Mexico: The Trump Effect

Donald Trump clearly has it in for Mexico. His opinion of that country is overwhelmingly negative. Ac­cording to Trump, Mexico has derived the greatest benefits from the North American Free Trade Agreement (NAFTA) by taking American jobs while endangering the safety of American citizens by dispatching hordes of criminals across the US/Mexico border.

Hence, Trump has proposed a 20 percent tariff on goods imported from Mexico, the re-negotiation of NAFTA, and the construction of a wall along the border to stop the flow of Mexican migrants into the US. He has also called for an increase in the deportation of Mexican migrants and a halt to remittance payments made by Mexicans working in the U.S. to their families back home. All of these proposals will be harmful to ordinary Mexicans, who have already experienced a variety of hardships arising from neoliberal reforms and NAFTA.

Current Social Conditions in Mexico: Mexico is not a NAFTA Winner

To grasp the deterioration in social conditions that is likely to occur with the Trump’s policies, it is helpful to highlight the not-so-impressive current situation. According to the Economic Commission for Latin America and the Carib-bean, in 2014 an estimated 41.2 percent of Mexi­co’s population was poor, an increase from 31.6 percent in 2006. Inequality is also high and has been increasing. Between 2004 and 2014, the bottom 30 percent of Mexico’s population saw its share of the national income decline from six to 5.1 percent.1

The very poorest of the poor are the indigenous population, numbering between seven and 18 million, depending on whether speaking an indigenous language or self-identification as indigenous is the criterion of measurement. Located largely in southern Mexico, the indigenous population is engaged in farming activities, producing corn, beans, and rice for local consumption. These people have already been hurt the most by NAFTA and will probably suffer even higher levels of deprivation if Trump’s policies come into effect.

Contrary to Trump’s pronouncements, Mexico has not been a NAFTA winner, although some parts of the country and some groups appear to have done well. There is a sharp regional divide between north and south, and this rift has worsened during the last fifteen years as the northern part of the country has experienced economic growth and employment generation due to its increasing integration with the US economy. Meanwhile, southern Mexico has languished with much higher levels of poverty. NAFTA has not generated anything close to sufficient employment in Mexico. A large proportion of the economically active population continue to work in the informal sector (approximately 60 percent according to the ILO).2 Informal employment is widely understood to be disguised unemployment. Higher levels of poverty and lack of social security protection are the norm in the informal sector.

Authoritarian Mexico, NAFTA, and Worsening Deprivation

Mexico’s problems of poverty and inequality, although arguably exacerbated by NAFTA, preceded it. Unhappily, the Mexican Revolution (1910-1917) did not result in a just political and social order. The Institutional Revo­lutionary Party (PRI), in power from 1929 to 2000, maintained political control through a combination of material rewards to key loyal supporters and repression when all else failed. The transition to democracy in Mexico did not come until 2000. This meant that Canada and the US negotiated NAFTA while Mexico was still under authoritarian rule. This fact would determine what groups within Mexico were the winners and losers under the NAFTA since under authoritarian rule some groups wielded enormous political influence while others were virtually excluded. The most disadvantaged were peasants who saw their social conditions improve the least during the high growth miracle years (1940-1965). Poor farmers were also subjected to greater doses of repression.3 Informal sector workers fared badly as well. Due to these unequal power arrangements, during the NAFTA negotiations representation of the interests of small and communal peasants and workers was notably absent.

With the NAFTA agreement, the Mexican economy changed in very fundamental ways—ways that will make the impact of President Trump’s new direction particularly damaging for Mexico’s poor. From an economy dependent upon the export of agricultural products, minerals, and petroleum, Mexico became an exporter of manufactured products. By the year 2000, 77 percent of the value of exports was manufactured goods, while in 1981 petroleum and petroleum products had accounted for 75 percent of the country’s exports.4 From the 1940s to the mid-1960s, government policy had promoted the growth of domestic industry through high tariffs, quota protection, and other measures.

However, Mexican industry was not export competitive. In line with the dictates of neoliberal thinking, from the mid-1980s the government reduced tariff protection, removed import quotas, and dismantled other aspects of industrial policy, such as requirements for technology transfer and the domestic purchase of inputs. Reliance for employment generation and export expansion now came to rest on the promotion of export processing zones (EPZs). EPZs are designated areas in northern Mexico where the government encouraged foreign (mainly US) companies to invest through such measures as tax holidays and the duty-free importation of machinery and equipment. These companies (known as maquilas) set up shop in Mexico to take advantage of cheap labor and lax environmental laws, and they are the ones that Trump rails against as having transferred jobs from the US to Mexico.

On the surface, Mexico’s transformation to a manufacturing export economy might appear promising. However, in a number of respects it is not. The companies that have invested in northern Mexico are at the low pay, low technology end of Global Value Chains. Mexico is largely engaged in the assembly of components, imported from the United States, with the final product exported back to the US market. The fact that these final products are made of expensive imported components inflates Mexico’s export values, artificially raising Mexico’s trade surplus with its northern neighbour. According to the OECD, using a value added calculation reduces the U.S. trade deficit with Mexico by 50 percent.5 Applying tariffs of 20 percent on exports from Mexico will also hurt US jobs, since U.S. factories produce the inputs for the products that Mexico exports.

The Mexican government claimed that new employment from this foreign investment would replace jobs lost when companies went bankrupt due to the removal of tariff and quota protection. However, though maquila employment expanded rapidly from the mid-90s to the early 2000s, the numbers dropped after 2001 as companies fled to China where wage rates were even lower than in Mexico. Jobs have expanded in the auto industry in Mexico—the one bright spot in the Mexican economy—but this is the very sector that President Trump has targeted as responsible for the loss of American employment. Arguably, low paid employment is better than no employment. However, overall, this strategy has been a poor job producer due to the absence of spread effects; the export processing zone companies buy almost everything they need from outside of Mexico and therefore do not stimulate employment growth in domestic companies. Hence, according to the World Bank, employment in industry at 27 percent of total employment in 1990 had dropped to 23.3 percent by 2012. Employ-ment in manufacturing at 13.4 percent for the 2000-2004 period had dropped to 9.8 percent by 2004-2012.6

While workers lost their jobs and many more were unable to obtain stable formal employment, the hardest hit sector of the population was the small and communal farmers of southern Mexico, particularly the country’s indigenous farmers. In the prelude to NAFTA, the government eliminated the minimal supports provided for small and communal agriculture (marketing boards, credit, guaranteed prices). Poverty rose in southern Mexico, and the country saw the emergence in 1994 of the Zapatistas, a revolutionary leftist political and militant group who declared their opposition to both neoliberalism and NAFTA.

While NAFTA provided for a 15-year phase-in for the reduction of tariffs on agricultural products, like corn, produced by Mexico’s poor indigenous farmers, the government, under pressure from big agribusiness interests, removed protection almost immediately. With the rapid influx of highly subsidized corn imports from the US, there was a loss of over one million rural jobs in Mexico. The damage to poor rural producers propelled migration, particularly from southern Mexico, northward into the United States.

Migration Northward: Driven by Poverty and Violence

The upsurge in migration into the United States, however, was not just due to the poverty arising from economic crisis and restructuring. The increase in criminal violence has also propelled migration, although poverty and criminality are closely intertwined. Both of these issues are central to the Trump agenda, so it is important to recognize the extent to which U.S. pressures and policy choices have fueled them.

Neither drug production nor trafficking is new to Mexico, of course. However, US policy has resulted in an increase in the level of drug activity and violence. The American-supported (and successful) campaign against the Colombia drug cartels was instrumental in causing the centre for drug trafficking to shift to Mexico. The economic dislocation occasioned by the crisis of the early 1980s and market liberalization, combined with the negative impact of NAFTA on farmers, encouraged the poor to become increasingly involved in drug activities. Many corn farmers moved into drug production while unemployed youth found work as paid assassins.

Meanwhile, the militarization of the government’s anti-drug strategy, most notably from 2006, ratcheted up the level of violence as drug traffickers developed ever-larger armies to confront the Mexican military crackdown. The strategy of militarization was strongly supported, indeed encouraged, by US policy, which has focused on production as the root cause of the drug problem as opposed to consumption. The US provided Mexico with millions of dollars in aid to support the defeat of the drug trade through its forceful eradication. Driven by poverty and rising levels of violence, the Mexican immigrant population in the US, the majority coming from southern Mexico, increased from 2 million to 11 million between 1980 and 2006. In 2015, these migrants sent $25 billion US in remittances back to their families—essential to the provision of the basic needs of the poorest Mexicans.

Given all of this, it is very clear that Trump’s Mexico agenda will produce an increase in poverty, deprivation, and criminal violence. The unemployment situation in Mexico, already dire, will worsen with increased trade protection on the part of the US. Factories will close and those that might establish in Mexico will probably not do so. If remittance payments are blocked, Mexican families will no longer receive funds essential to their survival. Sending more Mexican migrants home will mean a decline in those able to send financial support to their families. Increasing desperation will likely increase the level of criminal activity.

The Political Consequences of Trump’s Policies

There will also be important political consequences, ones that are already emerging. Faced with Trump’s various anti-Mexican pronouncements, including a threat to send in the military to help the country’s (weak) leadership rid itself of “bad hombres“ Mexico has witnessed a sharp rise in nationalist sentiment. Current president Enrique Peña Nieto, who appeared to cave to Trump’s threats by politely inviting him to Mexico for talks, has an approval rating of only 12 percent. With a presidential election occurring in July 2018, left populist presidential candidate, Andrés Manuel López Obrador (AMLO as he is widely known) is leading in the polls. AMLO, a fierce critic of neoliberalism and NAFTA, wants Mexico to take a strong stand against the current American administration. He has called for electoral defeat of his country’s corrupt “power mafia” and more jobs through a massive infrastructural program. He has been the most consistent national supporter of the country’s poor corn, bean, and rice farmers, which he says, have been “irrationally abandoned” by past governments. He claims that self-sufficiency in these agricultural products is an essential aspect of Mexican culture.

The mainstream US media is very worried about AMLO, characterizing him as a Mexican Donald Trump or Mexican Hugo Chávez (both leaders reviled by the US establishment). AMLO’s pledge to address the issues of the country’s corn farmers has their American counterparts particularly worried—and they should be. The U.S. corn industry has already lobbied the Trump administration to preserve the benefits bestowed on US agriculture by NAFTA.7 But AMLO, a more than capable politician, will not be cowed. He has a solid base of support and a strong commitment to the welfare of the Mexican poor. As mayor of Mexico City, he was, by all accounts, a competent administrator, implementing a number of social programs, including a popular pension program for the elderly poor and a program to support needy single mothers. He has already been a presidential candidate in two national elections. In 2006, he was defeated by a mere 0.56% of the popular vote.

NAFTA was sold to the Mexican public as an agreement that would bring Mexico into the developed world. This clearly has not happened. Now, the US is abandoning free trade—something that it sold to the Mexicans as the panacea for all of their economic and social woes. The current Mexican party in power was the one that negotiated NAFTA while the other main opposition party, the Popular Action (PAN) Party, has pursued free trade with great enthusiasm. The way seems clear for a left nationalist surge and the election of López Obrador in 2018. The likelihood of an AMLO victory and the difficulties this will bring in achieving U.S. objectives in the re-negotiation has meant that the US is currently pressing to get the NAFTA re-negotiation underway and largely completed before the next Mexican president takes power. However, given the strength of Mexican nationalist sentiment, expressed recently in large-scale national protests, even an early negotiation is likely to be fraught with difficulties should the current government appear to yield to US pressure. At the same time, the deterioration in economic and social conditions arising from the other proposals in Trump’s Mexico agenda will contribute to further political turmoil.

Judith Teichman is Professor of Political Science and International Development, University of Toronto. For more analysis see http://www.judith-teichman.com/blog.

Notes

1 ECLAC (Economic Commission for Latin America and the Caribbean), 2015. Social Panorama of Latin America 2015. Statistical Appendix. United Nations, ECLAC, Tables 4 and 13.

2 ILO (International Labor Office), 2014. Notes on Formalization. Informal Employment in Mexico: Current Situation, Policies, and Challenges. Geneva: Regional Office for Latin America and the Caribbean, 4.

3 Workers in strategic economic activities (petroleum, and mining) and the middle classes (especially the latter), on the other hand, fared much better. Those who did the best were the country’s most powerful business (industrial and agribusiness) interests, who had a pipeline to the highest reaches of political power.

4 Judith A. Teichman, 2012. Social Forces and States. Poverty and Distributional Outcomes in South Korea, Chile, and Mexico. Stanford CA: Stanford University Press, 190.

5 www.oecd.org/sti/ind/tiva_mexico_may_2013.pdf

6 Forbes Staff. “Empleo manufacturero en México cayó en los útimos 12 años.” Forbes México. 19 May 2015. forbes.com.mx/empleo-manufacturero-en-mexico-cayo-en-los-ultimos-12-anos<gs.z8gXWG4

7 National Corn Growers Association, 2017. AG Industry Letter to Trump Highlights NAFTA Successes. www.ncga.com/news-and-resources/news-stories/article/2017/01/ag-industry-letter-to-trump-highlights-nafta-successes

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