Smaller and poorer, Mexico can still make the U.S. economy feel significant pain should Donald Trump choose to exit the North American Free Trade Agreement.
Trump and his Mexican counterpart, Enrique Peña Nieto, have traded barbs on NAFTA, immigration and who pays for a border wall Trump wants to build. They have set a loose May date to begin discussions about a revised NAFTA, and both sides have threatened to walk away from the pact.
For Mexico, whose economy depends more on trade than does the U.S. economy, the costs are obvious. Its products would become more expensive to U.S. consumers in the world’s largest and most competitive market. But much of the trade going north is actually intra-company trade, so hypothetically it’d also get more expensive for Ford to manufacture a car or Caterpillar to make tractor parts.
And while Mexico is the smaller economy, it could insist on revisions that would hurt the U.S. farm belt and make representatives in Congress feel the consequences of a deteriorated trade relationship.
If NAFTA rules go away, Mexico would have the right under World Trade Organization rules to instantly slap a tax of up to 50 percent on some U.S. farm products. The United States, by design of its trade laws, has limited room to hit imported products.
Mexico can also turn elsewhere for some key imports it gets from U.S. farms.
“Mexico could certainly decide to look to NAFTA partner Canada – or even south to Argentina and Brazil – to supplant U.S. imports of grains, particularly wheat, and meat,” said Arturo Sarukhan, Mexico’s ambassador to Washington from 2007 to 2013, a high-water period for anti-narcotics cooperation that could also fray if relations worsened.
Much of the farm products the United States sells Mexico are above and beyond what’s produced or grown for U.S. consumption. If it stopped going to Mexico, it could lead to an oversupply and falling prices at home. Think corn, poultry and pork products, which all flow south in large volumes; Mexico is the second largest market for U.S. exports.
“It’s a very important market for the Midwest,” reminded Jaime Zabludovsky, who was one of Mexico’s chief trade negotiators in the early 1990’s when the NAFTA was forged.
Trump has said U.S. negotiators from the George H.W. Bush administration were duped by Mexico into a bad trade deal. Zabludovsky appreciates the compliment but said it is far from true. It was Mexico that had to adapt to the stringent standards and rules that were already in place for trade between larger and richer Canada and the United States. Mexico could no longer change the rules of the game overnight to protect a favored domestic industry.
There’s another little known advantage Mexico enjoys if the parties walk away from NAFTA: Mexico’s president does not need to get approval from his Congress is he wants to re-impose taxes almost instantly on U.S. products. Under NAFTA, most taxes on trade, called tariffs, disappeared over a 20-year horizon.
The legislation written to enact NAFTA gave the U.S. president the okay to do away with tariffs as part of the deal. It said nothing about reinstating them. The U.S. Constitution expressly gives the legislative branch, not the executive branch, the power to regulate foreign commerce.
“This could be done in Mexico without having to go through our Congress,” noted Zabludovsky, who expressed surprise that the United States would want to leave a deal that many Mexicans think favored the larger neighbor.
Trump held discussions Thursday with key lawmakers about trade and NAFTA. House Ways and Means Committee Chairman Kevin Brady, R-Texas, whose panel has jurisdiction on trade deals, said in a statement that portions of NAFTA “should be updated and improved” through negotiation.
“We also spoke about the importance of new markets for our manufacturing, agriculture, and services sectors and modernizing trade agreements so that they work for our workers and our country,” Brady said, hinting precisely at the importance of Mexico to many U.S. exporters.
The rough patch might actually lead to better trade talks, offered Antonio Garza, who U.S. ambassador to Mexico from 2002 to 2009.
“It’s good if both know where the red lines are,” he told McClatchy.
Exiting NAFTA also would have energy implications. Secretary of State Rex Tillerson, who assumed his post Thursday, could see the erosion of a deal he oversaw as the CEO of oil behemoth ExxonMobil Corp. that made Exxon part of a consortium that in December won a Mexican government bid to drill a deep-water well in the Gulf of Mexico thought to contain more than 1.4 billion barrels of crude.
Like many other products, oil and its related products move in both directions. Mexico exported about 600,000 barrels per day of crude oil to the United States during the first 10 months of 2016. If that was hit with higher taxes, Mexico could put it on a ship and sell it elsewhere.
In the other direction, the United States shipped about $14 billion worth of refined oil products into Mexico in the first 11 months of last year, and $2 billion worth of natural gas. The extra fuel products could be absorbed in the U.S. markets should Mexico slap on tariffs, but natural gas moves through pipelines and any disruption of products and pricing could really hurt U.S. natural gas producers in Texas and elsewhere.
“It would be bad news for producers across the United States. It would crater prices,” warned Kevin Book, managing director of ClearView Energy Partners, an energy research consultancy that compiled the data on two-way traffic.
Coal and electricity also are overlooked components of NAFTA trade, noted Elizabeth Rosenberg, an energy expert and senior researcher at the Center for a New American Security, a nonpartisan security think tank in Washington, D.C.
“There is quite a good bit of energy connectivity along the U.S.-Mexico border,” she noted, cautioning a NAFTA collapse could “get expensive for the constituencies that currently benefit from that power and energy trade in that region.”
Katie Glueck contributed to this article.