AMLO's election puts Mexico-US relationship at a crossroads

AMLO's election puts Mexico-US relationship at a crossroads

The electoral results in Mexico have been made clear. Andres Manuel Lopez Obrador (AMLO) has been elected with an overwhelming margin of victory over his opponents. Furthermore, AMLO’s coalition will have a commanding majority in Congress that has not been seen in recent decades.

His win was expected, reflecting the unhappiness of the voters with the existing political and social condition.

The outcome can be understood, given the concerns of the Mexican people about issues relating to personal security and violent crime, corruption and perceived incompetence of the authorities as well as growth and income inequality.

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But the question that's now on everyone’s mind is: Where does the future of relations with the U.S. stand? 

Several issues stand out: the expected, overall performance of the Mexican economy, the role of government in the economy (like the redistributionist policies that AMLO may pursue) and the nationalistic and protectionist policies on the side of Mexico, as well as the reaction of an aggressive U.S. government administration on trade policy.

All of these issues exist even as the newly-elected president has emphasized that he seeks to pursue a clean, austere and fiscally conservative approach, and he has declared himself to be pro-business more recently. 

Unfortunately, the uncertainty still exists in light of positive comments from AMLO and his advisors, and this is due to a lack of details in AMLO’s agenda. AMLO’s message is attractive in a very populist way, but he has yet to convert his message into actionable solutions, and it is most likely that his magic will wear thin.

This will undoubtedly be so unless he manages to implement government affairs in a pragmatic way. Overall, it will be a fine line the AMLO administration will have to walk given the dangers to the fragile nature of Mexico’s economic performance, especially in the context of the strong anti-Mexican view of the Trump administration.

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While economic growth in Mexico has been far from stellar, it has been in line with the trends of all Latin America since the beginning of the century. Mexico has experienced an average of 3-percent growth since 2012, which was slightly above the average for the region, even at a time when the ascending commodity cycle ended.

Even with considerable external shocks related to the price of oil, the fiscal accounts performed well, with a deficit averaging about 3.5 percent of GDP since 2012, again besting the numbers for the region and the other members of the North American Free Trade Agreement (NAFTA). 

These achievements could easily be overturned if AMLO seeks to subsidize Mexico’s domestic gasoline and electricity sectors or takes other populist measures. 

Even if the fiscal and monetary policy remains prudent, the statist tendencies of AMLO can — and almost certainly will — cause serious damage to the region. The president-elect is most likely to press for the return of the energy industry and other “strategic” sectors to the public domain.

This process, even with a less corrupt and a somewhat more efficient behavior of PEMEX, the government-owned oil company, does not bode well for a recovery of the energy sector. In addition, AMLO could reverse Mexico’s 2013 energy reforms that helped attract new foreign investment. 

He has recently suggested he would respect existing energy contracts, but considering his past statements and record, that claim should be called into question. 

Not unrelated to these trends, AMLO has expressed nationalistic and protectionist views, which compounded with the equivalent tendencies of President TrumpDonald John TrumpTrump's top adviser on Asia to serve as deputy national security adviser United Auto Workers strike against GM poised to head into eighth day Trump doubles down on call to investigate Biden after whistleblower complaint: 'That's the real story' MORE, will further erode the close and gainful relationship between Mexico and the U.S. in the last quarter-century.

Protective measures toward agriculture and efforts at self-sufficiency will hurt Mexican consumers and producers. While this can be offset in principle by closer links to the rest of the world, the views expressed by AMLO on trade do not provide any confidence in this regard.

Moreover, ALMO’s nationalistic approach will weaken the respect for the rule of law, particularly those principles based on multilateral agreements and with greater immediacy, those agreed among the NAFTA partners. 

A case in point for NAFTA is the investment regime, and more specifically, the Investor State Dispute Settlement (ISDS). A major element of NAFTA’s success has been the inclusion of ISDS provisions that protect investments through well-established mechanisms within the agreement.

Without it, American, Canadian and Mexican businesses will have contracts jeopardized, with no effective and fair recourse. It is concerning that the U.S. Trade Representative Robert LighthizerRobert (Bob) Emmet LighthizerOn The Money: Economy adds 164K jobs in July | Trump signs two-year budget deal, but border showdown looms | US, EU strike deal on beef exports Chinese, US negotiators fine-tuning details of trade agreement: report The Trump economy keeps roaring ahead MORE does not support the continuity of this arbitration mechanism. 

A weakening of mechanisms of this type would further erode NAFTA thereby harming both sides of the border. 

In the wake of AMLO’s election, one thing is clear: There is much uncertainty not only about the future of NAFTA, but the future of Mexico itself. 

Claudio M. Loser is president of the Centennial Group Latin America and a senior fellow at the Inter-American Dialogue, a U.S.-based center for policy analysis, exchange and communication on issues in the Western Hemisphere. He previously served as IMF Western Hemisphere director from 1994 to 2002. He is also a professor of economics at George Washington University.