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Threat of Recession in Mexico, and Emerging Economies at Risk

After the worldwide shock brought on by the Brexit, the election of Donald Trump confirms many of the fears that a new, uncertain world order is in store. As I warned in a previous article on the effects of the Brexit, these election trends toward populism and xenophobia place the building of a more-open, more-egalitarian global society at risk and show that the world is headed toward more fragmentation. Precisely when the world economy is so fragile, a return to protectionism and economic nationalism could mean practically irreversible high costs that could undo decades of integration and cooperation among nations.

The main concern is that policies such as protectionism, immigration reduction, and rejection of climate-change agreements, among others, will have a huge impact on the world economy, especially in emerging economies, whose growth and development depend greatly on trade, foreign investment, environmental action, and immigration permeability. 

For now, Trump’s policies—unpredictable and undefined until he is sworn in in January 2017—have unleashed high market volatility. Mexico is especially affected by the uncertainty regarding measures that affect us directly, such as a revision of or withdrawal from the North American Free Trade Agreement (NAFTA), the deportation of millions of undocumented workers, taxing or confiscation of migrant remittances, and the construction of the famous wall. 

One of the first effects of the volatility can be seen in the plunging value of the peso against the dollar, which during the week of the election reached 20.8 to one, a historical high since 1994, and at exchange booths it is above 21 pesos. During the first nine months of the year, the peso lost 14% of its value, and since 2014, it has depreciated 48%. To fight against this loss in value, the Bank of Mexico recently raised interest rates from 4.75 to 5.25%, the fifth increase in a year from 3%, to stop the depreciation and stabilize inflation—which continues to grow and could pass the 4% mark. The Bank of Mexico could still raise interest rates to 6.75% in December.

Another possible impact would be on flows of foreign investment, which would suffer greatly due to lost opportunities with a different or nonexistent NAFTA, and to the economic sanctions that might be slapped on U.S. businesses that invest outside of the United States. The auto industry is just one important sector that could be affected by Trump’s promise to put a 35% tax on the products made by assembly plants in Mexico. Foreign investment (FDI) could see a significant drop with the uncertainty we are facing, which is halting the flow of investments until people are clear about Trump’s intentions toward multinational treaties, especially NAFTA.

In fact, the trade protectionism Trump promised during his campaign, especially against China and Mexico, could be the worst piece of news for the Mexican economy. Wilbur Ross, Trump’s probable Secretary of Commerce, has already stated that if anyone should make concessions in the renegotiation of trade relations it is Mexico, because 80% of its exports are to the United States. To set the tone, Trump has already announced that he is abandoning the Trans-Pacific Partnership (TPP), which would have brought together 12 countries, including Mexico, and would have represented 40% of the world economy. Instead, he plans to create bilateral agreements, so long as they foster the creation of jobs in the United States. If he renegotiates NAFTA with Mexico and Canada, which Trump calls “the worst trade deal in history,” he could at the very least impose barriers or duties to reduce the trade deficit with Mexico. If he were to cancel NAFTA, the economic, social and geopolitical consequences could be very costly, damaging the growth potential of the entire North American region’s economy and the wellbeing of millions of consumers who today have access to goods at competitive prices thanks to free trade.

The second source of foreign income for Mexico comes from the remittances sent by the more than 34 million Mexicans living or working in the United States, another of Trump’s targets. He has suggested financing the wall with them. Whether through taxes, restrictions on transfers, or the highly unlikely illegal confiscation of the remittances, as Agustín Carstens, the governor of the Bank of Mexico has said, the impact could be very hard for a country that in 2015 received a total of 24.784 billion dollars from remittances, funds that have triggered a good deal of consumer spending in Mexico.

These factors, combined with less demand from the United States and another likely budget cut to public spending in Mexico, will have a direct impact on the country’s growth forecast. The peso’s depreciation has not been steep enough to stimulate exports. Furthermore, even though domestic consumption set off strong in 2016, it has slowed and is still too weak to compensate for the likely fall in U.S. demand. The Bank of Mexico has lowered its 2016 growth forecast to between 1.8 and 2.3% (the IMF forecasts that the Mexican economy will close out the year at 2.1%), and some analysts estimate that it is now more likely that the Mexican economy will even fall into a recession during the first half of 2017. This weak growth could worsen, due to a boom in protectionist policies from other countries, so Mexico should take on the task of diversifying the destination of its exports and focus on other regions and countries. Perhaps the failure of the TPP could help reinforce trade relations with Asian partners such as China, or allow us to look toward the barely integrated Latin American region, beginning with Central America and the Caribbean.

What would be best for North America would be for Trump’s administration to focus on the NAFTA strategic alliance in favor of growth for the North American region and on economic social, and cultural cooperation with its partners. This includes taking responsibility for sharing with Mexico a trade exchange of more than 583 billion dollars and a 3,184-kilometer border. The new U.S. administration must leave behind the confrontational rhetoric and continue to cooperate on economic, educational, migratory, and security matters, as in recent years. Otherwise, the region could end up lagging behind other regions of the world and could lose decades of economic and social integration.   

Another area that might suffer a huge setback is the fight against climate change, which is at huge risk at a decisive moment for maintaining the spike in temperatures within a manageable range. Trump has promised to repeal the global climate-change agreements, arguing that they are a “farce” made up by China to undermine U.S. competitiveness. If he abandons or weakens the Paris Agreement, approved by 196 countries, irreversible damage could be done to the planet and the global economy, which in the long run could suffer the huge costs of a worldwide rise in temperature.

Faced with these plans, we would have to wait and see what the President-elect is going to fight for and carry out once he takes office, although some of his cabinet appointments to date make us believe he could go through with his plans. If so, those of us who have worked for so many years toward including sustainable business solutions are overcome with dismay and discouragement. As the dean of EGADE Business School, an institution that heads several projects for the promotion of corporate sustainability and responsible business education—such as the Global Compact and the United Nations Sustainable Development Goals— I am very concerned about this step backward, but I can only reaffirm our commitment to fighting climate change and to promoting economic, social, and environmental sustainability, which we shall continue to strive for when developing leaders committed to global prosperity and in the research that entails business models that consider and promote sustainability within that prosperity.