NAFTA and US-Mexico economic ties under threat

After less than one week in office, US president Donald Trump signed an executive order detailing US intent to construct a border wall between Mexico and the US. Following the order, Mr Trump’s administration has announced a possible 20% tax on Mexican imports to help finance the wall.

Mr Trump’s proposed border tax, as well as his intention to construct a border wall, has threatened the survival of the North American Free Trade Agreement (Nafta), which accounted for $1100bn in commercial inflows between the US, Canada and Mexico in the year to November 2016.

The proposed border tax has created uncertainty for foreign investors considering plans in
North America, and has already affected the investment strategies
of large manufacturers, including Ford, which recently announced its decision to scrap a $1.6bn factory in central Mexico.

Other companies are being forced to rethink their North American strategy. Some, such as Mazda, are considering partnering with competitors such as Toyota to gain access to US manufacturing sites rather than establish a
flagship site in Mexico.

Mr Trump’s protectionist trade policies would dramatically affect FDI into the Mexican economy. Currently, the US is Mexico’s biggest source of foreign investment. Since the establishment of Nafta in 1994, US investments into Mexico have increased by more than six times to $100bn. 

The Mexican economy relies heavily upon the US market, as 80% of its exports are sold in the US so if Mr Trump continues to incentivise investors to pull out, Mexico’s economy will certainly suffer.

Yet experts have warned that such a tax could also be detrimental to the interests of US businesses. “Mexican direct investment in the [US] has increased by nearly
43% since 2010,” said Aaron Brickman from the Organization
for International Investment. An imposed border tax might encourage Mexico to retaliate with similar measures against US exports, which would in turn affect outward FDI into the US.

The tax would also affect US consumers. According to Duncan Wood, director of the Mexico Institute at the Wilson Center, there is “a concern for the consumer and the impact that [this move] would have on prices and inflation”.

Although Mr Trump has taken a harsh tone with regard to Mexico, his opinions on Canada, the third member of Nafta, are less clear. 

Canada ranks as the third
highest investor in the US and invested nearly $315bn into the US in 2015. Mr Trump’s desire to renegotiate Nafta or impose a border tax against Mexico may damage inward FDI from Canada.

It is still too early to determine the impact of these trade proposals, but most experts expect a renegotiation of Nafta, as well as the creation of more bilateral trade deals. n

timothy conley