“China Loses, Mexico Wins?”
By Manuel J. Molano, courtesy of IMCO and El Sol de México
Last September, Shannon O’Neil published an article in Bloomberg that said Mexico should benefit from the US trade war with China. O’Neil mentioned the openness of the Mexican economy, which is higher as a percentage of GDP than those of those two countries.
Quoting O’Neil: “Mexico amplified [its] advantages by graduating tens of thousands of technicians and engineers every year. It has facilitated the opening of companies, eliminating bureaucratic obstacles. Salaries have also remained relatively low, erasing one of the advantages China enjoys, where wages have been rising.”
However, few companies have moved to Mexico since Trump started his commercial hostilities. For most analysts, recent policies seem to weigh more than long-term trends, and O’Neil is no exception. She thinks that the Mexican business environment looks less favorable for business than in the past, and that this is the main reason why Mexico is not benefiting from Chinese misfortune.
It is true that the statements of President Andrés Manuel López Obrador have not helped attract investors. As of now, Mexico is already in a manufacturing recession. We could attribute this fact to the slight slowdown in the U.S. But the sharp decline in fixed gross investment also weighs on the economy, which, in part, has to do with the relatively high policy rate of the Bank of Mexico and with a serious lack of confidence in the Government and its policies.
On paper, López Obrador’s economic policies look good: he has not openly attacked Mexican commercial policy, he has maintained an orthodox stance on public spending and has refrained from meddling in the independence of the central bank.
So why is investor confidence so low? AMLO’s attacks on the press, government institutions, the judiciary and critical groups of its administration’s policies must bear some blame.
The deterioration of security was recently reflected in the failed capture of Ovidio Guzmán, the son of Chapo Guzmán. In security policies, Mexico is increasingly seen as a failed state.
Most analysts agree with O’Neil: the loss of China should be the gain of Mexico.
Without ignoring the damage that the AMLO Administration does to the Mexican economy, there is one aspect of the equation that we are missing: manufacturing in the U.S. It is slowing down because it needs many inputs and components from Asia to produce and export. Since the United States is the gateway to China for Mexico, the trade war between these two countries harms our country.
Trump and his Administration are playing with fire. An escalation or prolongation of the trade war with China means a slowdown or a possible recession in the global economy.
There are many things that the López Obrador government could do to improve confidence and the business environment in Mexico, but the solutions to the puzzle are outside the Mexican borders, the TMEC or the regional and global monetary policy.
The real question is when will Americans realize that trade is good for their economy and that it is important to have prosperous neighbors in the south. Unless the United States wakes up from its protectionist dream, the world is doomed to a long and hard recession.