Mexico Politics June 2019

Mexico

Mexico: U.S. tariffs averted for now but uncertainty lingers

June 10, 2019

Mexico and the United States reached a tenuous agreement on 7 June to avoid crippling U.S.-imposed tariffs on all Mexican imports that had been set to take effect only days later. The so-called immigration tariffs, threatened by U.S. President Donald Trump on 30 May in response to the perceived failure by Mexican authorities to tackle U.S.-bound migration flows, were set to tax all goods entering the U.S. from Mexico at 5% before increasing stepwise to 25% through October. Although the U.S. eventually shelved its proposal—only three days before the tariffs were set to take effect on 10 June—in favor of a deal to curb the flow of migrants reaching the Mexico-U.S. border, analysts reasoned that much of the damage had already been done. Most visibly, the heightened level of uncertainty surrounding the Mexico-U.S. trade relationship despite last year’s United States-Mexico-Canada Agreement (USMCA) has left the already-ailing economy on even shakier ground; both Fitch Ratings and Moody’s said as much in their back-to-back ratings calls on 5 June, highlighting the recent deterioration of the macroeconomic outlook alongside other Pemex-related fiscal anxieties. Moreover, U.S. demands are expected to strain an already-strained budget as Mexico’s economy absorbs more of the cost of U.S.-bound migration flows. The gut-punch to economic sentiment, meanwhile, has all but dashed hopes of a short-term recovery in investment.

Analysts had proceeded with caution in assessing the probable fallout from the U.S.-imposed tariffs, although they had been unanimous that they would devastate the economy; some had seen them pushing it toward stagflation and, credibly, even into recession. Although tariffs were dodged in recent days, their threat still looms and additional flare-ups in the Mexico-U.S. trade relationship are next to inevitable. “We believe the link between immigration and trade policy cannot be reversed,” noted analysts at Nomura. Expanding on this point, they explained “the fact that immigration is an important political issue to President Trump means that the risk of some sort of disruption […] will remain at least through the 2020 [U.S.] elections.” Looking ahead, analysts polled by FocusEconomics expect the recent bout of uncertainty to persist: “If social media is any guide, those in Mexico feel this is more of a postponement than a cancellation,” argued analysts at ING. Much of our panel agrees. The uncertainty pushed them to lower their growth forecasts in recent days and Consensus now sees growth at 1.5% this year, which is down 0.2 percentage points from last month’s forecast, and at 1.8% next year.

Meanwhile, how recent events could affect the ratification of the USMCA still remains to be seen. Although the last-minute walkback by the U.S. could signal that ratification is still on the rails just north of the Rio Grande, a number of outstanding concerns persist in the U.S. House of Representatives. “House Democrats maintained a positive attitude toward the agreement last week despite the threat of tariffs,” commented analysts at Nomura, adding that Republicans in the House are expected to rally around the U.S. president like when Section 232 tariffs on “steel and aluminum […] were removed for Mexico and Canada”. Despite a clearer path toward ratification, however, a number of analysts remain skeptical that House Democrats will be able to strike a compromise with the U.S. Trade Representative.

Amid the narrowly-averted diplomatic crisis, the Mexican peso plummeted before recovering somewhat in the run-up to the tariffs’ suspension. On 7 June, the MXN traded at 19.62 per USD, depreciating 3.0% from the same day in May. Looking ahead, a fraught trade relationship with the U.S. is expected to continue battering the peso, as will heightened economic and political uncertainty. FocusEconomics analysts see the peso trading lower in the near-term, ending this year and next at MXN 20.04 and 20.31 per USD, respectively.


Author:, Economist

Sample Report

Looking for forecasts related to Politics in Mexico? Download a sample report now.

Download




Mexico Economic News

More news

Search form