Our US Public Policy Strategist Ariana Salvatore and Chief Latin
America Equity Strategist Nikolaj Lippmann discuss what Trump’s
victory could mean for new trade relationships.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on
the Market. I'm Ariana Salvatore, Morgan Stanley's US Public
Policy Strategist.
Nikolaj Lippmann: And I'm Nik Lippmann,
Morgan Stanley's Chief Latin American Equity Strategist.
Ariana Salvatore: Today, we're talking
about the impact of the US election on Mexico's economy,
financial markets, and its trade relationships with both the US
and China.
It's Friday, November 22nd at 10am in New York.
The US election has generated a lot of debate around global
trade, and now that Trump has won, all eyes are on tariffs. Nik,
how much is this weighing on Mexico investors?
Nikolaj Lippmann: It’s interesting because
there's kind of no real consensus here. I'd say international and
US investors are generally rather apprehensive about getting in
front of the Trump risk in Mexico; while, interestingly enough,
most Mexico-based investors and many Latin American investors
think Trump is kind of good news for Mexico, and in many cases,
even better news than Biden or Harris. Net, net, Mexican peso has
sold off. Mexico's now down 25 per cent in dollar terms year to
date, while it was flat to up three, four, 5 per cent around May.
So, we've already seen a lot being priced then.
Ariana, what are your expectations for Trump's trade policy with
regards to Mexico?
Ariana Salvatore: So, Mexico has been a big
part of the trade debate, especially as we consider this question
of whether or not Mexico represents a bridge or a buffer between
the US and China. On the tariff front, we've been clear about our
expectations that a wide range of outcomes is possible here,
especially because the president can do so much without
congressional approval.
Specifically on Mexico, Trump has in the past threatened an
increase in exchange for certain policy concessions. For example,
back in 2019, he threatened a 5 per cent tariff if the Mexican
government didn't send emergency authorities to the southern
border. We think given the salience of immigration as a topic
this election cycle, we can easily envision a scenario again in
which those tariff threats re-emerge.
However, there's really a balance to strike here because the US
is Mexico's main trading partner. That means any changes to
current policy will have a substantial impact.
So, Nik, how are you thinking about these changes? Are all tariff
plans necessarily a negative? Or do you see any potential
opportunities for Mexico here?
Nikolaj Lippmann: Look, I think there are
clear risks, but here are my thoughts. It would be very hard for
the United States to de-risk from China and de-risk from Mexico
simultaneously. Here it becomes really important to double-click
on the differences in the manufacturing ecosystems in North
America versus Southeast Asia and China.
The North American model is really very integrated. US companies
are by a mile the biggest investor. In Mexico – and Mexican
exports to the US kind of match the Mexican import categories –
the products go back and forth. Mexico has evolved from a place
of assembly to a manufacturing ecosystem. 25 years ago, it was
more about sending products down, paint them blue, put a lid on
it. Now there's much more value add.
The link, however, is still alive. It's a play on enhancing US
competitiveness. You can kind of, as you did, call it a China
buffer; a fender that helps protect US competitiveness. But by
the end of the day, I think integration and alignment is going to
be the key here.
Ariana Salvatore: But of course, it's not
just the direct trade relationship between the US and Mexico. We
need to also consider the global geopolitical landscape, and
specifically this question of the role of China. What's Mexico's
current trade policy like with China?
Nikolaj Lippmann: Another great question,
Ariana, and I think this is the key. There is growing evidence
that China is trying to use Mexico as a China bridge.
And I think this is an area where we will see the biggest
adjustments or need for realignment. This is a debate we've been
following. We saw, with interest, that Mexico introduced first a
25 per cent tariff and then a 35 per cent tariff on Chinese
imports. And saw this as the initial signs of growing alignment
between the two countries.
However, Mexican import from China never really dropped. So, we
started looking at like the complicated math saying 35 per cent
times $115 billion of import. You know, best case scenario,
Mexico should be collecting $40 billion from tariffs; that's huge
and almost unrealistic number for Mexico. Even half of that would
go a long way to solve fiscal challenges in that country.
However, when we started looking at the actual tax collection
from Chinese imports, it was closer to $3 billion, as we
highlighted in a note with our Mexico economist just recently.
There's just multiple discounts and exemptions to effective
tariffs at neither 25 per cent nor 35 per cent, but actually
closer to 2.5 [or] 3 per cent. I think there's a problem with
Chinese content in Mexican exports, and I think it's likely to be
an area that policymakers will examine more closely. Why not
drive-up US or North American content?
Ariana Salvatore: So, it sounds like what
you're saying is that there is a political, or rhetorical at
least, alignment between the US and Mexico when it comes to
China. But the reality is that the policy implementation is not
yet there.
We know that there's currently nothing in the USMCA treaty that
prevents Mexico from importing goods from China. But a lot has
changed over the past four years, even since the pandemic. So,
looking forward, do you expect Mexico's policy vis-a-vis China to
change after Trump takes office?
Nikolaj Lippmann: I think, I certainly
think so, and I think this is again; this is going to be the key.
As you mentioned, there's nothing in the USMCA treaty that
prevents Mexico from buying the stuff from China. And it's not a
customs union. Mexican consumers, much like American consumers,
like to buy cheap stuff.
However, the geopolitics that you refer to is important. And when
I reflect, frankly, on the bilateral relationship between the two
countries, I think Mexican policymakers need to perhaps pause and
think a little bit about things like the spirit of the treaty and
not just the letter of the treaty; and also about how to maintain
public opinion support in the United States.
By the end of the day, when we see what has happened with regards
to China after the pandemic, it has been a significant change in
political consensus and public opinion. When I think Americans
are not necessarily interested in just using Mexico as a China
bridge for Chinese products.
During the first Trump administration, the NAFTA agreement was
renegotiated as the US Mexico Canada agreement, the USMCA, that
took effect or took force in mid 2020. This agreement will come
under review in 2026.
Ariana, what are the expectations for the future of this
agreement under the Trump administration?
Ariana Salvatore: So, I think this USMCA
review that's coming up in 2026 is going to be a really critical
litmus test of the US-Mexico relationship, and we're going to
learn a lot about this China bridge or buffer question that you
mentioned. Just for some very brief context, that agreement as
you mentioned was signed in 2020, but it includes a clause that
lets all parties evaluate the agreement six years into a 16-year
time horizon.
So, at that point, they can decide to extend the agreement for
another 16 years. Or to conduct a joint review on an annual basis
until that original 16 years lapses. So, although the agreement
will stay in force until at least 2036, the review period, which
is around June of [20]26, provides an opportunity for the signing
parties to provide recommendations or propose changes to the
agreement short of a full-scale renegotiation.
We do see some overlapping objectives between the two parties.
For example, things like updating the foundation for digital
trade and AI, ensuring the endurance of labor protections, and
addressing Mexico's energy sector. But Trump's approach likely
will involve confronting the auto EV disputes and could possibly
introduce an element of immigration policy within the revision.
We also definitely expect this theme of Chinese investment in
Mexico to feature heavily in the USMCA review discussions.
Finally, Nik, keeping in mind everything that we've discussed
today, with global supply chains getting rewired post the
pandemic, Mexico has been a beneficiary of the nearshoring trend.
Do you think this is going to change as we look ahead?
Nikolaj Lippmann: So, look, we [are] still
underweight Mexico, but I think risk ultimately biased with the
upside over time with regards to trade.
We need evidence to be able to lay it out, these scenarios;
Mexico could end up doing quite well with Trump. But much work
needs to be done south of the border with regards to all the
areas that we just mentioned there, Ariana.
When we reflect on this over the next couple of years, there's a
couple of things that really stand out. Number one is that first
wave of reshoring or nearshoring, which was really focused on
brownfield. It was bringing our manufacturing ecosystems where we
already had existing infrastructure.
What is potentially next, and what we're going to be watching in
terms of sort of policy maker incentives and so on, will be some
of the greenfield manufacturing ecosystems. That could involve
things like IT hardware, maybe EV batteries, and a couple of
other really important sectors.
Ariana Salvatore: And that's something we
might get some insight into when we hear personnel appointments
from President-elect Trump over the coming months. Nik, thanks so
much for taking the time to talk.
Nikolaj Lippmann: Thank you very much,
Arianna.
Ariana Salvatore: And thank you for
listening. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen, and share the podcast with a friend
or colleague today.
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