What are the Potential Implications and Feasibility of Trump’s Main Campaign Promises to Mexico?
The direction of America’s trade, immigration and foreign policies under the Trump administration is, at this time, anyone’s guess. Donald Trump, the 45th President of the United States, will be the first commander-in-chief who has neither held public office nor served in the military. Indeed, he is touted as the country’s first ‘business president’ and is thus expected to apply unconventional approaches to running the world’s largest economy. Having said that, what we do know is that during his campaign he promised to radically redefine the US-Mexico trade and immigration relationship.
Trump’s main campaign promises on Mexico
While campaigning ahead of the elections, Trump’s top five promises in relation to Mexico were to:
- Build a wall along the US-Mexico border.
- Expedite deportation of millions of undocumented Mexicans living in the US.
- Reduce or tax remittances from Mexican immigrants.
- Renegotiate or ‘tear up’ trade deals including NAFTA (and possibly bilateral agreements).
- Impose heavy tariffs on Mexican imports.
Potential implications and feasibility
Listed below our assessments of the possible impact of these promises (if converted into policy), and our analysis of the feasibility of implementing the original campaign promises.
Building a wall along a portion or all of the US-Mexico border would have severe diplomatic ramifications. Notably, it could lead to negative consequences for both countries, as the erosion of trust could undermine their ability to continue co-operating on issues of joint national concern such as the fight against the narcotics trade and illegal immigration from/via Central America. Moreover, construction of a wall is also likely to impede the flow of water between Mexico and the US that was agreed in the 1944 water distribution treaty covering utilisation of water from the Colorado River and Rio Grande from Fort Quitman in Texas to the Gulf of Mexico.
The president-elect has seemingly softened his stance on the construction of a border wall (for which he had also promised to force the Mexican government to pay; in another variation, Trump had threatened to tax remittances from Mexicans living in the US to fund the wall’s construction). Instead, in the weeks after his victory Trump said that he will consider building fences at certain parts of the border. Even if he goes ahead with his original plan to construct a wall, as president he would still need Congressional approval to finance it; by conservative estimates this will be a hugely expensive project given that the border between the two countries is almost 2,000 miles long; Trump had promised that the wall would be 1,000 miles in length and at least 50 feet high. Such a project could also be complicated by heavy regulatory requirements, such as those pertaining to the environment, as well as by the legal challenges that are expected to be triggered. In financial terms alone, a border wall could cost a minimum of USD25bn by some estimates, aside from maintenance costs and the unquantifiable costs of the damage to US-Mexico relations. Relatedly, applying capital controls to remittances from Mexican immigrants would require legislative amendments; for Mexico, remittances overtook oil revenue as a source of foreign income in 2015, for the first time.
If Trump decides to follow through on promises to deport between three and eleven million Mexican immigrants with criminal records and/or those who are illegally living in the US, the socioeconomic impact on Mexico would be severe, particularly as the Mexican economy has displayed sub-par performance in the last few years. After growing by an average of 4.5% per annum between 2011 and 2013, growth has slowed to around 2% between 2014 and 2016 and is expected to remain subdued for the next several years. Indeed, successive recent cuts to planned government expenditure preclude any expansion of its social safety net to accommodate returning residents. Undoubtedly, therefore, mass deportation would put an enormous strain on the government’s finances - and on the US-Mexico diplomatic relationship - and would likely lead to a ramping up of Mexican hostility toward the US. While Mexico has limited scope for retaliation, it could choose to withdraw its current efforts to stem the flow of illegal migrants to the US from Central America via Mexico. It has been speculated that the Trump administration could respond by using its intelligence on drugs cartels in Mexico to pressure the latter to accede to US demands. Ultimately, this would be a lose-lose situation - albeit with Mexico standing to lose more than the US.
By most analyses, it would be extremely difficult for the Trump administration to deport millions of undocumented immigrants within the two-year period he has promised: the constitutional and legal hurdles alone would require a significant amount of resources. Moreover, the already overburdened US immigration system would be overwhelmed. Legal issues aside, deportation on this scale would require financing, which would again necessitate the president going to Congress. From a political standpoint, attempts to attain mass deportations on the promised scale could bring a negative political backlash (such as public demonstrations).
‘Tearing up’ NAFTA/renegotiating bilateral trade deals
In 2015 Mexico’s top exports included vehicles, electronic equipment, machines, engines, pumps, oil, medical and technical equipment, valued at USD269bn and equivalent to 70% of total exports. Mexico is now the world’s fourth largest automobile exporter, and foreign investment in Mexico’s tradeable sector is substantial. According to the US Department of State, 18,000 companies with US investment are active in Mexico. In addition, the US is Mexico’s main single export market, taking almost 80% of total exports, while the US and Canada (under NAFTA) take 82% of total exports.
Conversely, in 2015 Mexico was the US’s second largest market for goods exports, valued at around USD236bn and accounting for almost 16% of total US exports that year. The main US export goods to Mexico were electrical machinery, other machinery, vehicles, minerals and plastics. In addition, Mexico is the third largest market for American agricultural exports including corn, soybeans and dairy products as well as pork and beef. Significantly, according to the US Department of Commerce’s statistics, exports to Mexico were responsible for roughly 1.1m American jobs.
Based on the above, ‘tearing up’ the nearly-23-year-old North American Free Trade Agreement (NAFTA, which includes the US, Canada and Mexico) would be detrimental to both the US and Mexico - although it is obvious that the effects on the Mexican economy would be proportionally far greater. With firms having developed extensive supply chains beyond the US and Mexican borders in the past two decades, America’s withdrawal from NAFTA would also be detrimental for crucial sectors in the US, such as its car manufacturers. Such a move could prompt retaliation from Mexico (as it did in the 2009 NAFTA trucking dispute, which resulted in higher tariffs being applied on 89 products exported from the US to Mexico).
During campaigning Trump had threatened to apply tariffs on cars manufactured by US companies in Mexico. However, to impose tariffs of American automobile manufacturers specifically would require Congressional approval. Barring this, the president could apply non-targeted tariffs that include car makers without the approval of Congress.
Given the foregoing and the fact that we are awaiting clarity from the Trump administration vis-à-vis the implementation of campaign promises, our recommendations at this time remain at a high level. Consequently, these include our suggestions for firms to:
- Assess the impact of potential changes in US trade policies on the main import and export sectors identified in the preceding analysis. Formulate contingency plans for ‘worst case scenarios’ where feasible.
- Determine the likely effect of harsher US immigration policies and capital controls on remittance inflows. This is especially important for firms operating in the retail sector, as household incomes would be most affected.
- Monitor the peso’s volatility against the dollar while uncertainty regarding the Trump administration’s future policy direction prevails. Expect central bank intervention to defend the currency, but also seek to minimise foreign exchange risks, where possible.
- Note that a rise in ‘anti-globalisation’ sentiment could create a groundswell of support for nationalistic parties and candidates in upcoming elections in Mexico. Note that this could make for a more difficult business climate for foreign investors in the next few years.
- Note that the US’s involvement in the Trans-Pacific Partnership is expected to end under Trump, as he has promised to follow a highly protectionist agenda that includes US withdrawal from multinational trade deals.
- Expect Mexico’s leadership to attempt to secure the country’s economic future by encouraging the expansion of exports to other markets in Europe, Asia and Latin America in order to reduce its vulnerability to changes in the US business cycle and/or trade policies. This could push Mexico to forge new free trade agreements in addition to the 40 existing FTAs and to enhance access to new markets for export-oriented firms.