Mexico backed into economic corner as Trump ups protectionist pressure

With its currency in freefall, inflation rising due to gasoline and electricity price hikes, recurring spending cuts, watered-down energy reforms and the international financial markets jittery, the 5% GDP growth that President Enrique Peña promised when he took office in December 2012 has turned into a mirage.

The auto industry has been one of the main beneficiaries of the North American Free Trade Agreement (NAFTA), signed 22 years ago. Since then, Mexico’s car production has increased threefold, while exports to the United States and Canada have grown by more than 80%. Along the way, it has become Latin America’s leading car maker and the world’s eighth biggest, above France and Spain.

The free trade ecosystem has created an interconnected production chain, fed on one side by technology and added value, and on the other by logistics and low salaries. Seventeen factories owned by the world’s leading brands are located in Mexico.

Almost 80% of the more than three million cars produced in Mexico end up across the border

The auto sector generates close to one million jobs in the country, most of them on assembly lines; the skilled and higher-paid positions are overwhelmingly held by Europeans and people from the US and Japan. Trump wants to change that and fulfill his election pledge to working-class whites by bringing their old jobs back home. Scrapping NAFTA, as he has proposed, would hit Mexico like an earthquake of unpredictable consequences.

Almost 80% of the more than three million cars produced in Mexico end up on the other side of the border. The sector represents more than 3% of GDP and absorbs 10% of foreign direct investment (FDI). Ford’s decision not to invest $1.6 billion could be copied by other car makers: Kia, Toyota and BMW all have plans for Mexico. Financial analysts Banco Base predict a 15% falloff in FDI over the course of 2017.

Exports have been falling sharply in recent months, 9% down year on year at the end of November, according to the latest figures from AMIA, which represents the Mexican auto industry. The domestic market has so far held firm due to cheap financing conditions. But the Bank of Mexico’s interest rate hikes will make it more costly to borrow.

The auto industry has been one of the main beneficiaries of NAFTA

“The national market continues to grow rapidly; but it isn’t big enough to compensate for the fall in exports,” reads a recent survey by BBVA Bancomer, which forecasts GDP growth of 1.8% for this year - not enough to bridge the inequality gap and pull more than half of Mexicans out of poverty.

Five sectors make up 60% of the Mexican economy: manufacturing, trade, real estate, construction and mining. All five have slowed down over the last year. The peso has lost 50% of its value in the last two years. Ford’s decision prompted a further fall. It reached a historic low, and could fall even further, say the analysts. The biggest risk is that instability will spark capital flight.

On the positive side, the country’s reserves are still in good shape, while remittances are rising fast, prompted paradoxically by fear of what Trump will do when he takes office.

English version by Nick Lyne.