It was the late Mexican dictator Porfirio Díaz who coined the immortal phrase that summed up his country’s eternal dilemma: “Poor Mexico. So far from God, so close to the United States.”

Living next door to the world’s most powerful country has been tough for Mexico. For a start, it would be much bigger if not for the gringos up north. Places like Texas and California? They used to be Mexican until they were taken from it, along with a slew of other states.

But historically troubled relations were placed on a better footing with the signing of the North American Free Trade Agreement (NAFTA) in 1992 which saw Mexico form a trade bloc with the US and Canada. Coming into force in 1994 NAFTA has been a key driver of Mexican growth in the intervening years. It has tied the country into the supply chains of industries in the rich, technologically advanced economies to the north and helped wean it off a dangerous dependence on oil receipts.

And now along comes Trump. The US president launched his campaign with a notorious racially charged attack on Mexican immigrants to the US, describing them as “rapists” and promising to build a wall to keep them out. Oh, and for good measure, make them pay for it.

Even more threatening for Mexico than the wall is the protectionist Trump’s threat to rip up the NAFTA agreement which he has slammed as “the worst trade deal in history”. Were the world’s biggest economy to walk away from the bloc, Mexico could see its access to the market which buys 80% of all its exports suddenly restricted thanks to the sudden bizarre turn US domestic politics has taken. Poor Mexico indeed.

“Mexico is now fully integrated with the US and Canadian economies. In this sense, it is much more of a North American economy than it is a Latin American one. Because of this integration if the US suddenly decided to walk away from NAFTA there would be financial turmoil in Mexico,” says Alberto Bernal, chief Latin America economist with XP Securities.

Back on track?

That means for Mexican investors the recent release of the US blueprint for renegotiating NAFTA has been met with relief. Already Trump has backed down from his threat to just walk away from the agreement. That has been revealed as bluster. Now instead of new tariffs, the US is looking to lower non-tariff barriers to its goods being sold into Mexico. The US blueprint also includes a commitment to duty-free market access. This means it contains enough to allow investors to imagine Mexico’s current NAFTA-based economic model will survive Trump, though his mercurial nature will leave observers nervous especially as the renegotiations have an aggressive timetable. Desperate for some sort of political win, Trump is demanding a deal be reached by year-end and is again threatening tariffs as his self-imposed deadline looms.

Forget lazy stereotypes of the Mexican ‘manaña’

In part it is NAFTA’s very success in achieving its designers’ hopes that it would pull the continent closer together that is likely to save it. Trump rails that the agreement allowed US companies to export manufacturing jobs across the Rio Grande. But much of what they now make in Mexican factories gets re-exported back across the border as parts needed to keep plants open back in the US. “Because of this integration if the US walked away the impact on a company like General Motors would be huge so we think a US withdrawal will not happen, not necessarily because of pressure from Mexico and Canada, but because of that from US corporations,” predicts XP’s Bernal.

In a recent speech Mexico’s President Enrique Peña Nieto, who has sparred with Trump, recently said he now had “real optimism that we will be able to build a new working agenda in the bilateral relationship that would be positive”.

But if the worst fears over Trump’s threat to the basis of the economy are now receding somewhat, the giant to the north still has the potential to create turmoil in Latin America’s number two economy. This is because despite integration to the north, Mexico still shares some features with its Latin cousins to the south. One clear example of this is their economic exposure to the expected tightening cycle from the Fed in Washington after the extended period of record low rates and quantitative easing. After a period of austerity and fiscal reform, Mexico’s government has done much to reduce the deficit, leaving it well placed to confront a hiking cycle in Fed interest rates. But there are fears about corporations that have loaded up on cheap US dollar-denominated debt. A sudden hike in the cost of servicing those debts could hit investment and so curb growth.

...more remains to be done to tackle these powerful domestic groups...

That could become a serious issue if the historic main driver of Mexico’s economy – the oil industry – continues its slower than expected transformation after the state gave up its 75-year monopoly in 2013. President Peña Nieto sold the move to a sceptical public saying allowing outside drillers to compete with state giant Pemex would inject dynamism into a pillar of the economy that is in structural decline. But the great recession, the collapse in the oil price and the emergence of the shale oil industry in the US have helped dampen the enthusiasm among foreign drillers for Mexican assets. After decades of being shut out, they have shown up, but it has been far from the promised stampede.

Elections
And even that is at risk of being reversed. Veteran left-wing politician Andrés Manuel López Obrador is leading in the polls for presidential elections in July, 2018. An opponent of the ending of the oil monopoly, like he once opposed NAFTA, he says if elected he would hold a referendum on letting foreign drillers in. Painted by opponents as a potential Mexican Hugo Chávez, the autocrat who drove oil-rich Venezuela over an economic cliff, 63-year-old López Obrador is determined to win the presidency many believe he was cheated out of in a dubious election in 2006 that handed victory to right-winger Vicente Fox.

López Obrador is a vocal critic of Trump, having taken his campaign to Mexican communities in the US and saying he is the only candidate who will stand up to the US president. The prospects of two voluble antagonists running the two neighbours by next year could puncture the current optimism surrounding prospects for NAFTA.

President Peña Nieto cannot run again but the rampant corruption at the top of his administration will hobble the chances of his conservative-populist Institutional Revolutionary Party. The right-wing National Action Party high-flying independent candidate Margarita Zavala is tainted by association with her husband, Felipe Calderón. As president, he launched a cack-handed crackdown on drug traffickers which failed and has led to a huge surge in violence that is yet to end.

With these advantages in his favour, the thought of López Obrador as president already has some investors selling the peso. Even if as president he does not let his antagonism towards Trump hit NAFTA or upend the oil sector reform, a López Obrador presidency would present other challenges to the Mexican economy. He has opposed economic liberalisation as right-wing neo-liberalism. But a halt to reform could block efforts to end what is widely seen as one of the main blocks of growth in Mexico – the existence of powerful monopolies and duopolies in key sectors.

President Peña Nieto’s reforms have not just targeted state control over sections of the economy but also these private groups. Reforms of the telecoms sector – dominated by Carlos Slim, once the world’s richest man and whose fortune is still $54.5 billion – has seen competition and services improve even as costs have fallen. But more remains to be done to tackle these powerful domestic groups which are the most Latin characteristic of this North American economy.

Whether López Obrador would do so is open to question and this, the NAFTA talks and the future moves at the Fed have many observers wondering if the current calm in Mexican markets is just a lull before the next of the country’s occasional bouts of volatility. And so the next twelve months are shaping up to be interesting ones for the most successful of Latin America’s big economies. What happens next though is not wholly in the hands of its own voters. As ever, events in the US will play their part in shaping Mexico’s immediate future. NAFTA, and the central role it now plays in the Mexican economy, has only reinforced the truism uttered over a century ago by Porfirio Díaz.

Doing business in Mexico

Despite integration with the two economies to its north, Mexico’s business world remains a relatively closed affair, proving that in many respects it remains a deeply Latin country. Family conglomerates still dominate. Old school connections, even if made on US MBA programmes, are important. As in other Latin economies, finding a local partner is a good means of helping with introductions. Invest the time, as many Mexican business people will be reluctant to do deals with people they do not know, regardless of the reputation they bring to a first meeting.

...Mexico’s business world remains a relatively closed affair...

English is widely spoken in Mexico’s business community but this is a Spanish-speaking universe. Making an effort with the language is a worthwhile investment, especially if you are trying to build the sort of long-lasting relationships that lead to success in the country. If you cannot speak any Spanish, do not just assume that those you are meeting also speak English. Bring an interpreter. Even if you end up not needing one, the respect shown in doing so will stand you in good stead.

In Mexico the breakfast meeting is just as important as the lunch one. Be prepared to attend them even for initial encounters with potential partners. When at one, tuck in, especially as lunch is a later affair in Mexico than in the US, say, often not starting until after 2pm. If you have serious business to discuss, try to avoid doing so at lunch which normally is a very social affair consisting of several courses.

Forget lazy stereotypes of the Mexican ‘manaña’. This is a serious country where punctuality is prized and expected. Business attire is smart, especially in Mexico City, the country’s political, business and financial capital. Mexican business people are a stylish bunch. Pack your best suit when travelling. But unlike in some parts of Latin America, there is no kiss on greetings. A formal handshake is sufficient.

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