CEO Executive Summary

A month ago, we noted that the future of the NAFTA renegotiations was very uncertain and that the time to get a deal done in 2018, with the current Mexican government and the current U.S. Congress, was quickly evaporating. Regrettably, the situation has only worsened since then. It is now quite clear that there is virtually no chance for a deal in 2018, although none of the parties has yet formally abandoned the negotiation process and talks—for whatever they are now worth—continue. But we must be honest about the situation: it’s not looking good. The Trump Administration has, at least until now, been unwilling to compromise on some of its key demands that the Mexicans and Canadians believe are non-starters. Mexican gestures of compromise on autos have been largely rejected. And President Trump, perhaps (wrongly) thinking he could gain some leverage in the negotiations, initiated a process on May 23 that could lead to a 25% tariff on all cars imported into the United States and, to the surprise of all, on May 31, terminated the Mexican and Canadian exemptions from the 25% steel and 10% aluminum tariffs imposed in March. Both countries retaliated, with Mexico imposing 15%-25% tariffs on a wide range of U.S. exports targeted to impact the districts of key Republican lawmakers. Mexico also challenged the legality of the U.S. tariffs in the World Trade Organization. Meanwhile, following the G-7 summit in Canada, an aggrieved President Trump and his White House advisors launched a blistering and quite personal attack on Prime Minister Trudeau, casting a pall over the NAFTA talks.

Adding insult to injury, after weeks of remaining silent, President Trump returned to his demand that Mexico pay for a wall, which elicited a tersely-worded response from Mexican President Peña Nieto stating that Mexico would never pay for a wall. In the midst of these tensions, it was presidential front-runner Andrés Manuel López Obrador (AMLO) who tried to play the peace-maker by calling on the Mexican government to act firmly in response to American taunts, but to not respond in kind to every affront for fear of starting a trade war that Mexico can ill-afford.

In Mexican politics, polls show that López Obrador remains the favorite to win the presidency, and his party is well-positioned to win a majority in the national legislature. This has Mexican business leaders very concerned. But the broader private sector and foreign investors have a more sanguine attitude about a potential AMLO presidency. They appear to have concluded that his primary concern is the market-distorting special treatment that key private sector participants have enjoyed for decades rather than capitalism in general.

Meanwhile, the Mexican economy continued to outperform expectations, and inflation continued to fall in May. But the peso sank throughout the month, reflecting problems in the NAFTA negotiations and concerns over an AMLO victory. Meanwhile, two Mexican business confederations demanded that the government do more to respond to a crime wave that has 2018 on path to be the most violent in recent Mexican history.

Full Newsletter: Monarch News – June 2018