The Mexican stock market is up 11% year to date—but the outlook is cloudy as US President Donald Trump threatens to impose a border adjustment tax on imports.
One of the priorities for Trump and his administration is to address the trade deficits and loss of jobs due to what he has deemed poor agreements with large US trading partners. Mexico and the North American Free Trade Agreement are near the top of his list of concerns, NewsNow reported.
The uncertainty about what changes the administration may recommend or new policies it may implement has darkened investors’ outlook for Mexico and its markets.
T. Rowe Price, Latin American Equity fund, in his survey said: “We spent a week in Mexico earlier this year, meeting with company executives and with government and policy leaders. We were struck by the strong sense of uncertainty expressed by nearly everyone we met.”
The potential steps Trump might take to implement his new trade policies include renegotiating NAFTA, while he could also impose a border adjustment tax on imports from Mexico. While the aim would be to reduce the trade deficit with Mexico–which was $60 billion in 2015–it is not clear these aggressive policies would achieve that goal.
More than 80% of Mexico’s exports go to the US and there are no clear alternative destinations for these exports. This means a large tariff on Mexican goods would simply weaken the peso, reducing Mexico’s production costs in dollars versus US producers, more or less negating the effect of the tariff on trade volumes.
In addition, economies are highly integrated. For example, Mexico bought 18% of US manufacturing exports in 2015. Mexico-sourced intermediate good inputs also are an important part of US manufacturing supply chains. In other words, the US would also feel the impact of protectionist policies. Many Mexican exporters are US-owned companies. In fact, nearly 40% of the value added in US imports from Mexico originated in the US.
The most likely outcome will be a more pragmatic solution, with a renegotiation of NAFTA that does not fundamentally change the terms of Mexico’s access to the US market, but updates the treaty with stronger labor standards and more stringent requirements for goods to receive duty-free status.
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