Mexico Didn't See Trump Coming

like Mexico didn't even see this coming. The country has its own election next year, and populous candidates are on the rise there as well, not just in the United States. Welcome to Bloomberg Benchmark, a show about the global economy. I'm Daniel Moss, an editor for bloomboag View in New York, and I'm Scott Landman and economics editor for Bloomberg in Washington. How is Mexico court napping? Joining us as Shannon O'Neil from the Council on Foreign Relations, where she's the Nelson

and David Rockefeller Senior Fellow for Latin American Studies. Shannon, Welcome thank you for having me. Was Mexico actually court napping, I do think they were. I think both the government believe that NAFTA would go on forever. This was a stable agreement, and there are reasons to think so. It's already been in place for twenty three years. It's become a big bolster of their economy and really their legal system, particularly when it pertains to contracts to business, to the

private sector. And you also see the private sector was resting on their loyals here too. They had made a big push in the early nineties to get NAFTA passed, and then they all went back to their businesses. They all went back to their day to day ways of doing things and thinking about profits and losses and all of that, not thinking about the need um, not even recognizing the need to defend this agreement that allowed so much of that to happen. What would be the economic

effects on Mexico if NAFTA collapse? What are the common estimates for GDP or or how much of its economy is just tied to NAFTA at this point. You know, I've seen a lot of estimates from different banks come out and they range really widely. Some say, it might just take off half a percentage of point from GDP. Others think it would lead Mexico into recession. So there's a lot of uncertainty about what would happen. But one

thing you've seen in Mexico that's quite interesting. Mexico for the last twenty plus years has grown something like two two and a half percent a year, so not horrible, but not spectacular, right, not not a big growth, not classic em it's not classic emerging market. But what's interesting is if you get beyond the national numbers and you look at the state level, you see a huge divergence.

And so the northern States, the NAFTA oriented states, they have been growing at six, seven, eight, even ten percent a year. So these are Asian tiger rates. It's the southern states, the ones that are marginalized, that aren't connected to the United States, that aren't connected to the global economy through NAFTA or other trade agreements, they are stagnating

or even in decline. So the North South divide. The sounds kind of familiar, it does, indeed, but it is very did you see the benefits of NAFTA there, right, the modernization, the more competitive global industries, and how much Mexico can grow in part because of the trade agreement. So it is more important than just say that the overall national numbers would suggest. Shannon, did Mexico have these kinds of supply chains with the United States and Canada

before NAFTA was formed? I mean, can you give us a sense of how much has been built up in Mexico and how important it is not just to the North American economy but the global economy since NAFTA was signed more than twenty years ago. That is really the big change in Mexico US and somewhat Canadian trades. So we saw we've seen in the twenty plus Yearson's NAFTA trade itself quadruple and that's a huge shift. But really

what's changed is the nature of this trade. So before NAFTA, eight percent of Mexico's exports went to the United States. Today eight percent of Mexico's exports go to the United States. But they're very different exports. Before it was oil, it was other commodities. Today it is the pieces and parts and components of these supply chains. And telling statistic is before NAFTA, about five percent of Mexican trade North was sort of these intermediate goods, right, the pieces and parts

that go together to make something. Today it is roughly by some estimates, So we've seen a huge shift in this, and it is all sorts of industries. It's the car industry, it's aerospace, it's medical equipment, it's electronics, it's food products, process food, it's all kinds of industries where you see this integration. So that means that the United s dates is exporting to Mexico. In fact, it's our second largest

export destination, just second to Canada. But they're also receiving imports from Mexico to the United States, and so that tie is very different than twenty plus years ago. So, Shannon, you and I both participated in the Mexico Business Summit last month, and one line that we heard over and over again was, wait, we thought we got married in the early nineties and we didn't have to do anything else.

Now we've got a war room where brainstorming, we're trying to influence senators and congressmans, like, how is this blind spot able to happen? I think people took the status quo as the status quo, that it was unchangeable, or that there was no one who would want it to change, And from the Mexican point of view, NAFTA has actually been fairly politically popular. You look at opinion polls, and

the majority of Mexicans think it's a good thing. Many Mexicans, as we know, have family members others in the United States. They see the United States increasingly as a partner, as a friend. Those that have relatives living here or friends living here feel more warmly to the United States than those that don't. So from the Mexican point of view, they thought this was all good, this was a benefit.

They saw it as a win win for the United States and Mexico and couldn't imagine that the United States would want to tear it up. And all of the careful economic studies show that it's a net benefit for the United States. Now, of course, we know that net benefits hid particular losses for particular people, right concentrated losses

for more diffuse benefits. But they were focusing on the net benefits and not realizing that there may be this political movement which we've seen here in the United States. For those that have lost, whether from this or from other things, NAFTA has often become the focus for the bad that's happened to many Americans, So it's a proxy

for whatever might be bothering exactly. Shannon, can you tell us a bit about how the political rhetoric in the United States, and I guess the actual policy move to start renegotiating have to has affected the political situation in Mexico. I mean, how many people in the US know that there's an election in Mexico next year and if they don't, should they They should know? And I think not enough. No, either in the general population or perhaps even people in

our own government. The United States government aren't really thinking about the ramifications from Mexico's election. So next July, Mexicans will go to the polls to elect not just the president, including their president, but every senator, every representative, hundreds of local posts, so over three thousand positions overall, which is

the biggest election in Mexico's modern history. So we could see, depending on how these elections pan out continuity with Mexico, a stable democratic Mexico, one that's market friendly, one that's US friendly, or we could see a see change in Mexico's politics turning to a more protectionist policy. Back to some of the policies of the nineteen sixties or seventies, and perhaps a set of leaders in position that are

more anti the United States. And one thing the rhetoric coming out of the United States, not just NAFTA, but the general talk about building a wall or denigrating Mexicans and Mexican immigrants or Mexicans in general, is it has led to a resurgence of Mexican nationalism. Um. You know, they're upset about their own dignity, about their sovereignty. And we've seen the leading candidate, man named Andres Manuel Lopezo Bodor, who comes from the left, is more of a populist

type leader. We've seen him play very well on these sort of anti American sentiments and standing up to Trump saying he is the one who can stand up while others can't. So broadly, he's like the Bernie Sanders of Mexico. The Bernie Sanders are perhaps the Donald Trump will see. But the general point is, you know, we used to worrying about the impact of populist politics in the United States and the threat that poses to the international economic system.

Should we be worried about popular threats from Mexico rather than the United States. I think we should worry about a shift in Mexico in terms of its politics, particular, if it moves in a direction that's much more suspicious of the United States, are much less likely to cooperate. And this matters first and foremost on the economic side. What we've been talking about, we have so many companies, so many of their workers who depend on exports to Mexico.

That is where they're livelihood. And as we were talking about, these supply chains that are forming whole industry sectors of the U S. Economy are globally competitive today because they have parts of their operations in Mexico, parts in the United States, and some have also parts in Canada, and

all of that came about because of NAFTA. But we should also worry about working class Trump voters know that, I think very few and one of the most one of the most important sectors are the ones that will be hit most quickly is actually the U. S. Agricultural sector and agricult real States were you know, almost uniformly went for Trump. But this is one of our biggest exports to Mexico. We send eighteen billion dollars a year of different products, whether it's pork or beef, or soy

or potatoes and all sorts of other agricultural products. They are some of our biggest consumers and that will be hit immediately if we end NAFTA. If NAFTA actually does collapse, would Mexico be able to shift more of its exports to other countries around the world. Is it competitive enough in the export market to do that or is there a serious risk that you know, they won't be able to refocus their economy or refocus their trade and things

will get really bad. You know. As much as we talk about globalization and global supply chains, geography is still incredibly important in the way the world's economies work. And so I don't see a future where Mexico is totally detached from the United States. But they are starting, perhaps the bit belatedly, but they are starting to look past the United States and what could they do to diversify exports and imports frankly as they go forward. And so

Mexico is one of the most open economies already. It has free trade agreements with over forty different nations, so not just the United States, but also the European Union and others. Um they are continuing to participate in the Trans Pacific Partnership negotiations the t p P. There's only eleven now instead of twelve, but they're still there and they see that path forward as one where perhaps they

could find a way to diversify their base. But in the end, I mean, as I said before and after exports came to the United States from Mexico, they continue to be that number. I do think you can move that percentage somewhat, but United States and Mexico will always be tied economically as well as in a whole host of other ways. Question we both heard a lot at the Mexico Business Summit was is there a link between the success or failure of tax cut legislation and NAFTA.

You know, it's hard to divine what's going to happen with the Trump administration and how it makes its decision

process from the outside. But I do think as we look at the U s electoral process, we head into midterm elections coming next November, just a year away, and the Republicans, those that want to keep their seats, need something, They need something to run on, and so far they have been frustrated in their ability to pass almost anything, So tax cuts seems to be the most promising of those, though it's still a very hard road to home, and many have been talking, as you just mentioned, NAFTA might

be the thing that he could that Trump could do to give something to his base, to show that these first you know, two years, have they've seen successes. So I think that is the real question, and what would hold the Trump administration back, in my view, is all of these governors, local representatives, mayors and businesses that are slowly on. We talked about the Mexican side not really being waking up to the challenges or what would happen

if NAFTA disappeared. I think it's been almost worse here on the U S side. There's so many US businesses and particularly as I was menting, the agricultural sector, who really had no idea that Mexico was their biggest client and that the benefits and that free trade back and forth, the tariffs that would come up would make them uncompetitive

those markets. So where you're going to see, we'll see tax reform go through maybe first quarter of next year, maybe not, we'll find out, but I do think that's when you will see a lobby of these business leaders, of governors of others that would be hit very hard in particular sectors with NAFTAS demise start talking to the Trump administration and asking him and others not to end it. So that's kind of a reprieve period while they try to get tax cuts through and signed, and then the

focus will again shift to NAFTA. I would expect that because the Trump administration, if they want tax cuts, they need these Midwest states, right, they need them to go along. And so if you're at the same time undermining the agricultural sector, undermining the auto industry, undermining some of these other businesses that rely on supply chains, it's hard to get their vote for your tax reform. So I think

there's a trade off there. But then you could see a revisit, say second quarter of next year, which is exactly when Mexico is in full campaign mode for their July elections. So Shannon, right now, the NAFTA talks are not going that well. To say the least. The US has taken a hard line into the talks. Mexico and Canada have resisted some of these pretty tough proposals that the US has been making. At the same time, the talks have not collapsed. They extended them until next year.

You're talking about how they actually could work out in some way. What's your best guests as far as the result here? You know, I think it's hard to make a real legitimate guest to know what's happening. But I would say one scenario, perhaps the most likely scenario but not with a huge probability, is that NAFTA sort of

muddles through. We see these conversations continue. Neither the Mexicans or Canadians walk away from the table, but they do stand pretty firm on some of these quote unquote poison pills, things that the US has put on the table that they just can't accept. Then next March April, the Mexicans say, you know, we're in full campaign mode. You're going to

have to negotiate this with our next president. At the same time, the US Congress, the last thing they want to be doing is negotiating a trade agreement as they're out campaigning in their districts for for re election. So there's a possibility. Two eighteen. Everybody takes a deep breath, everybody. They continue to talk, but it's not intense negotiations and it's not really till two thousand nineteen that we get back to the table. But that gives everybody a little

bit of breathing room. Um, and it allows NAFTA in the meantime to to continue to be the law of the land. That we've talked about agriculture, let's talk about autos and NAFTA is as much about autos as anything else. But is it possible we're kind of missing the big picture here. Isn't China now the largest auto How does that fit into this? It is right, this has been the iconic US and now North American industry, the auto industry. But you think of the big three, you think of

this is really the leaders in this industry. Um. But a funny thing has been happening over the last decade plus. Actually, China is the biggest auto industry in the world. And when you look at per capita GDP growth, when you look at demographics, it will continue to grow while the

US may not. And so as we think about the future of autos and we think about NAFTA, NAFTA has allowed with different production in different countries at different you know, different skill sets, different wages, and different technologies and like has allowed autos to remain a North American industry. If it disappears, and particularly in some aspects of the car industry, which would have much higher tariffs, we might just see a wholesale departure for China, because one, they sell more

cars there and they will in the future. And too, if you're already gonna pay the tariffs coming in, it doesn't make a ton of sense at least for particularly car smaller cars, not trucks and pickups are like it makes much more sense for on an economic basis, for Ford, for GM, for others. Make them in China, sell them where where your real market is, and then you can export some here for the United States for those kind

of consumers. But what that does is it takes away production not just in Mexico, but all of those suppliers who are also here and assemblers who are also here in the United States. But I thought the Trump administration was all about stopping China eating America's lunch as well. Might they ultimately have to choose between which is the lesser evil, and it's that Chinese argument something that ultimately could sway the decision. This is the big question I

think for people who watch free trade agreements. I do think you look at at economists and other reports that have been done, and China has in many cases played unfairly in the world trading system um to the detriment of u S interests. But we're picking on Mexico, We're not picking on China. Now we can discuss why that is. There's lots of geopolitical reasons there. North Korea feeds in as well, but it is an interesting dynamic and one

that is in my view, quite misplaced. If you really want to set free your trade agreements around the United States or around the world, we should be addressing China. We shouldn't be addressing Mexico. And in fact, NAFTA, even though it needs in a modernization and update, is actually a model for how the United States would want the world to play, rather than one that we should be disparaging. Have we just concluded that NAFTA is really about China.

It's becoming more and more about it China, And if we keep NAFTA, I do think it's a bulwork against a Chinese manufacturing hub that's there. It gives us in the United States a competitive platform to compete with goods that are coming out of Asia. If we lose NAFTA, then we lose some of that competitiveness. Shannon, thanks for sharing a perspective with us. My pleasure, Ben Shamonk will

be back next can. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app, as well as Apple Podcasts, pocket Casts, and stitchert While you're there, take a minute rate and review the show so more listeners can find us and let us know what you thought. You can follow me on Twitter at Moss Underscore, Eco, Scott at Scott Landman, and Shannon Shannon Ka. Benchmark is produced by Sarah Pattison. The head of Bloomberg

Podcast is Francesca Levie. Thanks for listening. We'll see you next time.