US President Donald Trump has stated that he will soon begin “renegotiating” the North American Free Trade Agreement (NAFTA) with his Canadian and Mexican counterparts.
According to the newly sworn-in president, meetings have been scheduled with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto. The White House website states that if Canada and Mexico refuse to accept a renegotiation of the agreement that provides a “fair deal” for American workers, then the US will move to withdraw from it.
Speaking at a ceremony to swear in senior White House staff, President Trump also stated that he would tak with Mexican President Pena Nieto about immigration and and border security in a meeting that the White House says will take place on 31 January. No date has been given for a meeting between Mr Trump and Mr Trudeau.
Meanwhile on 21 January, President Pena Nieto’s office disclosed that the Mexican leader had called Mr Trump to congratulate him. In a statement, the Mexican president “reiterated the strategic priority of bilateral ties…and expressed his interest in maintaining an open dialogue.” President Trump meanwhile has stated that “Mexico has been terrific. The president has been really very amazing.” In regards to the NAFTA renegotiations, President Trump stated, “I think we are going to have a very good result for Mexico, for the United States, for everybody.”
President Pena Nieto has faced criticism in Mexico for lacking a clear plan of action to deal with President Trump’s threats, which include building a massive border wall at Mexico’s expense and imposing a tax on Mexican imports. Protests were held on 20 January outside a Ford showroom in Mexico City after the car company cancelled a US $1.6 billion plant that it had planned on building in Mexico.
What is the NAFTA Agreement?
The North American Free Trade Agreement came into effect between the US, Canada and Mexico in 1994, when Bill Clinton was president. The agreement effectively created one of the world’s largest free trade zones by reducing or eliminating tariffs on most products. The pact was meant to benefit small businesses by lowering costs and reducing bureaucracy in a bid to facilitate buying and selling abroad. However whether it has ultimately helped or harmed Americans has been hotly debated. In 2015, the Congressional Research Service, which provides independent analysis, stated that “in reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters,” adding that “the net overall effect of NAFTA on the US economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of US GDP.”
The US presidential elections are already swinging the pendulum for Latin America in significant ways. The fear that the US will now revert to protectionism lead to a major sell off across different asset classes. The Mexican Peso tumbled to 20-years lows and has hardly recovered as of yet, pulling down the entire region. After an initial quick fall the Dollar bounced hard and is currently trading at multi-month highs. This has exacerbated the devaluation of Latin American currencies, which are traded against the Dollar.
Apart from the financial fallout, geopolitical consequences of Trump’s future policies have appeared as well. Now that Trump has confirmed he will not support the Trans-Pacific Partnership, potential members like Chili, Peru, Mexico and Colombia will likely beef up their bilateral economic relations in order to compensate for TPP. Peru already stated to foresee bilateral negotiations with Australia and New Zealand. Argentina, very open to free trade, will receive $4.1 billion in investments from Canada. This is about half the amount expected from US companies through 2019. A more protectionist approach by Trump could bring that amount down and leave the door open for Canadian companies to fill the gap. Withdrawal from NAFTA could exacerbate this and will constitute extra incentive for Latin American countries to strengthen bilateral relations with other geopolitical powers. Peru, which has strong historic ties with China, already trades more with China than with the US, a development that could potentially spill over to increased security and military cooperation. President Kuczynski’s pull to China is very clear: “We hope to tap into new markets in China, especially for agriculture. We are also interested in cooperation on science and technology. Furthermore, cultural exchanges and cooperation in archaeology and climate change are also very important for us.” It remains the question whether the US will look on from the sidelines if Russia and China increase their influence in Latin America.
Interregional relations are likely to strengthen as well, given Trump’s veiled threats to Central American countries on the topic of immigration. Whether the US will build a wall or will significantly increase deportations of immigrants, Honduras, Guatemala and El Salvador have said to form a bloc with Mexico to deal with the US under Trump leadership. However, with regards to Mexico, it is likely that organized-crime competition will increase, as a result of traffic restrictions and stricter border controls. In this scenario, conflict over control over the remaining open crossings would lead to increased violence. Violence in border cities like Ciudad Juarez and Tijuana is already on the rise. The second security consequence for Mexico stems from the influx of deportees, who would have few employment opportunities in Mexico. They could provide a ready pool of labour for criminal organizations. Central American cooperation is said to increase collaboration on jobs, investments and migration.
It remains to be seen as to which direction the pendulum will eventually swing, however, for the moment significant financial, economic and security consequences are already visible in Latin America.