President Donald Trump, like his populist right-wing precursor Sarah Palin, is a barracuda. In business he was merciless in pursuing his own interests, outsmarting and out-competing large, slow-swimming rivals by ruthlessly pursuing advantages through tax breaks and subsidies. He also hounded hapless minnows, refusing to pay independent contractors, architects, and suppliers. He was a big, ferocious fish in his pond—the rough and tumble world of New York real estate—and he left behind a trail of destruction and bankruptcies in his wake. But he was never big enough to upset the entire balance of the economic ecosystem. That all changed when he entered the Oval Office.
Trump, however, still does not appear to understand the magnitude of the influence he now wields. His post-election behavior toward Mexico, to name a pressing example, has been petty and petulant, but also remarkable in its continued focus on demonizing U.S.’s neighbor to the south. Some observers thought Trump’s anti-Mexico rhetoric would disappear—or at least soften—after the inauguration. But Trump is still the same old New York real estate predator. He has maintained a hostile tone toward Mexicans, particularly those who would like to come to the U.S.; shamed American companies, like Carrier, Ford, and GM, that want to set up shops in Mexico; belittled Mexico’s government and people by demanding that they pay for a wall on the border; and signaled that he will squeeze out every last possible penny from this bilateral relationship for the U.S. His obsession with small victories may end up upending his country’s valuable, longstanding economic relationship with Mexico.
Trump appears to believe that Mexico will be unable or unwilling to respond. In his business dealings Trump proved adept at forcing suppliers and partners to eat costs and accept pay cuts. When relationships soured, such as his failed luxury condo project in Baja California, Mexico, Trump often moved on to new projects and new deals. He cannot do this with another country.
The irony is that Mexico, with its combination of a large pool of low-cost laborers and a small, well-educated professional class, is almost the perfect economic ally for the U.S. Mexican elites have helped create an unbalanced manufacturing economy that complements the U.S. rather than competing with it directly. Mexico never really tried to follow the example of South Korea and Japan, which created their own car companies and electronics giants that produced cheaper goods that undercut the goods produced in America. Such a rival on the U.S.’s southern border would spell trouble for American manufacturers. And it could materialize faster than you might think.
Since the start of the NAFTA era, Mexico has been governed by
a succession of centrist or right-of-center administrations that are pro-trade
and pro-business. These governments have pursued an oftentimes controversial
policy agenda to fundamentally re-organize Mexico’s economy towards
manufacturing and exports. Since the 1980s, Mexico has turned away from the
“mixed” model of state-led capitalism that it embraced during the economic boom
that followed World War II. It removed tariff barriers, opened its borders to
imports, and stripped away supports and subsidies for small farmers and small,
uncompetitive industries. These changes opened up the consumer market to U.S.- and Asian-produced goods, and also forced millions of rural residents to look
for low-paid work in major cities.
Trump demonizes Mexico as a manufacturing competitor. Unfortunately, Mexico has failed to cultivate any notable national brands that produce cars, machines, or electronic goods. While South Korea built up Samsung, LG, Kia, and Hyundai, mid-tier Mexican companies, as well as Mexican-based outposts from global contract manufacturers such as Foxconn, have simply integrated themselves into global production chains, taking over part of the fabrication process for U.S. and other foreign companies.
Mexico imports raw materials and exports finished goods. Critics complain that the inputs enter and the products go out and only the wages and utility bills stay in Mexico. Mexico now stands out in Latin America both for its high proportion of trade relative to the size of its economy, and for its overwhelming dependence on the U.S. as its primary export market. Eighty percent of Mexico’s exports go to the U.S.; in Trump’s view, this is a skewed dynamic that he thinks he can exploit.
Over the course of the last two decades, Mexico has moved up the production ladder, investing heavily in technical education, producing engineers, and shifting towards the fabrication of more complicated and more valuable products. Audi’s new high-tech $1.3 billion factory in the central Mexican state of Puebla and Honeywell’s new research and development center in Mexico City are supposed to be the harbingers of a new era of Mexican innovation and manufacturing. To many observers, Mexico now stands on the cusp of becoming a successful middle-income manufacturing economy.
But, for too many people in Mexico, the gains of the existing arrangement are still intangible. Over half of Mexico’s workforce is employed in low-productivity jobs in the informal economy: shining shoes, working on isolated family farms, selling candy and soda in the street, or operating small taco stands or storefronts. For these people, the benefits of living in Mexico’s globalized economy are negligible.
All of this is to say that Trump is crashing into a sensitive political and economic dynamic that could very well change, and not to the benefit of the U.S. economy and U.S. companies. Trump’s calculation is probably correct that Mexico’s president, Enrique Peña Nieto, will cave when faced with Trump’s demands. Trump may well extract some small concessions from Peña Nieto so that Mexico can keep the broad terms of the current economic arrangement intact. (Secretary of State Rex Tillerson will be in Mexico City on Thursday to smooth ties between the countries.) But, unfortunately for Trump, any deal negotiated with Peña Nieto would be likely be short-lived. In many corners of Mexico, Peña Nieto is viewed as a hapless figurehead and a lame duck, with just under two years left in his term. And in 2018, Mexico could be the site of a potentially game-changing election.
In 2006 and 2012, a messianic populist named Andres Manuel Lopez Obrador burst on the national political scene with a combination of protectionist rhetoric, old-school leftist economics, crowd-rousing oratory, and anti-elite (and sometimes anti-U.S.) discourse. He lost those presidential elections by the narrowest of margins. At the time, Mexico’s pro-business parties warned that Lopez Obrador would upend the status quo with the U.S. With Mexico struggling to succeed as an export economy, and with the president of the United States taking a demeaning and hostile stance toward Mexico, it is possible that in 2018 Mexican voters will no longer see much value in the existing economic arrangement. It shouldn’t come as a surprise that recent polls find that Lopez Obrador currently leads all potential candidates heading into the 2018 election.
There are other factors that suggest Mexico may be prepared for real change. Mexico’s wealthiest 1 percent controls 43 percent of the country’s wealth. Since the start of the NAFTA era, Mexico’s 16 wealthiest families saw their fortunes increase fivefold. Meanwhile, per capita GDP rose by an anemic average rate of 0.6 percent a year. According to data from Mexico’s National Statistics Agency, between 2010 and 2014 most Mexican households saw their incomes fall. Only the wealthiest 10 percent of all households reported income growth over this period.
Entry-level factory jobs at major multinational corporations in Mexico pay as little as $6 a day. The border city of Tijuana has been marked as a hub of modern Mexican manufacturing, but the new industries have not delivered widespread wealth for residents. The hills on the fringes of the city are densely packed communities where tens of thousands of workers still live in improvised housing cobbled together from discarded political billboards, cement blocks, and scraps of wood and metal.
The workers in northern Mexico’s factory towns aren’t really competing with their highly paid counterparts in the U.S. They are competing against the efficiency and cost effectiveness of automation. Some manual labor may be moving to Mexico, but the highest-paying manufacturing jobs are staying in the U.S. Companies like Ford and Carrier are deciding between designing expensive new automated plants in the U.S. or investing in lower-cost, labor-intensive factories in Mexico. High-paying low-skill jobs are a scarce commodity on both sides of the border.
Trump doesn’t seem to understand any of this, even after leading his own successful populist revolt. Last year was marked by a series of violent protests in the poorest parts of southern Mexico. A recent decision by Mexico’s federal government to raise gasoline prices has been met by mass marches and isolated cases of violence and looting. In Tijuana protesters staged a march and temporarily closed the San Ysidro border crossing. At another protest a man rammed his pickup truck into a phalanx of riot police, injuring several officers.
Scholars have long predicted that Mexico is ripe for a popular uprising. During the NAFTA era, however, Mexico’s politicians made small but important reforms, while avoiding radical changes. In many ways the status quo is protected by the belief that things will get better in the future, that Mexico is poised for more and better-quality economic growth. Every year people expect and hope that a new wave of investment and jobs will arrive. But it has reached the stage where Mexico imports more than $2 billion of corn a year from the U.S., while rural communities across Mexico continue to stagnate. Lopez Obrador’s message that Mexico should produce what it consumes may be resonating with more voters.
After twenty-plus years of disappointing growth, many Mexicans are losing their patience. Donald Trump’s insults and attacks are provoking a passionate response in a populace that is already irate. Trump, ever the negotiator, may feel that he can bring the Mexican government to heel by threatening to cancel NAFTA. But he doesn’t appear to realize that his hardball tactics may provoke Mexicans to finally elect a populist president who will try to radically re-arrange Mexico’s economic relationship with the U.S. Inadvertently, Trump may very well inspire a drive to build a Mexican economy that is more independent from the U.S. and more of a direct competitor.
If Lopez Obrador wins in 2018 and takes over the seat on the other side of the negotiating table, Donald Trump won’t be happy with the outcome.