The Mexpat Interview: The Mexico Political Economist
What's on the horizon for Mexico's economy with Trump 2.0?
Welcome to the first edition of The Mexpat Interview.
I sat down with Alex González Ormerod, the founder of The Mexico Political Economist (MXPE), to discuss what’s in store for Mexico’s economy under Trump 2.0, what cards Sheinbaum has to play and why he’s actually (cautiously) optimistic.
It’s been an eventful week since our conversation—with Trump buckling down on his plan to implement a 25% tariff on imports from Mexico (and Canada) on his first day in office, Sheinbaum rebutting that Mexico would respond in kind, and Secretary of Economy Ebrard saying the U.S. would shoot itself in the foot with such a plan.
“Neither threats nor tariffs will resolve the migratory phenomenon, nor the consumption of drugs in the United States,” stated Sheinbaum in a letter she penned to Trump this week. “…One tariff will be met with another, until we end up putting at risk our shared businesses. Yes, shared. For example, among the main exporters from Mexico to the United States are General Motors, Stellantis and Ford Motor Company, which arrived in Mexico 80 years ago.”
I followed up with the MXPE about Sheinbaum’s letter to Trump:
“A lot of people said, ‘oh my god, don’t talk to Trump like that, he’ll get really upset!’ but I think he appreciates the ‘tough guy’ talk. What was really important here was the name dropping of the companies—Ford, General Motors, Stellantis, whose stock collapsed when Trump announced tariffs. Trump is surrounded by Republican donors and influentials who tend to be linked to these companies, and they’re the ones who are supposed to put the pressure on him. That’s what the Mexican government has been banking on. Giving Trump what he wants on paper, whilst also going behind the scenes and applying pressure on Trump (or the people around him) with this sort of information.”
What do you think Mexico’s government can bring to the table to negotiate with Trump on tariffs?
MXPE: A lot. One of the reasons AMLO and Trump got along is they had a lot in common in terms of their agendas—higher wages for the Mexican worker are a big thing. This isn’t Mexico versus Trump (at least in the Mexican paradigm), it's the Mexican and the U.S. governments against dirty old business that is treacherous, not patriotic, and will ditch you if you don't undermine your own workers. Trump actually started what became AMLO’s tripling of the minimum wage. All of that was pre-negotiated with Peña Nieto under the renegotiation of NAFTA into the USMCA.
But this is important—if you do put up trade barriers, it'll hurt the U.S. just as much as Mexico. The Economist does this simplistic trade comparison: Mexico only accounts for 16% of U.S. exports, while Mexico sends 84% of its exports to the U.S. But Mexico is still the second-largest recipient of U.S. exports, it’s a massive amount.
And when you put up barriers to Mexican car parts, for example, you raise the price of American cars. Mexicans are contributing low value-add parts and manufacturing to the auto, aerospace and semiconductors industries, so a computer or a car might have to cross the border numerous times—and every time it crosses the border, it's going to get a tariff. Then Americans will end up paying more, leading to inflation.
I think what lost Biden the election was inflation. That's what the Democrats have come to understand. That's what Trump clearly understood throughout his campaign. And that's why the Republican Party overall, beyond the sort of ideologues who probably don't really understand trade, will likely come to a conclusion that the best way to “make America great again” and put “America first” is to create a sort of fortress North America. Because if you lock yourself into a tariff war, you end up only having your own market to sell to—the U.S. market is big, but the world market is much bigger and growing much faster.
Elon Musk paused Tesla's much-anticipated "gigafactory" in Nuevo León due to Trump’s tariff threats. How do you think this project and broader FDI in Mexico will be impacted by Trump 2.0?
MXPE: It seems pretty clear that the Tesla factory won't happen, especially given the position of Elon Musk, whose obsession is migration actually. Ironically, that’s one of Mexico's big trump cards since they’ve been honing in on getting their migratory “wall” up to please Trump, as they did to please Biden before. And it's very efficient at it. If you look at the National Guard, it's done badly at crime fighting and traffic control, but it excels at stopping migrants.
And what's sort of tragic about this is everyone's really worried about Trump violating migrants’ human rights, which is worrying, but Mexico is perfectly happy to stoop to that level as well. They've already used force against non-Mexican migrants. This is the difference between what Americans think migration is—that it’s Mexicans coming over—versus what I think Trump now understands, that Mexico is actually a corridor for people from all over the world.
Regarding foreign direct investment, you only need one example to show where we are. John Deere, which was a target of hatred during the Trump campaign, announced this week they are going ahead with moving from the midwest to Mexico— despite all the threats—because the economic logic is just there. My guess—and this is part of the critique from economic nationalists—is that these companies make a lot of money abroad, and if you try to make this stuff in America when the tariffs go up, you’ll be damned if you do and damned if you don’t. If you don’t leave the U.S., you basically forsake external markets because of retaliatory tariffs, and if you do leave, the labor will be cheaper and sure, it will be more expensive selling in the U.S., but you can still access the global market from Mexico. Mexico has one of the most complete free trade networks across the world. The U.S. is a global hegemon but it’s not the only game in town, which I think is something people don’t tend to realize.
If Trump succeeds in his mass deportation plan, what do you think the economic fallout from deportation would look like in Mexico?
MXPE: I think it’s very unlikely they’ll manage the J.D. Vance proposal of deporting 1 million people per year, but deportations are looming in the short term, so you'll probably end up with a sort of hybrid system in Mexico.
One system will shuttle people to the Guatemalan border, and basically do the same thing that Trump's doing to them. And the other will hire migrants.
One of the things that really goes uncovered in Mexico is the labor shortage across a lot of parts of the country. And what's interesting is a lot of the current administration’s plans for the development of the south include what you could call “migrant traps”—some to catch and deport them, but some to hire them. This is where private industry is taking initiative. You've got massive companies like FEMSA hiring migrant workers, but the sad thing is the government isn't playing ball, because we've got private vs public sector tensions in Mexico.
In terms of remittances from Mexican workers in the U.S., remember one thing that brings down governments across the world is inflation. I think it was Florida or Georgia that tried to do this strict deportation, and within weeks there were literally farmers crying on social media, begging for them to come back. That fruit rotting in the fields also means prices go up.
The U.S. is dependent on undocumented migrant labor. It’s not just that they’re willing to be paid what no one else wants to be paid. In some cases, American workers don’t have the skills anymore—sure, lots of Americans work in construction, but it’s just not enough. And people from Mexico, El Salvador, Honduras are known to be very good in this sort of skilled labor. If you want the Texas housing boom to continue, if you want factories to continue going to the Sun Belt, you need those migrants.
It's also why the immigration “crisis” has never been solved.
MXPE: Exactly. There’s a reason the focus is on migrants, not on the companies who hire migrants. They’re just a lovely scapegoat. Migrants are actually far less likely to commit crime. They're far less likely to commit fraud, they're far more likely to pay taxes and far less likely to take benefits. I feel the Democrats are pathetic on this—they haven’t been able to address people's worries about migration, leaving xenophobia open as the only way to address them.
The way to address concerns about migration is to help people understand these people are the reason America is the most prosperous economy on earth. And the reason U.S. workers don’t get paid more is because the companies are holding back that money. The migrants aren't getting extra money, the company bosses are. Profits are all-time highs, the company bonuses for executives are all-time highs, and yet the wages of both documented and undocumented workers are stagnant.
Do you think economic regionalism or nationalism will prevail in Trump’s second term?
MXPE: I think Trump will need to paint it as nationalism—much in the same way he's painted himself as a global peacemaker, it all comes down to the fact that he thinks that everyone's just exploiting American largesse.
If you’re an American hawk, you should worry. While I don't particularly care about American military hegemony across the world, the alternative does seem to be China—at least in Asia.
I think they’ll kick themselves in a few decades when they realize that actually most of the world economy, the dollarization of the world economy, was held at the point of a gun. The U.S. has forced countries at gunpoint to accept their trade terms, their economic system and their currency since the 19th century—starting when they bombarded Japan and forced them to open.
So, while Trump’s going to have to make it all look like nationalism, I suspect it'll be more regionalism in the end, because that benefits the U.S. far more than isolating completely.
Do you think Trump’s big talk on cartel crackdowns will translate into any significant impact on the illicit economy?
MXPE: I think it will be different than under the Biden administration. I'm actually excited about it.
The bad news is the fact that Trump says we want to bombard Mexico to kill drug lords—which isn’t upsetting because it's new, it's upsetting because it's the same plan. And it doesn't work. You just can't decapitate drug organizations and expect them to die. They're a hydra. We've been trying to do that. The Biden administration didn't bomb Mexico, but they organized to kidnap a drug leader on Mexican soil, violating Mexican sovereignty, just like Trump is saying he wants to do. So, we're getting the Trump policy via subterfuge, which I think speaks worse of the Biden administration.
That’s why the Mexican government sometimes appreciates Trump more than the Democrats, because with Trump, he tells you what he's going to do. He threatens you openly—which isn't nice—but at least you know what you're getting. Whereas the Democrats will smile, shake your hand and stab you in the back.
The good news to me is there seems to be a focus by the Trump administration on the money, while the Mexican government is putting efforts there as well.
How do you stop cartel money from getting into the global financial system? You can't do it without the U.S.—this is where we need the U.S. to cooperate, actually. Where is the money being laundered? New York and London. So to me, the fact that he's not as in cahoots with these bankers, like a lot of the Republican and the Democratic establishment, makes me slightly optimistic.
Will it make a dent in the illicit economy? I mean, it's massive. And it's so complex. But I think you can see how Mexico's tax authority (SAT) is really cracking down on tax evasion—sure, because they like screwing over big bad business that’s been avoiding paying taxes, but also because it's a good way of seeing who's who in the world of crime. There are a lot of sins that are uncovered by more sophisticated and rigorous tax collection. Forget the drugs—follow the money.
What would a best-case and worst-case scenario look like for Mexico’s economy under a second Trump term?
MXPE: The best case scenario for Mexico under the next Trump term is probably the one I just described: a bleeding out of organized crime, not through armed violence, but through tackling corruption and illegal money flows. If you cut off the head of the hydra, it grows back, but it won't if you just starve it to death.
A lot of these issues ultimately come down to Mexico's poor rule of law. Why is China such a big issue in Mexico? It's not because Mexico's loving Chinese products so much, it's because there is an illicit trade of Chinese goods, mislabeled as Mexican, coming into Mexico. If there were a more staunch rule of law, you could stop it. But guess who controls the ports? It's organized crime. So if you solve that issue, you actually do solve a lot of the issues that concern Trump and the Canadians. It doesn't feel like it, because why would tackling crime help with my China trade issue? But it would.
A worst-case scenario is Mexico as scapegoat, with a sinking economy because of tariffs. You get runaway inflation in the U.S. because of trade wars. Then you get a massive incentive for more undocumented migration because people will be rushing in to get the few jobs that businesses will try to fill on the cheap. And then you get this horrible vicious cycle of repressing the migrants that they need to keep their economy afloat, as it spirals out and takes Mexico with it.
I always say the worst case scenario for Mexico is the U.S. going to shit. And the worst case scenario for the U.S. is Mexico going to the dogs. It's somewhat hopeful, actually. The issue right now is we're sort of pointing trade nuclear missiles at each other, without understanding what could be mutually assured destruction.
Thank you for reading and feel free to send me your suggestions, comments and questions at hola@themexpatriate.com. And be sure to check out The Mexico Political Economist—you’ll get hooked on the MXPE Weekly Essentials.
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