11 October 2017

Mexico's Uncertain Future

The economies of few of the world’s largest emerging markets face a more uncertain future than Mexico, as a country that was once seen as a likely high-growth, high-potential market is now facing major economic troubles.  Of course, there are many positive aspects of the Mexican economy.  For example, its location gives it unique access to the 370 million consumers in the United States and Canada that make up the world’s largest and wealthiest developed market.  Furthermore, Mexico is home to large reserves of oil, gas and other natural resources.  However, Mexico’s economy continues to deal with too many negative aspects that have held back its growth and development in recent years.  For example, Mexico’s economic performance over the past few decades has been among the most disappointing of any large economy in the world.  Furthermore, Mexico continues to struggle to reduce its high level of crime and corruption that has prevented many segments of its economy from reaching their potential.  In addition, the Mexican government has failed to enact the reforms needed to boost the country’s economic competitiveness in the face of growing competition from Asia and other economic centers.  Finally, Mexico’s unique access to the US and Canadian markets is in jeopardy as the future of the NAFTA free trade agreement is increasingly uncertain. 

When NAFTA was formed in 1994, Mexico was expected to experience an economic boom, as investment was expected to pour into the country and growth rates were forecast to soar.  However, Mexico’s economic performance since 1994 can be described as disappointing, at best.  While Mexico benefitted from its improved access to the markets of the United States and Canada, it did little to improve its economic competitiveness at a time when China and other emerging markets were becoming major competitors for export markets.  As a result, Mexico has had a very difficult time in sustaining higher rates of economic growth for a longer period of time.  Since joining NAFTA, Mexico has had three periods of relatively high rates of economic growth, but sustaining this growth proved impossible and now, Mexico finds itself in a five-year period of relatively sluggish economic growth.  Meanwhile, foreign investment has poured into Mexico since it joined NAFTA, and while this has led to the dramatic expansion of Mexico’s manufacturing sector (and created huge numbers of manufacturing jobs), it has done little to bolster other segments of the country’s economy.  As a result, Mexico has thus far found it impossible to match the long-term high rates of economic growth that many of its competitors in Asia have managed to record since the 1990s.

While the Mexican economy faces a number of critical issues, one issue overshadows them all.  That issue is the looming threat of a collapse of the NAFTA free trade agreement.  Since taking office earlier this year, United States President Donald Trump has railed against the US’ trade deficit with Mexico and has blamed NAFTA for the loss of manufacturing jobs in the United States over the past two decades.  Now, the US has forced Mexico and Canada to renegotiate the NAFTA free trade agreement and has threatened to pull the US out of NAFTA if its demands are not met.  For the Mexican economy, this is a potential catastrophe.  The obvious reason is the fact that the United States and Canada account for 84% of all of Mexico’s export revenues.  Moreover, most foreign investors are interested in Mexico for its unique access to the US and Canadian markets.  Finally, millions of Mexicans are working north of the border in the United States, and many of them are now threatened with expulsion from the US, potentially reducing another key source of earnings for the Mexican economy.  As a result, any threat to its access to the US and Canada must be viewed as a serious threat to the future of Mexico. 

For Mexico, the country’s economy can go in a number of different ways.  The most optimistic outlook for the Mexican economy would be the result of a combination of the country maintaining its current access to the United States and Canadian markets and the Mexican government enacting serious economic reforms that would boost the country’s economic competitiveness.  This combination would undoubtedly allow for Mexico to record higher rates of sustainable economic growth.  A more muted outlook would involve Mexico maintaining at least most of its access to the US and Canadian markets, but continuing to fail to improve its economic competitiveness, resulting in economic growth rates that remain relatively low, as they have been in recent years.  Finally, a very pessimistic outlook would see a collapse of NAFTA and the loss of Mexico’s unique access to the US and Canadian markets, a development that would push Mexico into a deep recession and see it lose many of the competitive advantages that it held over its Latin American competitors.  This could lead to even more political instability in Mexico, a development that would be a major setback for the Mexican economy.  Therefore, it is clear that Mexico is facing a crucial moment in its history, one that could spell very bad news for this important country of 125 million people.