I plan to visit Mexico early next month as I do at least one or twice every year. This year I question what awaits me as evidence that Mexico’s economy and civil order is imploding mount. The latest strike against Mexico comes in its now escalating trade war with the United States.
The Mexican government said Monday it would slap tariffs on 90 U.S. industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favors free trade.
Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S.
Unions have for years fought to keep Mexican trucks off U.S. highways, despite longstanding agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $410 billion spending bill Mr. Obama signed last week.
The White House responded Monday to the tariff threat with assurances that Mr. Obama would work with Congress to create a new cross-border trucking program that addresses safety concerns.
White House spokesman Robert Gibbs said U.S. and Mexican officials would work on legislation for a new plan “that will meet the legitimate concerns of Congress and our [North American Free Trade Agreement] commitments.”
Mexico’s Economy Minister Gerardo Ruiz Mateos said Monday the legislation signed by Mr. Obama was “wrong, protectionist, and clearly violates” the free- trade treaty signed by the U.S., Mexico and Canada in 1994. Mr. Ruiz Mateos said the ban protected U.S. truckers while hurting Mexico’s ability to compete.
The Mexican government wouldn’t say Monday exactly which products would be hit with tariffs but that the total value of the products was $2.4 billion in 2007 and originated in 40 states. A detailed list was expected to be published this week.
Republican members of the House suggested such commodities as wheat, beans, beef and rice would likely be targeted.
Certainly, I fully anticipate protectionism to increase globally in the months ahead. However, this is not Mexico’s only problem. Mexico’s largest oil field has peaked, oil prices are way down, remittance income has shrunk, and drugs are a big concern.
Concern about a potential failed state — not Pakistan, not Somalia, but California’s neighbor Mexico – is mounting in Washington as an all-out war involving 45,000 Mexican military personnel fails to quell rising drug violence that is spilling from such Mexican cities as Tijuana into the United States.
An estimated 6,290 drug-related murders occurred in Mexico last year, six times the standard definition of a civil war, said Vanda Felbab-Brown, a leading scholar on the issue at the Brookings Institution.
All of this has had a very negative impact on Mexico’s currency as the chart below reveals. Last year just after the Lehman crisis, the Mexican Peso was trading at just over 10.50 to the dollar, today it trades over 14 pesos to the dollar. It has been over 15.
While recent reports from the likes of Morgan Stanley have been largely positive about Mexico’s economy, the backdrop is clearly deteriorating and the growing trade war with the U.S. is but one sign. If Mexico and its workforce come under pressure economically, the impact will surely be felt in the United States as well.
Update 430PM ET: A good video over at Bloomberg Television adds a bit more color to the situation. Enjoy.
Sources
Mexico Strikes Back in Trade Spat – WSJ
Migrant Workers Sending Less Money to Latin America – WSJ
Mexican Banks ‘Party’ May End as Economy Shrinks: Week Ahead – Bloomberg.com
Concern Grows in the U.S. That the Drug War Is Destablizing Mexico – AlterNet
Currency Charts – FXStreet.com