Mexico is long overdue for a pivot

Despite all Mexican President Enrique Pena Nieto’s big talk about Mexico’s economy, growth this year has been disappointing. As The Economist points out, this is partly due to one-time events, such as Banco Santander’s listing of its Mexican subsidiary, and partly due to a weak export market. Pena Nieto has been busy drafting reforms that attempt to address Mexico’s vulnerability to global market downturns–a worthy endeavour–and his focus on improving productivity within the country is well-founded. However, there are ways in which he could improve the export sector that would require little more than stepping out into Mexico’s own backyard.

The US, Canada, and China are Mexico’s biggest trade partners, with an alarming 74% of Mexico’s exports going to the US and 53% of imports coming from there. This makes Mexico extremely vulnerable to the mildly erratic whims of the US economy. To further complicate matters, China is also experiencing slower growth, which may take a chunk out of the $5B per year Mexico gets from selling to China. With the exceptions of Colombia and Brazil, Latin American countries all take less than 1% of Mexican exports. By diversifying its export customer base, Mexico could avoid some of the risks that come from putting all its export eggs in one American basket.

The main reason for Mexico’s northward focus is convenience: NAFTA has facilitated trade between Mexico, the US, and Canada. Mexico’s exports to the US have quadrupled since the agreement came into effect in 1994. While Latin American countries would have a hard time matching US demand for exports, it would still be worthwhile to diversify a little. Mexico is not a member of either of the two South American free trade blocs, Mercosur and the Andean Community of Nations (CAN), but these organizations are divided anyway and are weighed down by excessive political strategizing on the part of their members. Ten years ago there was discussion of turning NAFTA into a 34-country free trade area; these talks should be restarted.

Though there will likely always be debate over the economic effects of NAFTA and other free trade agreements, a Latin American free trade area would be significantly advantageous from a political standpoint. Free trade agreements can lead to increased political integration in regions, and Mexico’s increased participation in Latin America would be mutually beneficial. Unlike its neighbor to the north, Mexico has been loth to get involved in countries’ domestic matters. However, the various political crises and power struggles as of late have made it clear that the region needs a stabilizing presence to moderate disputes. Ranging from the comical (a diplomatic crisis was narrowly averted after Uruguayan President Jose Mujica called his Argentine counterpart an “old lady” and her late husband “cross-eyed”) to the serious (Paraguay and Venezuela’s democracies are borderline illegitimate), domestic disputes are increasingly spilling over borders and even affecting trade, as evidenced in Mercosur’s ejection of Paraguay after a suspected coup d’etat and subsequent installation of Venezuela in the bloc.

Latin America is deeply divided economically, with Mercosur and CAN competing for members. It would immensely improve efficiency if all the countries could agree to comprehensive and far-reaching terms under just one trade agreement. It is evident from the diagram above that there are too many acronyms and not enough overlap in the Americas.

Of course, the negotiations would be excruciating, and Latin American states tend to be less tolerant of perceived slights than the US has been; Chavez managed to get away with calling George W. Bush a donkey, but equally colorful allegations against Vicente Fox caused a diplomatic crisis in 2005. More recently, Colombian President Juan Manuel Santos provoked the ire of Venezuelan President Nicolas Maduro by meeting with Maduro’s opponent in the disputed April election, Henrique Capriles. After watching the fallout from the incident, Pena Nieto declined to receive Capriles. While this is in keeping with Mexico’s policy of non-intervention, it is disappointing that the country is not taking this opportunity to participate more actively in Latin American democracies, as many are floundering.

To be sure, Mexico has its own internal issues and is far from a paragon of modern democracy. However, strengthening ties with its neighbors to the south would likely bring increased stability and prosperity to the region, thus decreasing the number of illegal immigrants that pass through its borders on the way to the United States. It certainly will not be easy, but the rewards are worth it. Countries in Latin America must adopt the mentality espoused in the (optimistic) OECD motto: “whatever the weather, we must move together.”

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