Speaker 1: Worst trade deal ever. We know how Donald Trump views NAFTA,
Speaker 1: the North American Free Trade agreement that links the US, Canada,
Speaker 1: and Mexico. Dissing NAFTA and most things Mexican was a
Speaker 1: staple of his campaign. Attacking free trade was a key
Speaker 1: talking point. But from Mexico's perspective, the country that was
Speaker 1: supposed to be eating America's lunch, it's not really just
Speaker 1: about trade. Mexico's entire economic model and strategic view of
Speaker 1: the world has NAFTA at its center. Worse, it looks
Speaker 1: like Mexico didn't even see this coming. The country has
Speaker 1: its own election next year, and populous candidates are on
Speaker 1: the rise there as well, not just in the United States.
Speaker 1: Welcome to Bloomberg Benchmark, a show about the global economy.
Speaker 1: I'm Daniel Moss, an editor for bloomboag View in New York,
Speaker 1: and I'm Scott Landman and economics editor for Bloomberg in Washington.
Speaker 1: How is Mexico court napping? Joining us as Shannon O'Neil
Speaker 1: from the Council on Foreign Relations, where she's the Nelson
Speaker 1: and David Rockefeller Senior Fellow for Latin American Studies. Shannon,
Speaker 1: Welcome thank you for having me. Was Mexico actually court napping,
Speaker 1: I do think they were. I think both the government
Speaker 1: believe that NAFTA would go on forever. This was a
Speaker 1: stable agreement, and there are reasons to think so. It's
Speaker 1: already been in place for twenty three years. It's become
Speaker 1: a big bolster of their economy and really their legal system,
Speaker 1: particularly when it pertains to contracts to business, to the
Speaker 1: private sector. And you also see the private sector was
Speaker 1: resting on their loyals here too. They had made a
Speaker 1: big push in the early nineties to get NAFTA passed,
Speaker 1: and then they all went back to their businesses. They
Speaker 1: all went back to their day to day ways of
Speaker 1: doing things and thinking about profits and losses and all
Speaker 1: of that, not thinking about the need um, not even
Speaker 1: recognizing the need to defend this agreement that allowed so
Speaker 1: much of that to happen. What would be the economic
Speaker 1: effects on Mexico if NAFTA collapse? What are the common
Speaker 1: estimates for GDP or or how much of its economy
Speaker 1: is just tied to NAFTA at this point. You know,
Speaker 1: I've seen a lot of estimates from different banks come
Speaker 1: out and they range really widely. Some say, it might
Speaker 1: just take off half a percentage of point from GDP.
Speaker 1: Others think it would lead Mexico into recession. So there's
Speaker 1: a lot of uncertainty about what would happen. But one
Speaker 1: thing you've seen in Mexico that's quite interesting. Mexico for
Speaker 1: the last twenty plus years has grown something like two
Speaker 1: two and a half percent a year, so not horrible,
Speaker 1: but not spectacular, right, not not a big growth, not
Speaker 1: classic em it's not classic emerging market. But what's interesting
Speaker 1: is if you get beyond the national numbers and you
Speaker 1: look at the state level, you see a huge divergence.
Speaker 1: And so the northern States, the NAFTA oriented states, they
Speaker 1: have been growing at six, seven, eight, even ten percent
Speaker 1: a year. So these are Asian tiger rates. It's the
Speaker 1: southern states, the ones that are marginalized, that aren't connected
Speaker 1: to the United States, that aren't connected to the global
Speaker 1: economy through NAFTA or other trade agreements, they are stagnating
Speaker 1: or even in decline. So the North South divide. The
Speaker 1: sounds kind of familiar, it does, indeed, but it is
Speaker 1: very did you see the benefits of NAFTA there, right,
Speaker 1: the modernization, the more competitive global industries, and how much
Speaker 1: Mexico can grow in part because of the trade agreement.
Speaker 1: So it is more important than just say that the
Speaker 1: overall national numbers would suggest. Shannon, did Mexico have these
Speaker 1: kinds of supply chains with the United States and Canada
Speaker 1: before NAFTA was formed? I mean, can you give us
Speaker 1: a sense of how much has been built up in
Speaker 1: Mexico and how important it is not just to the
Speaker 1: North American economy but the global economy since NAFTA was
Speaker 1: signed more than twenty years ago. That is really the
Speaker 1: big change in Mexico US and somewhat Canadian trades. So
Speaker 1: we saw we've seen in the twenty plus Yearson's NAFTA
Speaker 1: trade itself quadruple and that's a huge shift. But really
Speaker 1: what's changed is the nature of this trade. So before NAFTA,
Speaker 1: eight percent of Mexico's exports went to the United States.
Speaker 1: Today eight percent of Mexico's exports go to the United States.
Speaker 1: But they're very different exports. Before it was oil, it
Speaker 1: was other commodities. Today it is the pieces and parts
Speaker 1: and components of these supply chains. And telling statistic is
Speaker 1: before NAFTA, about five percent of Mexican trade North was
Speaker 1: sort of these intermediate goods, right, the pieces and parts
Speaker 1: that go together to make something. Today it is roughly
Speaker 1: by some estimates, So we've seen a huge shift in this,
Speaker 1: and it is all sorts of industries. It's the car industry,
Speaker 1: it's aerospace, it's medical equipment, it's electronics, it's food products,
Speaker 1: process food, it's all kinds of industries where you see
Speaker 1: this integration. So that means that the United s dates
Speaker 1: is exporting to Mexico. In fact, it's our second largest
Speaker 1: export destination, just second to Canada. But they're also receiving
Speaker 1: imports from Mexico to the United States, and so that
Speaker 1: tie is very different than twenty plus years ago. So, Shannon,
Speaker 1: you and I both participated in the Mexico Business Summit
Speaker 1: last month, and one line that we heard over and
Speaker 1: over again was, wait, we thought we got married in
Speaker 1: the early nineties and we didn't have to do anything else.
Speaker 1: Now we've got a war room where brainstorming, we're trying
Speaker 1: to influence senators and congressmans, like, how is this blind
Speaker 1: spot able to happen? I think people took the status
Speaker 1: quo as the status quo, that it was unchangeable, or
Speaker 1: that there was no one who would want it to change,
Speaker 1: And from the Mexican point of view, NAFTA has actually
Speaker 1: been fairly politically popular. You look at opinion polls, and
Speaker 1: the majority of Mexicans think it's a good thing. Many Mexicans,
Speaker 1: as we know, have family members others in the United States.
Speaker 1: They see the United States increasingly as a partner, as
Speaker 1: a friend. Those that have relatives living here or friends
Speaker 1: living here feel more warmly to the United States than
Speaker 1: those that don't. So from the Mexican point of view,
Speaker 1: they thought this was all good, this was a benefit.
Speaker 1: They saw it as a win win for the United
Speaker 1: States and Mexico and couldn't imagine that the United States
Speaker 1: would want to tear it up. And all of the
Speaker 1: careful economic studies show that it's a net benefit for
Speaker 1: the United States. Now, of course, we know that net
Speaker 1: benefits hid particular losses for particular people, right concentrated losses
Speaker 1: for more diffuse benefits. But they were focusing on the
Speaker 1: net benefits and not realizing that there may be this
Speaker 1: political movement which we've seen here in the United States.
Speaker 1: For those that have lost, whether from this or from
Speaker 1: other things, NAFTA has often become the focus for the
Speaker 1: bad that's happened to many Americans, So it's a proxy
Speaker 1: for whatever might be bothering exactly. Shannon, can you tell
Speaker 1: us a bit about how the political rhetoric in the
Speaker 1: United States, and I guess the actual policy move to
Speaker 1: start renegotiating have to has affected the political situation in Mexico.
Speaker 1: I mean, how many people in the US know that
Speaker 1: there's an election in Mexico next year and if they don't,
Speaker 1: should they They should know? And I think not enough. No,
Speaker 1: either in the general population or perhaps even people in
Speaker 1: our own government. The United States government aren't really thinking
Speaker 1: about the ramifications from Mexico's election. So next July, Mexicans
Speaker 1: will go to the polls to elect not just the president,
Speaker 1: including their president, but every senator, every representative, hundreds of
Speaker 1: local posts, so over three thousand positions overall, which is
Speaker 1: the biggest election in Mexico's modern history. So we could see,
Speaker 1: depending on how these elections pan out continuity with Mexico,
Speaker 1: a stable democratic Mexico, one that's market friendly, one that's
Speaker 1: US friendly, or we could see a see change in
Speaker 1: Mexico's politics turning to a more protectionist policy. Back to
Speaker 1: some of the policies of the nineteen sixties or seventies,
Speaker 1: and perhaps a set of leaders in position that are
Speaker 1: more anti the United States. And one thing the rhetoric
Speaker 1: coming out of the United States, not just NAFTA, but
Speaker 1: the general talk about building a wall or denigrating Mexicans
Speaker 1: and Mexican immigrants or Mexicans in general, is it has
Speaker 1: led to a resurgence of Mexican nationalism. Um. You know,
Speaker 1: they're upset about their own dignity, about their sovereignty. And
Speaker 1: we've seen the leading candidate, man named Andres Manuel Lopezo Bodor,
Speaker 1: who comes from the left, is more of a populist
Speaker 1: type leader. We've seen him play very well on these
Speaker 1: sort of anti American sentiments and standing up to Trump
Speaker 1: saying he is the one who can stand up while
Speaker 1: others can't. So broadly, he's like the Bernie Sanders of Mexico.
Speaker 1: The Bernie Sanders are perhaps the Donald Trump will see.
Speaker 1: But the general point is, you know, we used to
Speaker 1: worrying about the impact of populist politics in the United
Speaker 1: States and the threat that poses to the international economic system.
Speaker 1: Should we be worried about popular threats from Mexico rather
Speaker 1: than the United States. I think we should worry about
Speaker 1: a shift in Mexico in terms of its politics, particular,
Speaker 1: if it moves in a direction that's much more suspicious
Speaker 1: of the United States, are much less likely to cooperate.
Speaker 1: And this matters first and foremost on the economic side.
Speaker 1: What we've been talking about, we have so many companies,
Speaker 1: so many of their workers who depend on exports to Mexico.
Speaker 1: That is where they're livelihood. And as we were talking about,
Speaker 1: these supply chains that are forming whole industry sectors of
Speaker 1: the U S. Economy are globally competitive today because they
Speaker 1: have parts of their operations in Mexico, parts in the
Speaker 1: United States, and some have also parts in Canada, and
Speaker 1: all of that came about because of NAFTA. But we
Speaker 1: should also worry about working class Trump voters know that,
Speaker 1: I think very few and one of the most one
Speaker 1: of the most important sectors are the ones that will
Speaker 1: be hit most quickly is actually the U. S. Agricultural
Speaker 1: sector and agricult real States were you know, almost uniformly
Speaker 1: went for Trump. But this is one of our biggest
Speaker 1: exports to Mexico. We send eighteen billion dollars a year
Speaker 1: of different products, whether it's pork or beef, or soy
Speaker 1: or potatoes and all sorts of other agricultural products. They
Speaker 1: are some of our biggest consumers and that will be
Speaker 1: hit immediately if we end NAFTA. If NAFTA actually does collapse,
Speaker 1: would Mexico be able to shift more of its exports
Speaker 1: to other countries around the world. Is it competitive enough
Speaker 1: in the export market to do that or is there
Speaker 1: a serious risk that you know, they won't be able
Speaker 1: to refocus their economy or refocus their trade and things
Speaker 1: will get really bad. You know. As much as we
Speaker 1: talk about globalization and global supply chains, geography is still
Speaker 1: incredibly important in the way the world's economies work. And
Speaker 1: so I don't see a future where Mexico is totally
Speaker 1: detached from the United States. But they are starting, perhaps
Speaker 1: the bit belatedly, but they are starting to look past
Speaker 1: the United States and what could they do to diversify
Speaker 1: exports and imports frankly as they go forward. And so
Speaker 1: Mexico is one of the most open economies already. It
Speaker 1: has free trade agreements with over forty different nations, so
Speaker 1: not just the United States, but also the European Union
Speaker 1: and others. Um they are continuing to participate in the
Speaker 1: Trans Pacific Partnership negotiations the t p P. There's only
Speaker 1: eleven now instead of twelve, but they're still there and
Speaker 1: they see that path forward as one where perhaps they
Speaker 1: could find a way to diversify their base. But in
Speaker 1: the end, I mean, as I said before and after
Speaker 1: exports came to the United States from Mexico, they continue
Speaker 1: to be that number. I do think you can move
Speaker 1: that percentage somewhat, but United States and Mexico will always
Speaker 1: be tied economically as well as in a whole host
Speaker 1: of other ways. Question we both heard a lot at
Speaker 1: the Mexico Business Summit was is there a link between
Speaker 1: the success or failure of tax cut legislation and NAFTA.
Speaker 1: You know, it's hard to divine what's going to happen
Speaker 1: with the Trump administration and how it makes its decision
Speaker 1: process from the outside. But I do think as we
Speaker 1: look at the U s electoral process, we head into
Speaker 1: midterm elections coming next November, just a year away, and
Speaker 1: the Republicans, those that want to keep their seats, need something,
Speaker 1: They need something to run on, and so far they
Speaker 1: have been frustrated in their ability to pass almost anything,
Speaker 1: So tax cuts seems to be the most promising of those,
Speaker 1: though it's still a very hard road to home, and
Speaker 1: many have been talking, as you just mentioned, NAFTA might
Speaker 1: be the thing that he could that Trump could do
Speaker 1: to give something to his base, to show that these
Speaker 1: first you know, two years, have they've seen successes. So
Speaker 1: I think that is the real question, and what would
Speaker 1: hold the Trump administration back, in my view, is all
Speaker 1: of these governors, local representatives, mayors and businesses that are
Speaker 1: slowly on. We talked about the Mexican side not really
Speaker 1: being waking up to the challenges or what would happen
Speaker 1: if NAFTA disappeared. I think it's been almost worse here
Speaker 1: on the U S side. There's so many US businesses
Speaker 1: and particularly as I was menting, the agricultural sector, who
Speaker 1: really had no idea that Mexico was their biggest client
Speaker 1: and that the benefits and that free trade back and forth,
Speaker 1: the tariffs that would come up would make them uncompetitive
Speaker 1: those markets. So where you're going to see, we'll see
Speaker 1: tax reform go through maybe first quarter of next year,
Speaker 1: maybe not, we'll find out, but I do think that's
Speaker 1: when you will see a lobby of these business leaders,
Speaker 1: of governors of others that would be hit very hard
Speaker 1: in particular sectors with NAFTAS demise start talking to the
Speaker 1: Trump administration and asking him and others not to end it.
Speaker 1: So that's kind of a reprieve period while they try
Speaker 1: to get tax cuts through and signed, and then the
Speaker 1: focus will again shift to NAFTA. I would expect that
Speaker 1: because the Trump administration, if they want tax cuts, they
Speaker 1: need these Midwest states, right, they need them to go along.
Speaker 1: And so if you're at the same time undermining the
Speaker 1: agricultural sector, undermining the auto industry, undermining some of these
Speaker 1: other businesses that rely on supply chains, it's hard to
Speaker 1: get their vote for your tax reform. So I think
Speaker 1: there's a trade off there. But then you could see
Speaker 1: a revisit, say second quarter of next year, which is
Speaker 1: exactly when Mexico is in full campaign mode for their
Speaker 1: July elections. So Shannon, right now, the NAFTA talks are
Speaker 1: not going that well. To say the least. The US
Speaker 1: has taken a hard line into the talks. Mexico and
Speaker 1: Canada have resisted some of these pretty tough proposals that
Speaker 1: the US has been making. At the same time, the
Speaker 1: talks have not collapsed. They extended them until next year.
Speaker 1: You're talking about how they actually could work out in
Speaker 1: some way. What's your best guests as far as the
Speaker 1: result here? You know, I think it's hard to make
Speaker 1: a real legitimate guest to know what's happening. But I
Speaker 1: would say one scenario, perhaps the most likely scenario but
Speaker 1: not with a huge probability, is that NAFTA sort of
Speaker 1: muddles through. We see these conversations continue. Neither the Mexicans
Speaker 1: or Canadians walk away from the table, but they do
Speaker 1: stand pretty firm on some of these quote unquote poison pills,
Speaker 1: things that the US has put on the table that
Speaker 1: they just can't accept. Then next March April, the Mexicans say,
Speaker 1: you know, we're in full campaign mode. You're going to
Speaker 1: have to negotiate this with our next president. At the
Speaker 1: same time, the US Congress, the last thing they want
Speaker 1: to be doing is negotiating a trade agreement as they're
Speaker 1: out campaigning in their districts for for re election. So
Speaker 1: there's a possibility. Two eighteen. Everybody takes a deep breath, everybody.
Speaker 1: They continue to talk, but it's not intense negotiations and
Speaker 1: it's not really till two thousand nineteen that we get
Speaker 1: back to the table. But that gives everybody a little
Speaker 1: bit of breathing room. Um, and it allows NAFTA in
Speaker 1: the meantime to to continue to be the law of
Speaker 1: the land. That we've talked about agriculture, let's talk about
Speaker 1: autos and NAFTA is as much about autos as anything else.
Speaker 1: But is it possible we're kind of missing the big
Speaker 1: picture here. Isn't China now the largest auto How does
Speaker 1: that fit into this? It is right, this has been
Speaker 1: the iconic US and now North American industry, the auto industry.
Speaker 1: But you think of the big three, you think of
Speaker 1: this is really the leaders in this industry. Um. But
Speaker 1: a funny thing has been happening over the last decade plus. Actually,
Speaker 1: China is the biggest auto industry in the world. And
Speaker 1: when you look at per capita GDP growth, when you
Speaker 1: look at demographics, it will continue to grow while the
Speaker 1: US may not. And so as we think about the
Speaker 1: future of autos and we think about NAFTA, NAFTA has
Speaker 1: allowed with different production in different countries at different you know,
Speaker 1: different skill sets, different wages, and different technologies and like
Speaker 1: has allowed autos to remain a North American industry. If
Speaker 1: it disappears, and particularly in some aspects of the car industry,
Speaker 1: which would have much higher tariffs, we might just see
Speaker 1: a wholesale departure for China, because one, they sell more
Speaker 1: cars there and they will in the future. And too,
Speaker 1: if you're already gonna pay the tariffs coming in, it
Speaker 1: doesn't make a ton of sense at least for particularly
Speaker 1: car smaller cars, not trucks and pickups are like it
Speaker 1: makes much more sense for on an economic basis, for Ford,
Speaker 1: for GM, for others. Make them in China, sell them
Speaker 1: where where your real market is, and then you can
Speaker 1: export some here for the United States for those kind
Speaker 1: of consumers. But what that does is it takes away
Speaker 1: production not just in Mexico, but all of those suppliers
Speaker 1: who are also here and assemblers who are also here
Speaker 1: in the United States. But I thought the Trump administration
Speaker 1: was all about stopping China eating America's lunch as well.
Speaker 1: Might they ultimately have to choose between which is the
Speaker 1: lesser evil, and it's that Chinese argument something that ultimately
Speaker 1: could sway the decision. This is the big question I
Speaker 1: think for people who watch free trade agreements. I do
Speaker 1: think you look at at economists and other reports that
Speaker 1: have been done, and China has in many cases played
Speaker 1: unfairly in the world trading system um to the detriment
Speaker 1: of u S interests. But we're picking on Mexico, We're
Speaker 1: not picking on China. Now we can discuss why that is.
Speaker 1: There's lots of geopolitical reasons there. North Korea feeds in
Speaker 1: as well, but it is an interesting dynamic and one
Speaker 1: that is in my view, quite misplaced. If you really
Speaker 1: want to set free your trade agreements around the United
Speaker 1: States or around the world, we should be addressing China.
Speaker 1: We shouldn't be addressing Mexico. And in fact, NAFTA, even
Speaker 1: though it needs in a modernization and update, is actually
Speaker 1: a model for how the United States would want the
Speaker 1: world to play, rather than one that we should be disparaging.
Speaker 1: Have we just concluded that NAFTA is really about China.
Speaker 1: It's becoming more and more about it China, And if
Speaker 1: we keep NAFTA, I do think it's a bulwork against
Speaker 1: a Chinese manufacturing hub that's there. It gives us in
Speaker 1: the United States a competitive platform to compete with goods
Speaker 1: that are coming out of Asia. If we lose NAFTA,
Speaker 1: then we lose some of that competitiveness. Shannon, thanks for
Speaker 1: sharing a perspective with us. My pleasure, Ben Shamonk will
Speaker 1: be back next can. Until then, you can find us
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Speaker 1: as well as Apple Podcasts, pocket Casts, and stitchert While
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Speaker 1: what you thought. You can follow me on Twitter at
Speaker 1: Moss Underscore, Eco, Scott at Scott Landman, and Shannon Shannon Ka.
Speaker 1: Benchmark is produced by Sarah Pattison. The head of Bloomberg
Speaker 1: Podcast is Francesca Levie. Thanks for listening. We'll see you
Speaker 1: next time.