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The Rachman Review
Mexico hopes to stave off Trump tariffs
00:28:27
Economic and political consequences of the end of free trade could be devastating
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- [00:02]
A
Hello and welcome to the Rachman Review. I'm Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week's podcast comes from Mexico City. My guest is Luis De la Calle, widely regarded as Mexico's leading trade economist. De la Calle played a major role in negotiating the North American free trade agreement, NAFTA, in the 1990s, which reshaped the economy of Mexico and the whole of North America. But now Donald Trump's threatening to hit Mexico with swinging tariffs. So what does that mean for the political and economic stability of Mexico?
- [00:47]
B
We're going to be changing the name.
- [00:50]
C
Of the Gulf of Mexico to the Gulf of America, which has a beautiful ring that covers a lot of territory. The Gulf of America. What a beautiful name that was.
- [01:02]
A
Of course, Donald Trump. As I flew into Mexico last week, I couldn't help noticing that the moving map on the plane still read Gulf of Mexico. But trying to change names on a map is much less threatening to Mexico than the economic changes that Trump wants to make, which could wreck the usmca, the free trade agreement that succeeded nafta. Trump has gone backwards and forwards on tariffs. He imposed heavy duties on Mexican imports, then partially lifted them. Claudio Sheinbaum, the President of Mexico, hailed that pause in the tariffs as a victory in a speech earlier this month in the central square of Mexico City before a crowd estimated at 350,000 people. President Sheinbaum's head of the left wing, Morena Party and some of the party's policies have been heavily criticised by liberal economists. In particular, a plan to fire all Mexico's judges and to replace them with elected figures. However, Sheinbaum's also been widely praised for skillfully handling Donald Trump, who's called her a wonderful woman. Partly as a result, her poll ratings at home are now at a sky high 80%. But well informed Mexicans know that it's far too soon to celebrate. Along with the rest of the world, Mexico is Now waiting for April 2, when the US president has threatened to impose a new round of tariffs on the whole world. The stakes are particularly high for Mexico, since almost 80% of the country's exports go to the USA. So I began my conversation with Luis de la Calle by asking him how he assessed the threat of Trump's tariffs.
- [02:52]
C
It's a very significant threat. I mean, Mexico made a wager 30 years ago to change the economic model we were following and engage a country with which we had a very difficult historical relationship as a partner. And the usmca, now the nafta, before that was predicated as a tool to make sure that Mexico would keep its economy open and lock in the modernization reforms that we are entertaining. And 30 years later the news is that we'll see whether the USMCA will lock in the President of the US So it's a very significant change. I mean Mexico made a gamble based on the assumption that the US will keep its side of the deal and we'll see whether that happens now.
- [03:38]
B
And how much if you took the worst case scenario or even a sort of middling scenario of what Trump is doing, how much would it unpick free trade with Mexico if he really follows through? Is that just an adjustment to the current system or its destruction?
- [03:52]
C
Well, eventually it might destroy the system, not only the USMCA, but also the international trading system, wto. And the problem with that is that Mexicans and Mexican politicians and Mexican government might draw the wrong conclusion, which is that maybe we should go back to the statistics government controlled economy that we used to have in the 1970s, that the decision we took to open up the economy had become a more globalized society and economy was probably not the right one.
- [04:21]
B
And in fact the ruling party, Morena and President Scheinbaum and Forforja President Lopez Obrador were quite tempted by that anyway, aren't they?
- [04:29]
C
Yes, they were. We went through a revolution to such an extent that you had the first president from Morena and there is Marlon Lobsurador defending the trade opening and the second president of Morena and Mexican Senate controlled by Morena approving the USMCA and speaking on behalf of free trade even in large gatherings in Mexico City main plaza defending free trade. It's quite a change.
- [04:53]
B
But you're worried that if it goes wrong they'll go back to their old instance.
- [04:56]
C
Correct.
- [04:57]
B
And just give us a sense of how dependent is the Mexican economy on that trade with the United States.
- [05:04]
C
Well, I mean Exports to the US are 32% of Mexico's GDP. Wow. So it's quite large. And not only that the best jobs in Mexico, the better companies in Mexico have a larger dependence or co dependence with the US in terms of sales or EBITDA or job creation or investment that is very much linked to the US and the successful states in Mexico. I mean Mexico is a country that in the last 30 years has been moving at three different speeds. The central northern part of the country, something we could call the USMCA states.
- [05:37]
B
So that's around Monterrey and well from.
- [05:40]
C
To the north of Mexico City. And then they'll be growing at rates similar of Asia and countries, then central Mexico City. Mexico City and the surrounding states, they've been growing at European rates. And southern Mexico has not been growing at all. So if we lose what gave central and northern Mexico the compass to that growth, which is integration with the US that will be a significant blow. We will be losing the most attractive part of the Mexican economy. I don't think it'll happen.
- [06:09]
B
Yes, we'll come to that.
- [06:10]
C
Why?
- [06:10]
B
You don't think it'll happen? But let's describe where we are now. I'm conscious we're talking now on March 13, and in a week's time or two weeks time, it could be very different because Trump changes his mind rapidly. But explain what has Trump done so far and what are the decisions that are to come?
- [06:30]
C
Well, I mean, Trump has imposed three kinds of duties so far. Duties on China, he had imposed duties on China for 25% eight years ago. Those remain under Biden. And after the inauguration, he imposed 10% more, and then more recently, 10% more. That is bad news for the world economy, bad news for the Chinese economy, but it's positive news for Mexico in the short term because makes Mexico more attractive. So the imposition of Chinese duties has been good for Mexico under Trump. Second types of duties that he has Imposed is the 25% duty on Canada and Mexico, conditional on Mexico and Canada helping on fentanyl and migration. He imposed that across the board for all products that lasted two days. In two days, he made an exemption to goods that qualify under the rules of origin of usmca, but which is.
- [07:24]
B
The trade agreement, current trade agreement, the.
- [07:25]
C
Trade agreement that we have, Canada, Mexico and the U.S. and then on March 12, he imposed duty on aluminum and steel, 25 on steel and 10 on aluminum for all countries around the world, something that he did eight years ago when he was president the first time. Those are the duties he's imposed. And he has announced a set of other duties that would enter into force on April 2nd.
- [07:48]
B
Right. And that sounds like, as you say, him retracting after two days obviously sounds like good news. But it's a bit more complicated than that, isn't it? Because something like half of Mexico's exports to America don't come under the USMCA, is that correct?
- [08:03]
C
Yes. I mean, this arrangement of 25% on products from Mexico and 25% on products that comply with the USMCA, North American products, if you wish, means that for this fraction of Mexican exports, the US have to pay now 25% duties. And we'll see what happens. On April 2, the Mexican government will have to take a decision as to whether to challenge that 25% duty before WTO. It's a violation of WTO and whether we retaliate. Canada has taken the decision already not to remove the retaliation that it did at the beginning when Trump imposed duties on everything and has taken the case to wtl. So yes, that's a problem.
- [08:45]
B
Why do you think Mexico has taken a softer line?
- [08:47]
C
Well, because we have more complex issues on fentanyl and migration than Canada does. That's reason one. Reason two is that Canada and the US view for Mexico as a fight between brothers and the Canadians have a level of familiarity with the US that we don't have, not as yet. And therefore family type of views are deeper, more complex. So you see some of that. And the third reason is that the Canadian and the U.S. economy are very much similar and they compete in many sectors much more than the U.S. and Mexican economy that tend to complement each other more. So we hold the stronger cards at the negotiating table that Canada does.
- [09:29]
B
Right. So Claudia Sheinbaum has been lauded here, I think, for handling Trump relatively well. But you're saying in a sense her main decision is not to retaliate because the treatment of Mexico and Canada's not that different, is it?
- [09:41]
C
Well, I mean, in terms of the duties that being charged on Mexico and Canada, the treatment is exactly the same. So you have two very different strategies, Canada and Mexico. And we have obtained the same result. But I mean, this is only the first days of a long term battle with the US and we'll see how it ends up.
- [09:58]
B
Yeah, well, we'll come to that in a minute. How you think this is going to play out? Because I think you probably have a better idea than most. But coming, I mean, you have a lot of Mexican business clients. How concerned are they or does it vary sector by sector?
- [10:11]
C
Well, they were more concerned eight years ago. When Trump came to power eight years ago, there was a lot of nervousness as to what Trump might do to the Mexican economy and to Mexico. I mean, the best indicator of that is the peso dollar exchange rate. When Trump came to power eight years ago, the peso depreciated quite significantly more than now in this situation. The depreciation happened before Trump, Trump won and before Trump made the threats and duties. The depreciation of the peso was linked more to the reforms that the Mexican government undertook in 2024 that made Mexico less competitive.
- [10:47]
B
What kind of policies?
- [10:48]
C
Well, the policies under the so called Plan C that Lopez Salvador pushed for at the beginning of 2024, that reduces the independence of the judiciary branch. So the economy is in a position that is potentially more vulnerable to, to bad news. I mean, we're closer to the abyss, if you wish.
- [11:05]
B
Because the budget deficits. What?
- [11:07]
C
Because the budget deficit is much larger and because we have made Mexico less competitive. And the risk premium for Mexico, if you look at the spread between the 10 year bond in the Mexican and US is now trading at 530 basis points. Because there is a lot of pressure on Mexico.
- [11:24]
B
You said in some ways Mexico is in a more advantageous position than Canada. But socially you're much more vulnerable because you've got many more people who live in poverty or on the breadline who could be, you know, even a small adjustment in the economy, they're in trouble.
- [11:37]
C
Absolutely. But maybe Mexicans have a higher threshold of pain because of that than Canadians have. And Americans.
- [11:45]
B
Yes. And so we come to America. One of the reasons I think that you're relatively optimistic is that you think that the whole vision that Trump has of the re industrialization of America and forcing all these factories that are currently in Mexico to move to the US Is never going to work.
- [12:02]
C
Well, if you look at manufacturing employment, Mexico, US and you chart that in a graph, the correlation between US and Mexico's manufacturing employment is 90%. So when you have more production in the US you'll get more production in Mexico. And conversely. So if Trump's aim is to re industrialize the US he will industrialize Mexico because we move together. And the US Is in no position to have a successful industrialization process without the help of Mexico and also Canada.
- [12:39]
B
So explain to me, what is it that Peter Navarro and Trump and Jamison Greer, all these people who are driving US Trade policy, who seem to believe that they can have these factories in the US Why are they wrong?
- [12:52]
C
Well, because they don't have clients, as you said before. I mean, when you talk to people that actually do investment in the US on assembly line processes and they try investing in the main states of the US that do manufacturing, what they all find is that in the US There is very significant scarcity of skilled workers to do manufacturing and therefore they always end up relying on Mexico participating in part of the process.
- [13:20]
B
And why is that shortage of skilled workers? I mean, is that something that they can't get around through training or higher wages or.
- [13:27]
C
Well, you can try all those things, but it's difficult to convince Americans to work in assembly lines these days.
- [13:32]
B
And you have this Story about the plant that Trump eight years ago hailed.
- [13:36]
C
Yeah. Foxconn announced a large investment to please Trump. Foxcom is a Taiwanese company, the largest in the world, that produces electronic goods, from TV sets to computers to tablets and mobile phones. They began the construction of a large plant in the state of Wisconsin, and that plant today is not working. Eight years later, it's closed. And at the same time, Foxcom in Mexico has now 30,000 employees, and they have 200,000 in China.
- [14:04]
B
And is that simply that basically manufacturing is now a low wage activity or a lower wage activity, and that if you were to pay Americans, the goods would just be so much more expensive?
- [14:14]
C
I mean, maybe the wage level is one of the reasons, but I mean, no matter how much you increase the WAGRE in the US you will not find enough workers to do it. The same thing happens in the agricultural side. In 2024, 27% of the US total imports of food came from Mexico, 12% from Canada. So between the two of us is close to 40%. So when you think about it, is it credible at the same time to impose a 25% duty on food coming from Canada and Mexico and prevent migrant workers to work in the fields in the U.S. well, I mean, that will be probably the most ambitious program to reduce obesity in the U.S. yeah.
- [14:54]
B
Somebody told me that 60% of America's fruit and vegetable comes from Mexico.
- [14:58]
C
Yeah, well, in terms of imports, not total production, yes. Our average market share is 27%, beer is 60%, and fruits and vegetables in the wintertime is probably close to 70%.
- [15:10]
B
So if Trump was really serious and he keeps up with this 25% tariff, there has to be a big inflationary effect in the US really quite quickly.
- [15:18]
C
Yes. Eventually will.
- [15:20]
B
Eventually or fast?
- [15:21]
C
Well, I mean, at the beginning you can negotiate, but I mean, eventually, in few weeks, it will have a price impact that will be shown up in supermarkets.
- [15:30]
B
And in fact, I think televisions, they're also produced here, largely in Mexico.
- [15:34]
C
Well, yeah, Mexico, we export everything to the US from medical devices. I mean, if you go to an operating room in the U.S. in a U.S. hospital, half of the equipment is from Mexico, the other half is from China. If you want to keep Medicare in check, well, you need a lot of medical devices, and many of them come from Mexico, from scalpels to stents, to respiratory machines to everything.
- [15:54]
B
So is that why you think, thinking it through? Well, I mean, this is not going to last.
- [15:59]
C
I mean, people sometimes say that we make the rational argument. And I always say, well, I mean, if you want the Irrational arguments. Ask somebody else. But the rational arguments in the end will win. I mean, the reality will impose. Its.
- [16:15]
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- [16:48]
B
But you also said to me that, you know, if it was purely a trade argument, you thought reality would impose itself quite quickly. But there's also these other things you referred to, the argument about illegal migration and the argument about fentanyl, which is this highly powerful drug, a lot of which is produced here in Mexico via precursors that come from China and so on. So explain to me why those issues make the trade stuff much harder.
- [17:14]
C
Well, I mean, Mexico has always tried successfully, for the most part, to separate the difficult issues that we have in the bilateral relationship. Drugs and migration front trade. But Donald Trump has insisted in mixing them up. So the 25% duty that he imposed on Canada and Mexico is not a unilateral duty. It's a conditional duty, conditional on Mexico and Canada collaborating on fentanyl and migration. So that raises three questions. Question one is, are Mexico and Canada going to collaborate? And the answer is yes. Second question is, is that collaboration enough to please President Trump? The answer is probably no, because he would like to have always the ability to threaten that thing again. So he will never be fully satisfied. He might postpone the duties, but not entirely eliminate them. But then the third question is, is it credible that the US Will only impose duties on Canada and Mexico that are the US Largest trading partners? And the answer to that is probably not, unless the US Imposes duties across the board on every country. Then the discussion begins to be whether Mexico and Canada will have a preference with respect to other countries into the US Market, which is what they have at the moment, which we have at the moment with the usmca. So without collaboration on fentanyl and migration, I think that the probability of finding an amicable solution to trade is close to nil. But once you have collaboration on those two issues, then the relevant question becomes, in US Trade policy, is the US Going to give Mexico and Canada a treatment a little better than it will give to other countries? And the answer to that is probably yes, because the trade that Canada and Mexico do with the US Is more centered around inputs and intermediate goods as opposed to final goods. So when we export to the US and the US Complains about having a trade deficit vis a vis Mexico, the things we export to the US Have a lot of US Content. So that produces a network of people in the US Particularly in Trump territory, the Midwest, the Corn Belt, Texas, Oklahoma, that will argue in favor of Canada and Mexico, because the poor guys only have as neighbors Canada and Mexico. The people in the east coast, they have England, and in the west coast, they have Japan. But I mean, the guys in the middle, they have, for good or bad, only Mexico and Canada.
- [19:40]
B
Right. You said earlier that people accuse you of making the rational argument. It's a nice accusation to have, but I guess one of the concerns is that there's a lot of emotion and arguments that don't necessarily make sense. I mean, the Canadians say we're not a source of fentanyl. What's going on here? And one of the things that I picked up that Mexicans here are very worried about is this talk in the US of actually using military force against drug cartels. What do you hear on that? How serious is it?
- [20:08]
C
No, the risk of all this is, of course, better not to have any of this. So Mexico was already very competitive in the US Market as things stood before. The risk of this and President Trump pushing the envelope too far is that some red lines might be crossed. And therefore the Russian arguments don't work anymore because people become emotional. So, yes, you cannot dismiss the probability of some red lines being crossed.
- [20:35]
B
And that would be like, say, a drone strike.
- [20:37]
C
A drone strike or some sort of military operation on the Mexican side or something on trade that is difficult to reverse. It is possible. And that's why keeping heads cool on every side is extremely important.
- [20:52]
B
But when the Trump people say, as they do, well, look, Mexico's a narco state, you know, the drugs barons are just too powerful. They're too infiltrating the state. The Mexicans aren't serious, what's the response to that?
- [21:04]
C
Well, the US Government has three concerns about Mexico. They are trade, migration, and drug trafficking. And the irony is that for the three of them, the US Needs Mexico's collaboration. So that produces a sort of equilibrium that you can blame and finger point to each other. With Mexico, we always say, well, I mean, the Problem is that you sent us too many arms and your citizens consume a lot of drugs. Why don't you stop consumption? So finger pointing has some political use, but in the end, I think Mexicans realize that on drug trafficking and trade and migration, we have to collaborate with the US and the same realization happens on the US Side that even though you might have a lot of noise about this, they know that Mexico is crucial for the security of the U.S. economic security and security in the security sense.
- [21:57]
B
And some Mexican businessman or a Mexican businessman said to me, you know, actually, if Trump puts pressure on us to really go after the drug cartels, that may not be such a bad thing.
- [22:07]
C
Well, I mean, Trump becomes a mirror for Mexico because it forces us to take some hard decisions. Not only Mexico, also Europe and other places. And yes, it might have that beneficial aspect to it.
- [22:19]
B
I mean, how serious a problem is it for regular business, the drug cartels? Or is it just something out there in the countryside but doesn't affect the real economy? Or is the real economy badly affected by the size of the drug economy?
- [22:31]
C
I mean, it depends on the region and the products that you work on. I mean, for the most part in export activity, there is almost no relationship with organized crime of any type. But it makes Mexico less attractive for investment, Mexican investment to begin with. So if we have a safer environment and rule of law, the trade deficit with the US Would be much larger because Mexico would be much more competitive. So it has an impact. But I mean, in spite of that, that gives you an idea of how competitive Mexico is. I mean, if you look at border towns like Reynosa and the state of Tamaulipas is neighbor of McAllen, Texas. Dain also has a reputation of being a dangerous town because there's a lot of drug trafficking in that area. I mean, if you see the factories that exist there, the level of sophistication in robotics and the things they do, you'll say, jesus, if these guys did not have these security problems, this could be multiplied many times over. So, yes, there is some good out of Donald Trump forcing countries to do what's right.
- [23:35]
B
Right. I mean, you said, and you've made quite a convincing case, that in the end reason will prevail and the trading relationship will have to be restored. I wonder what kind of timescale you put on it. And in the meantime, it must have a very freezing activity on investment, because with policy changing every week, nobody can make an investment, surely.
- [23:57]
C
Yeah, I mean, we closed 2024 with investment over GDP at 25%, which is quite high for Mexico. And in 2025, it will go down maybe to 23%. It's a significant drop, and that's due not only to Trump, but also to the policies implemented by the Schembank government. So, yes, there will be some drop in investment. The challenge for President Schimbank is to bring that back up to 25. And she announced a program for her term of six years term that she wants to end up with 30% investment over GDP by 2030. But given that the government investment will amount to maybe 2% in 2030, that means a 28% private sector investment over GDP, which would be compared to levels you will see only in Asia and the largest in Mexico's history. So this is quite interesting that a president with her ideological background, she's supposed to promote the largest infusion of private investment in Mexico's history.
- [25:00]
B
You sound a bit skeptical that's going to happen.
- [25:02]
C
Well, we'll see how it goes. The Trump episode on Duties will be very significant in that process.
- [25:08]
B
Yeah. Going back to where we started. I mean, you were one of the architects of nafta, and as you said, NAFTA was obviously crucially important economically, but it was also part of a political process where it was associated with the end of one party rule in Mexico and a more liberal, more open society. Are you worried about not just the impact on the economy, but the impact on society and on democracy if you really go backwards in terms of trade?
- [25:36]
C
Yeah. I mean, the revolution of opening up the economy and the revolution of moving away from a single party system with limited liberties in Mexico run parallel to each other and they feed into each other. So, yes, if we lose the open trade inclination Mexico now has, that will reinforce the centralization of power that has become so prevalent in many countries around the world.
- [25:59]
B
Well, let's hope it doesn't happen.
- [26:00]
C
Well, we have to work because we are not only observers, we have to be active as citizens to make sure that that does not work.
- [26:06]
B
But it does seem a bit like there was some domestic momentum in that direction anyway under Lopez Obrador. I mean, he was an old style leftist.
- [26:13]
C
These reforms were meant to recentralize power in the way the PRI used to have it in the 1950s. That's what Lopez Valador is all about. President Trump is in many ways very similar to that.
- [26:27]
B
Yeah. Kind of strongman, populist figure.
- [26:29]
C
Yeah. With few checks and balances.
- [26:31]
B
So does it feel like the whole liberal era, economically and politically, is in danger?
- [26:37]
C
Well, Claude Sherman grew up in a family and professional and student environment, that was very much against that and very much in favor of democracy. So her roots deep down are over a very democratic person. And we'll see whether in her presidency she can rediscover her true roots.
- [26:56]
B
Yeah, but again, in the US the backlash against NAFTA made this argument that the Biden people even accepted to some extent that neoliberalism, as they called it, had gone too far, that the free trade had damaged America and they lost elections. Yeah, but Trump is that argument on steroids.
- [27:12]
C
Well, I mean, if President Biden had, when he came to power, said, listen, I'm going to rethink the duties on China and I'm going to rejoin the Trans Pacific Agreement, maybe he would have a different electoral result in 2024.
- [27:27]
B
Yeah.
- [27:27]
C
This is impossible to collaborate. But I mean, the thing he did, which was to try to imitate Donald Trump on trade, did not work.
- [27:34]
B
But what about here in Mexico? Is there also a group of people who say, actually, even though people like Luis de Caye said this has been transformational for Mexico in a great way, actually it was all a mistake?
- [27:46]
C
Not now, because even the Mexican government is now making the argument. Listening to the daily press conference from Claudia Sheman on her cabinet is quite interesting these days because they are defending free trade. That's quite revolution. But I mean, if things go south and we have a big fight with the US and the whole agreement collapses, then there is a risk that Mexico will look inwards again and will impoverish ourselves once more. It wouldn't be the first time that we've done it.
- [28:13]
B
Yeah, but also there would be a risk to the livelihoods of ordinary people. And somebody said to me, look, if Trump is really serious, this wouldn't just be a recession for Mexico, would be a depression, potentially.
- [28:26]
C
Yes. So the end and result for Trump would be higher prices in the U.S. less production in the U.S. and much more migration from Mexico into the U.S.
- [28:35]
B
Because people would have to move.
- [28:36]
C
People will move, and they've been crossing that border for thousands of years. They'll cross it again if need be.
- [28:46]
A
That was Luis de la Calle, consultant and economist, speaking to me in Mexico City. Thanks for listening and please join me again next week.
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