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Trump taking bite out of Mexico’s economy

Trump taking bite out of Mexico’s economy
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With over a week to go until his inauguration, President-elect Donald TrumpDonald John TrumpTrump renews attacks against Tester over VA nominee on eve of Montana rally Trump submits 2017 federal income tax returns Corker: Trump administration 'clamped down' on Saudi intel, canceled briefing MORE has already had a profound effect on Mexico’s economy and politics. 

The Mexican peso has dropped 16 percent of its value against the dollar since Trump’s election victory on Nov. 8.

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Analysts say Trump’s tweets threatening tariffs against products made in Mexico have put at crimp on foreign investment in the country, a measure for an economy based on international trade. 

As president-elect, Trump has zeroed in on the automobile industry, threatening to impose tariffs or a border adjustment tax on cars made in Mexico for U.S. consumption.

The auto industry has been the keystone of Mexico’s transformation from a commodity-based economy to a manufacturing hub. Automakers from around the world have set up shop in Mexico to take advantage of its 40-plus free trade agreements, particularly tariff-free access to the U.S. market through the North American Free Trade Agreement (NAFTA) — a deal Trump has promised to renegotiate.

Mexican markets reacted negatively to tweets from Trump warning that General Motors and Ford would face tariffs on vehicles produced in Mexico. Ford announced last week it would scrap a $1.6 billion investment in Mexico in favor of a $700 million investment in Michigan.

A similar tweet from Trump warning Toyota rattled investors further, who saw the attack on the Japanese-owned company as a sign that Mexico itself — not just American companies investing there — was Trump’s broader target.

Toyota, along with other manufacturers including BMW, Volkswagen and Kia, defended their Mexican investments while touting their investments in the United States.

But Fiat Chrysler CEO Sergio Marchionne, speaking at the North American Auto Show in Detroit Monday, laid out a stark scenario.

If high enough tariffs were imposed on Mexican manufactured goods, Marchionne said, “it will make production of anything in Mexico uneconomical and we would have to withdraw.”

Some analysts pin blame for the gloom-and-doom scenario on Mexico’s government, notwithstanding Trump’s tweets.

“If NAFTA would change or break, the trade relationship would come under the World Trade Organization, which doesn’t look that bad,” said Juan Pardinas, director of the Mexican Institute for Competitiveness.

“Those are the kinds of messages that would bring serenity to markets and investors, and those are not the narratives I have seen in government,” he said.

An analysis of Mexican macroeconomic health presented by International Monetary Fund (IMF) researchers at Washington’s Wilson Center Monday showed that, while economic growth has been stagnant, the country’s finances are for the most part healthy.

Fabian Valencia, an analyst on the IMF team that performed the research, said the country’s financial institutions and corporations were well capitalized, but growing public debt has become a concern.

Valencia also referred to worldwide volatility, lower oil prices and an increase in “protectionist tendencies” as downsides for the Mexican economy overall.

“This was our view at the end of consultation but since then of course downside risks have increased,” Valencia said.

Since economic reforms in the 1990s, the Mexican government has followed strict fiscally conservative policies. That strategy has attracted major investments, but limited overall growth. Despite the economic modernization, the country’s poverty rate has remained high.

“It’s worth highlighting the very sound macroeconomic management that Mexico has managed to maintain for decades now,” said Christopher Wilson, a Mexico expert at the Wilson Center. 

“The fact that inflation remains so well anchored despite the depreciation of the peso has been one of the big wins,” he added.

Robert Rennhack, the head of the IMF team, said that to control inflation Mexico’s central bank has been forced to raise interest rates and spend currency reserves to control inflation and protect the peso, moves that had a “dampening effect on growth.”

Rennhack said Trump’s tariff threats had taken their toll, although “the financial system is pretty robust to absorb shocks.”

“The adverse scenario is already leading people to mark down growth in Mexico,” he said. 

But he questioned how the threat of tariffs could be implemented.

“A 35 percent tariff is not good, but it’s not clear under what legislation they could do that,” Rennhack said.

A senior Senate Democratic aide told The Hill that, regardless of whether tariffs could be imposed, Trump’s threat runs counter to U.S. interests.

“A functioning Mexican economy gives them the capacity to hire and keep people there, reducing our exposure,” he said.

Republicans from border states and states that rely heavily on trade with Mexico have also expressed their interest in maintaining stability south of the border.

“If we have a strong Mexico and a strong America, we then have a stronger relationship. If we have a destabilization of Mexico, it is not in our best interest,” said Rep. Pete Sessions (R-Texas).

Luis de la Calle, a former NAFTA negotiator who runs a think tank in Mexico City, said Trump’s tweets could, over time, bear “diminishing returns” or even backfire.

“If threatening companies becomes a modus operandi from the White House and firms learn to use that to extract concessions from the White House, more companies will come to Mexico,” said de la Calle, “because to make those threats credible, they actually have to come.”

Some analysts believe Trump’s tough talk on trade is a negotiating tactic to push through other items in his agenda.

“One of the things Trump did with his opening statement he found there is a lot of political resonance with attacking Mexico,” said the Democratic aide. “It’s the opening line of his campaign and it doesn’t cost him in the short term politically.”

“What we are going to see is a tax negotiation rather than an international trade negotiation,” de la Calle said.

Trump’s supporters, meanwhile, say they are confident the president-elect will forge a good working relationship with the Mexican government.

“Mexico will always have a lot of internal issues and Mexico is finding that balance with us and we’re going to strengthen it,” Sessions said. “Their instability — anybody’s instability south of our border — puts more people at our border, and that’s not what we should be doing.”