The Americas | Bello

Mexico is growing less pessimistic about Donald Trump

That does not mean the country can relax

IN THE anxious days before Donald Trump was inaugurated in January the outlook for Mexico seemed bleak indeed. Mexicans worried that the president-elect would do what he said: tear up or drastically revise the North American Free-Trade Agreement (NAFTA), build a wall on the United States’ southern border and deport millions of their countrymen. Between election day in November and mid-January the peso lost 15% of its value against the dollar.

Now, 11 weeks into Mr Trump’s shambolic administration, the mood has lightened somewhat. Mexicans watch with mounting glee as judges block his executive orders. They are encouraged, too, by the impression that he cannot get bills through Congress and is hobbled by probes into connections between some of his advisers and Russia.

Now they have reason to hope that Mr Trump’s protectionism will be less calamitous than feared. Wilbur Ross, the United States’ commerce secretary, talks of making a “very sensible” agreement with Mexico. A leaked draft letter to Congress by the acting trade representative, Stephen Vaughn, proposes updating NAFTA to make it more like the Trans-Pacific Partnership (TPP), an 11-country trade agreement from which Mr Trump withdrew. Peter Navarro, Mr Trump’s trade adviser, wants to create a “mutually beneficial regional powerhouse”, though his way of doing that could be disruptive. He would tighten rules of origin, which might make it hard for Mexico to get car parts from China to sell within NAFTA, for example.

All this better-than-expected news from Washington has pushed the peso, which functions as a national mood ring, nearly back to its pre-election levels. That reduces the risk of higher inflation and interest rates. JPMorgan Chase, a bank, recently lifted its forecast for growth in Mexico this year from 1.3% to 2%. Outside the theatre of Mr Trump’s threats, real-world trade is doing well. Strong manufacturing growth in the United States is helping Mexican factories: Mexico’s non-oil exports grew 5.5% year-on-year in February. The boss of a maquiladora factory on the border says: “2017 is looking good.”

It is still too early to conclude that some combination of Mr Trump’s incompetence and reasonableness among his trade negotiators will shield Mexico’s economy from his aggression. Congress has yet to confirm the United States’ trade representative, though here, too, the signals are mildly encouraging. Mr Trump’s nominee, Robert Lighthizer, is more likely to be a vigorous enforcer of trade rules than a shredder of the rule book.

Stay scared

More worrying, perhaps, is what the United States might do on tax. Paul Ryan, the Speaker of the House of Representatives, wants a 20% “border-adjustment tax” to pay for a cut in corporate-tax rates. Steve Bannon, the leading economic nationalist in the White House, is thought to support the idea. It is little comfort to Mexico that the tax would hurt all exporters to the United States, not just Mexicans.

The fact is that Mexico remains uncomfortably exposed to Mr Trump’s whims and Mr Ryan’s tax plans. Although they may not carry out their worst threats, they have already done damage. Foreign investment is likely to be lower this year than in 2016. Higher inflation, the result of the peso’s slump and a rise in fuel prices ordered by the government, has hurt consumer spending, the main source of growth last year. GDP growth in 2017 is unlikely to match last year’s 2.3%.

The government of Enrique Peña Nieto must not let down its guard, in part because the Trump scare is a spur to do things Mexico should be doing anyway. It is improving trade ties with more-distant partners, including China and the European Union. Minus the United States, the TPP could become a hub of future trade agreements. Mexico is making a case for NAFTA among Americans who would be hurt by Mr Trump’s protectionism, from maize growers in Iowa to consumers across the country.

Most important, the Mexican government needs to do more to spread prosperity, raise productivity and strengthen the rule of law. Excessive red tape encourages many businesses to remain informal. The economy is still hobbled by poor infrastructure and criminality. This week the editor of El Norte, a newspaper in the border town of Juárez, said it would close down because journalism had become too dangerous. A reporter who had contributed to the paper was recently murdered in the nearby city of Chihuahua. If Mexico wants to be strong enough to cope with the Trump era, it must do something about such lawlessness.

This article appeared in the The Americas section of the print edition under the headline "Not so bad, perhaps"

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