and special needs, as well as investing in rural communities to assist migrant workers and working mothers, among other projects.

Inflation & Scarcity

GDP growth fell to 2.3% in 2017, while inflation hit 6.7%, the highest in 17 years, with Mexicans’ wallets strained by the sharp rise in fuel prices in 2017 as a result of liberalisation and an end to subsidies. This has also resulted in an increase in the number of people living in poverty to 53.4m, or 43.6% of the total population, with 9.4m people (7.6%) in extreme poverty, according to the National Council for the Evaluation of Social Development Policies (Consejo Nacional de Evaluación de la Política de Desarrollo Social, CONEVAL). CONEVAL defines poverty as not being able to afford a food basket on a minimum salary, which is MXN88.36 ($4.90) per day. The country’s peso plummeted against the US dollar between 2012 and 2018, from MXN13.15 ($0.71) to the US dollar to MXN18.99 ($1.03) in the second quarter of 2018, although this marks a recovery from the lows of MXN21.39 ($1.16) seen in January 2017.

Trump & NAFTA

In addition to violence and insecurity, investor confidence in Mexico has been undermined by the election of US President Donald Trump, and his aims to build a wall along the two countries’ 4828-km border and to renegotiate NAFTA, bemoaning the US trade deficit and a shifting of manufacturing to Mexico from the US. The talks are ongoing, with stumbling blocks including an attempt by the US to adjust local and regional content rules, particularly with respect to the automotive sector, in an attempt by the US to ensure more parts are assembled at home. The trade deal is largely seen as positive for Mexico, with trade between Mexico and the US having increased by some 390% since the deal came into effect, trade between Mexico and Canada having increased by 574% and trilateral trade up 219%. NAFTA trade currently totals more than $1trn. US-Mexico trade reached $616.6bn in 2017, with the US exporting $276.2bn and importing $340.3bn, for a $71.1bn goods trade deficit, a 10.4% increase on 2016. Goods trade increased by 6.3% to $317bn, with vehicles, machinery, computers, medical and optical instruments, and mineral fuels the top imported goods. Agricultural imports totalled $27.4bn, and imports of services reached $24.6bn, up 7.4% on 2016, led by the travel, transportation and technical sectors. US direct investment, meanwhile, has increased four-fold since NAFTA came into effect, and the development of manufacturing centres in the country by US firms, particularly in the automotive sector, has turned Mexico into an assembly and export hub, and created jobs. Almost every single major carmaker now has a plant in Mexico, including Volkswagen, Audi, BMW, Mercedes Benz, Nissan, Kia, Hyundai, Honda and Toyota. This has helped shift the automotive industry from a trade deficit to a surplus with the US, and has made Mexico’s automotive industry important on a global scale.

NAFTA has also benefitted US industries by providing access to the relatively cheaper Mexican workforce and by creating a value chain across the three countries that lowers production costs. It increased Mexican farm exports to the US, but critics of the trade accord have said this has also meant Mexican farmers are now forced to compete with heavily subsidised US agricultural products. With Mexico increasingly dependent on the US as an export market, NAFTA has made the country more vulnerable to a US downturn, as evidenced by the effects of the 2008 financial crisis.

President Trump’s initially aggressive tone, followed by his import tariffs on steel and aluminium, eased in March 2018, with a hint that the tariffs may not apply to Mexico if a new NAFTA deal was struck, but which he appeared to condition to Mexico stepping up its fight against the illegal drugs trade. In mid-2018 media reported that Canada and Mexico were planning to place their own retaliatory tariffs on US agricultural product. The US sending troops to patrol the border in an attempt to stop illegal immigration and the border wall also remain points of discussion.

Diversifying Trade

In March 2018 Mexico was among 11 signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the other nations being Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam, creating the world’s third-largest free trade area after NAFTA and the EU, with a combined GDP of $10.6trn and representing 15% of global trade. The agreement replaces the Trans-Pacific Partnership (TPP), signed in February 2016 but not ratified, from which the US withdrew in January 2017. In April 2018 the US announced that it may consider re-entering the Pacific-Rim trade agreement if there were modifications. While signatory states have expressed a willingness to let the US back in, they appear to be reluctant to change the agreement to President Trump’s design. Although some US lawmakers hailed the shift, there are some union leaders and workers who say that the deal would be detrimental to US industry.

Outlook

The Mexico-US bilateral relationship has been strained as a result of Trump’s presidency and aggressive discourse, including the demand that Mexico pay for a border wall, an insistence on renegotiating NAFTA and the deployment of US troops to the border. With outgoing President Peña Nieto having cancelled two planned meetings with President Trump and NAFTA renegotiations dragging on amid US threats to shelve the deal entirely, the relationship the two nations built up during 24 years of NAFTA appeared to be on the brink of a complete falling out.

Investor confidence in Mexico was further unsettled by President Trump’s claimed dissuasion of the Ford Motor Company from building a $1.6bn plant in Mexico, which cancelled its plans in January 2017, as well as his criticism of General Motors assembling cars in Mexico to sell in the US. However, with NAFTA talks entering their final stretch in early 2018, fears of a total trade breakdown have been largely assuaged.

Mexico and the US are much more intrinsically linked commercially than they were prior to NAFTA, particularly in the energy sector, with the construction of cross-border natural gas pipelines and Mexico’s role as a significant off-taker of the US’ abundant reserves unlikely to be affected by a new NAFTA or no NAFTA. It is possible that a rebooted trade agreement could coincide with Mexico’s new government, led by AMLO, scheduled to take office in December 2018, ushering in new forms of engagement that could help write a new chapter in bilateral relations. Nevertheless, the recent volatility of its ongoing relationship with the US has sounded a warning bell for Mexico, encouraging it to diversify its trade links and seek out new markets and to that end, the recent CPTPP could serve it well.