There is now doubt that the Mexican economy is heavily dependent upon NAFTA. The Mexican economy was battered initially when Donald Trump threatened to withdraw from NAFTA. The latest round of the renegotiation meetings between the governments of Canada, México and the United States ended with Canada and México telling the Trump administration that they are willing to continue to negotiate but will not accept a sunset clause in the accord nor accept Trump’s demand for changes in the “rules of origin” for automobile production. The Trump administration insists that its proposals for a sunset clause and rules of origin must be part of the renegotiation while Canada and México disagree. With the insistence of the Trump administration on the poisoned pills and the unlikelihood that the negotiations will end prior to the Mexican presidential elections in 2018 and the U.S. mid-term elections, it is likely that the Trump administration would start the unwinding process for NAFTA soon after. The question is, can México survive?
Before we address the central question, it is important to note that although Donald Trump has signaled his willingness to end the trade accord, there are powerful forces both in the national business community and in the Republican establishment that do not want NAFTA to end. Trump must negotiate with these two groups to pass his much-needed tax reform package. Since Trump has failed in repealing Obamacare and in securing funds for the U.S.-México wall, Trump needs a legislative win in tax reform to keep his base in line. Therefore, it is unlikely Trump would end NAFTA prior to securing the tax reform legislation he desperately needs.
However, even if Donald Trump decides to begin the process to end NAFTA, or withdraws later, the trade accord requires a six-month ramp down process. Additionally, because of the intricate supply chain in the automobile industries and other manufacturing activities, substantial trade between México and the United States will not end even after the six months of the NAFTA wind down period.
Upon the withdrawal of the United States from NAFTA, the World Trade Organization (WTO) rules would kick in. Trade between the two countries would be governed by the WTO. This means that even if Trump were to order the withdrawal from NAFTA, it would be years before trade between the countries would substantially change. Even then, powerful lobbies, such as the car industry would carve out special niche legislation for their sectors.
But how would México’s economy deal with a post-NAFTA scenario?
México’s economy is substantially dependent on its exports to the U.S. under NAFTA. However, since the beginning of this year, when Trump began threatening to withdraw from NAFTA and the continued attacks by the Trump administration on México, the Mexican economy is expected to grow, instead of contracting. This even after the earthquakes and hurricanes this year.
Several analysts have pegged México’s economic growth to between 2 and 2.6% of GDP. This is after the threats by the Trump administration and the various earthquakes and hurricanes. However, Reuters recently reported that there likely would be “small contraction” after four years of growth. But analysts say the contraction will be short term as México moves to repair the damage from the earthquakes and hurricanes.
But NAFTA has been key to the Mexican economy, even under the Trump administration. Both Canada and México are now seriously considering life after NAFTA. There is no doubt that México’s economy would be battered by the withdrawal of the United States from NAFTA, however, the extent may not be as dire as initially suggested.
México’s economy has been resilient under the Trump threats and the natural disasters. The Mexican government has been actively seeking to expand its export markets since Trump took office ten months ago. Additionally, even if Trump were to start the withdrawal process, it will be at least a year, but likely more, before the full effects on trade translate across the North America continent giving México additional time to negotiate side deals with the U.S government for specific commodities and continue to grow its trade markets across the globe. The resilience of the economy the last ten months demonstrate that the Mexican economy may rebound from the collapse of NAFTA, if necessary.