Is Mexico's President Pushing For "Mexit" From Trade Pact?
In irking Mexico's chief trading partners with decisions affecting energy firms, the country's leftist President Andrés Manuel López Obrador is tinkering with the free-trade pact that is the very engine and ballast of Mexico's vast, and vulnerable, economy.
MEXICO CITY — The key to having a nuclear bomb is to never use it. Its fundamental value is in its deterrence of other powers wielding the bomb. The same applies to negotiations between governments in areas like investments or trade. Clearly the risk is inferior, as the country will not face physical destruction, which may be why Mexico's President Andrés Manuel López Obrador (AMLO) sees no risk at all in raising the stakes in his spat over energy with the United States and Canada — the country's paramount free-trade partners.
AMLO already incurred a $16 billion bill for the country cancelling an airport project, without a political fallout. The devaluation many feared did not happen and the government managed to somehow sweep the cancellation's direct costs under the carpet. It was its indirect costs that could not be hidden though — in the form of absent investments, jobs not created and growth that never materialized. These may seem unreal to people in the administration, but are palpable to ordinary Mexicans to whom prospering seems an increasingly distant, if not impossible, prospect.
The lesson President AMLO seems to have drawn from the Texcoco project is that his actions have no negative consequences. Yet in retrospect, clearly there were consequences, and big ones, as the country's general paralysis suggests. Furthermore, the airport was supposedly a singular case as a project conceived under the previous administration, which AMLO had lambasted (as costly) when running for the presidency. He could claim his decision was legitimated by his earlier warnings — regardless of the cost of cancelling a half-built complex.
Now, a similar affair has emerged in the dispute over energy (following decisions taken here that favor Mexico's own energy producers). Almost five years into his presidency, the president cannot assume that our trading partners, businesses concerned, and potential investors will accept another volte-face simply because, again, it relates to laws from the previous administration.
The trilateral treaty in force or USMCA (formerly NAFTA), was ratified inside this six-year term and is the law. The Mexican government has two options here. One is to find a solution of sorts allowing all sides to save face, as happened with another unnecessary spat over gas pipelines in 2019. The other would be the nuclear option: to leave USMCA.
Aerial view of the Texcoco project.
Time to leave ?
Some are already talking of a Mexit, alleging the cost of the United Kingdom's Brexit divorce from the EU was not excessive. The AMLO presidency has — thankfully — yet to add this coup to its achievements, but there are relevant points of reflection and comparison with Brexit.
For a start, Brexit was the fruit of extensive, lengthy debates followed by an election where a majority emerged. The United Kingdom is furthermore a consolidated nation, with longstanding institutions that assure stability. In spite of these, the costs of Brexit are piling up even in the slightest things: the rear lights of trucks, food labelling, the frontier between the EU and Northern Ireland in the Irish Sea, etc.. Every little cost is reducing Brexit's supposed benefits.
Some are already talking of a Mexit.
For Mexico, the NAFTA treaty was conceived as a means of conferring certainty to economic agents. Breaking it would mean breaking that confidence — which is akin to pushing Mexico into a spiral of self-destruction. NAFTA was the Mexican government's solution to the abusive expropriation of banks (in 1982). It sought and found abroad that source of trust and credibility lacking inside the country, and the U.S. was ready to provide it. Unfortunately since it came into force (in 1994), Mexican governments have done precious little to boost or create other sources of internal trust and credibility, which leaves us in precarious conditions.
When banks were nationalized amid desperate circumstances, Mexico had few economic links with the world, but even then President José López Portillo's heroic gesture had enormous costs, including hyper-inflation. Breaking with the USMCA today would prove far more costly given the depth of existing ties and the treaty's effective role as the engine of our economy. It would be suicidal. As for this president, the opprobrium heaped on López Portillo would be as nothing compared to the backlash AMLO could expect.
Another way of seeing the mess the government has (gratuitously) waded into is that NAFTA was conceived anticipating the arrival of a president intent on smashing the treaty. The treaty and the institutions formed around it were akin to Tony Blair's first actions on becoming Britain's prime minister. He made the Bank of England independent, with the aim of reassuring businesses and the public. Instead of pushing the destruction button, how about if AMLO were to use USMCA to replace China as our northern neighbors' privileged trading partner? That would be the solid basis for national economic growth, a promising future, and why not, even his cherished reputation.
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