Mexico set to squander gains of USMCA

The United States-Mexico-Canada agreement (USMCA) takes effect on Wednesday. After years of intense negotiations, cajoling, and sometimes outright intimidation, the Trump administration’s signature trade negotiation replacing the North American Free Trade Agreement (NAFTA) heads for implementation. Mexico’s headstrong leader, Andrés Manuel López Obrador (AMLO), will make the first international trip of his presidency to participate in a crowning ceremony of sorts with his US (and probably Canadian) counterpart at the White House.

Fortuitously, the USMCA’s implementation coincides with a major shift in North America’s business climate due to the coronavirus pandemic. US and Canadian businesses have shown genuine interest in “nearshoring” their manufacturing and relocating their post-pandemic supply chains closer to home. However, Mexico under AMLO appears to be entering a dark period of economic decline and spiraling violence. The triumphal rollout of the USMCA isn’t likely to change this trajectory.

Mexico's President Andres Manuel Lopez Obrador speaks during a news conference in Ciudad Juarez, Mexico January 10, 2020. REUTERS/Jose Luis Gonzalez
Mexico’s President Andres Manuel Lopez Obrador speaks during a news conference in Ciudad Juarez, Mexico January 10, 2020. REUTERS/Jose Luis Gonzalez

The coronavirus continues to cripple the main pillars of the Mexican economy — tourism, energy production, and manufacturing. The country’s economy could contract 9 percent this year, and more than 20 million Mexicans could slip into poverty. According to an internal government report, the pandemic is likely to cost Mexico one million (formal sector) jobs. AMLO, whose comments frequently present an alternate reality, says his administration will create two million new jobs as a result of its policies.

AMLO’s overall response to the coronavirus has left much to be desired. A delayed and incoherent public health response to the coronavirus has left Mexico’s healthcare system teetering on the edge of collapse and the country’s COVID-19 caseload skyrocketing to one of the highest in the world. The absence of state services in urban and rural spaces alike has opened a void that Mexico’s cartels have exploited. And Mexico has spent less than any country in the region as a percentage of its GDP, save for the Bahamas, to support its industrial base

This is highly regrettable, because the USMCA focuses heavily on the manufacturing sector and raises NAFTA’s content requirements for duty-free exports. Mexico’s sizable automobile industry is hanging by a thread as exports ground to a halt in recent months. Correspondence between the National Association of Manufacturers and AMLO’s administration warn of the dire consequences to Mexico’s economy if he continues to use government austerity as a cudgel during a global pandemic.

Instead of shoring up the economic model that brought Mexico tremendous growth and diversification in the last 25 years, AMLO has indulged his contentious relationship with the private sector. “Neoliberalism” remains his favorite ideological target, which in his telling accounts for nearly all of Mexico’s present ills — ranging from the country’s epidemic of gender-based violence to his own administration’s inability to contain the coronavirus.

Meanwhile, the pandemic has exacerbated the country’s persistent violence at the hands of criminal groups. A spate of murders drove up Mexico’s homicide rate 3 percent during the first five months of 2020, scuttling hopes that stay-at-home orders would lead to their decline. The economic costs of this violence epidemic are astronomical. One study from 2018 finds the cost of violence to be equivalent to 21 percent of Mexico’s GDP, or $1,757 per capita — more than four months of income for the average citizen.

Emboldened by a feeble and ambiguous security plan emanating from AMLO’s administration, powerful cartels continue to launch brazen attacks. In recent days, the Cartel Jalisco Nueva Generación (CJNG) made an assassination attempt on Mexico City’s police chief. The CJNG staged the early morning attack on the Paseo de la Reforma, perhaps the most iconic boulevard in the Mexican capital, suggesting that norms against attacking tourist destinations may no longer hold. More high-profile attacks could further erode Mexico’s reputation as a place to visit and do business.

USMCA’s implementation comes at a time of heightened uncertainty for Mexico’s economic and security prospects. Quite simply, under AMLO’s leadership, the country is the least poised of the three partner nations to take advantage of the coming upgrade in trade benefits.

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