International Dossier. Wipe out NAFTA and start from scratch?

In his first week in office, U.S. president, Donald Trump reiterated his demands to have Mexico pay for the construction of the border wall and to accept renegotiation of the North American Free Trade Agreement (NAFTA). For Trump, the only viable negotiation, according to him, is that which modifies NAFTA to suit the U.S. recovery of jobs and investment that were transferred into our country over the last twenty-two years.

In the light of his demands, Mexico responded by sending a delegation of senior officials to Washington so as to negotiate the bilateral relation. Trump, being true to his nature, received them with the issuance of executive orders to start with the construction of the wall, harden treatment of illegal immigrants and by announcing that Mexico would pay for the construction of the border wall.

Such insolence changed something in our country. President Enrique Peña Nieto decided to call off his already scheduled meeting to the U.S., while the Mexican society expressed its solidarity with his position. Domestic and foreign responses have applauded the Mexican president and left, an unsurprised Trump, with an ample rejection of his attitude towards Mexico. Having learned from this lesson, and in spite of the fear of the Mexican business class, we must follow this path and say “no” to the renegotiation of NAFTA, unless Trump publicly renounces to his protectionist demands. With this stand, Mexico would be in better conditions to establish a successful path as our fears of the possible exit of the U.S. from NAFTA are, largely, the result of a generalized lack of knowledge of the benefits derived from the agreement for the U.S. as well of our naivety to think that Trump will be reasonable at the time negotiations take place.

To begin with, about half of the bilateral trade between our countries is created by the exchange of inputs between companies with headquarters based in the U.S. The impact of renegotiating the agreement under Trump terms would adversely affect their competitiveness, production and estimated profits. This should be enough to turn them against the demands of the U.S. president and to make them our allies in term of trade.

Secondly, although the U.S. represents 80% of the Mexican exports market, we are the second U.S. exports market. For state like Texas, California, New Mexico, Michigan, South Dakota, Nebraska and Missouri we represent a key customer that has a direct impact on their economical welfare. By working hand in hand with the local governments of these states we could define a program to jointly face the restrictions enforced by the U.S. administration against the commerce between our nations.

Thirdly, around 70% of our exports are based on six business sectors: transport equipment, auto-parts, electronic equipment and computers, electric equipment, machinery (non-electric) and hydrocarbons. The combination of few localized sectors with major export companies would allow the Mexican government to design public support policies to ease the negative impact of the trade measures announced by Trump; for instance, to design of a program that defines the whole of Mexico as a special economic zone (SEZ).

Fourthly, over the last 15 years, foreign direct investment (FDI) in Mexico reached over US$375,000m, which enabled us to build an installed production capacity that cannot be put to a halt. This will result in a negative impact on employment, however it will not be to the extent many national businessmen and politicians fear.

Fifthly, this economic integration has contributed to an unprecedented social, cultural and business inclusion in the history of our countries. Mexicans take almost 13 million annual trips to the U.S., while U.S. citizens take over 20 million trips to our country. I the light of this human exchange it would impossible not to find people interested in avoiding any affectation to their businesses amidst a failed negotiation of NAFTA.

What is there to do? The correct strategy implies to say NO to Trump’s insolence. This answer should be supported by three key actions effective with no further delay so as to equate the negotiation arena.

First and foremost we should not compromise our principles. Our country’s vocation for free trade should not be violated by accepting negotiations that weaken it. We should resist the temptation of accepting solutions based on the imposition of tariffs to the exports or imports of goods coming and going to the U.S., for the sake of the permanence of this country in NAFTA.

We should make it absolutely clear that the infringing country is the U.S. and that we will not accept to be labeled as such. However, in the light of the fear of the Mexican business class and in tune with the Mexican adagio “a bad deal is better than a fight” we could fall into taking deals aligned with the demands of the Trump administration and accept quotas and tariffs to imports. Such a decision would question the strength of our convictions, as it would alienate new investments and affect the technological production and welfare of our country. In the light of the political weakness faced by our government and the wish of the business sector to minimize losses in the short run, the temptation to take this deal would be intense and hardly easy to resist. Accepting it, however, would fuel the protectionist rhetoric that seeks to reinstate policies that support our national industry, the worst of the possible futures for our country in the run for the 2018 presidency.

The second action should be the definition of an industrial and fiscal policies program, alongside the coordinated participation of the companies that participate in our foreign trade, to counter various scenarios ranging from the feared unilateral exit from NAFTA to the enforcement of arbitrary rules such as the 20% border tax or 35% tariffs that have been mentioned by the current U.S. administration. We should expedite this action as it would lend credibility to our NO response to Trump.

Finally, Mexico must initiate a global offensive in defense of free international trade. Our international reputation and our officials proven capacity in the agencies in charge of the commercial and international negotiations before the World Trade Organization (WTO) and the diplomatic negotiations in the Ministry of Foreign Affairs (SRE) credit our country for such task; the vigorous defense of free international trade principles by forging new allegiances with China, India, Brazil and Argentina, as well as with the European Union. Doing so, would prevent that our negotiation with the U.S. remain at a very unfavorable isolated bilateral level, which would be very negative for Mexico.

Yet,… there is no time to lose.

Former Ministry of Economy and Foreign Affairs, Headmaster of the University of the Americas Puebla