USMCA: Encouraging, but Miles (and some Politics) yet to Go
By ANTONIO GARZA, Former U.S. ambassador to Mexico
This summer has brought some encouraging economic news for the United States and North America at large. There appears to be a developing consensus that the U.S. economy is on its way to a soft landing. With inflation decreasing as growth continues to be strong, economists are recalibrating their forecasts of a dramatic recession. Yet, Fitch struck a cautionary note by downgrading the U.S. credit rating, a move criticized by experts, given the country’s recent economic resilience.
Post-pandemic, obstacles still stand in the way of global economic growth. China recently announced policy changes to combat widespread unemployment, debt and deflation resulting from its much weaker-than-expected recovery. With lower Chinese demand and high interest rates, Europe showed only very modest growth last quarter and could face a dire outlook for the rest of 2023. And continued geopolitical conflict presents a wildcard. There is little certainty how the war in Ukraine will play out, although all eyes will be on Jeddah this weekend for the Saudi-hosted peace summit.
Against the backdrop of positive economic news out of the United States, Mexico’s economy has reason for moderate optimism. In the first four months of 2023, Mexico surpassed China and Canada as the top U.S. trade partner, with combined bilateral trade totaling $263 billion. Growth has outperformed expectations, due to a strong showing of exports to the United States and services. Mexico’s inflation is down and the peso is at its strongest point since 2015.
In the first quarter of this year, total foreign investment in Mexico rose nearly 50 percent. This appears to be largely the result of “ally-shoring,” with large U.S. manufacturers relocating their operations south of the border to take advantage of greater proximity and relative stability. China has also joined the nearshoring trend by investing billions in Mexico. Yet, challenges for nearshoring remain, in particular regarding Mexico’s energy policies and a limited water supply in some industrial hubs, which could pose middle- to longer-term constraints on growth.
On July 1, the United States-Mexico-Canada Agreement (USMCA) marked its third anniversary, but prolonged dispute consultations continue to be a source of increasing frustration and uncertainty for investors. And with presidential elections in both countries next year, it appears that governmental negotiations have largely stalled on pending commercial complaints. This suggests that the environment for trade may prove particularly challenging in the next few years as, in addition to 2024 presidential elections, the USMCA is approaching its 2026 sunset review.
There’s been no shortage of news on immigration. On July 25, a federal judge temprarilly blocked the Joe Biden administration’s new rule put into place when Title 42 expired in May, which restricts asylum eligibility. The Biden administration appealed the decision, countering that the rule is lawful and that its approach to expand legal pathways has successfully led to reduced unauthorized border crossings, though the most recent border numbers suggest otherwise. And last week, a federal appeals court panel approved the Biden administration’s emergency request to keep the restrictions in place pending further judicial action. The administration recently announced a new initiative to accept Cubans, Haitians, Nicaraguans and Venezuelans in Mexico for refugee resettlement in the United States.
This summer, Texas’ multi-billion-dollar border security initiative, Operation Lone Star, has been a source of controversy. Public outcry broke out over emails revealing that state officers had been ordered to employ cruel tactics at the border such as pushing migrants, including babies, into the river. In addition, the Department of Justice sued the state of Texas over a string of buoys it deployed in the Río Grande, claiming the move violates federal environmental laws and puts public safety at risk. Mexico also filed a complaint that the buoy barrier violates bilateral water treaties.
On security, violence in Mexico continues to be a top concern. As Mexico’s illicit drug trade has shifted to meet U.S. demand for synthetic drugs, fentanyl has become a source of cartel violence. Homicides have slightly declined since 2021 but remain high. Yet, the United States and Mexico remain divided on the underlying factors driving the country’s violence, making progress on security challenging.
Last month, experts charged with the investigation of the massacre of 43 students from Ayotzinapa ended their decade-long efforts. The United Nations’ human rights commissioner claimed that the investigation was obstructed by Mexico’s military, which has expanded its power and influence during President Andrés Manuel López Obrador’s (AMLO) administration.
With the June 2024 elections approaching, Mexico’s political parties will announce their presidential candidates in September. Former Mexico City Mayor Claudia Sheinbaum is ahead in the polls for the candidacy of López Obrador’s National Regeneration Movement (Morena) party, with former Mexican Foreign Secretary Marcelo Ebrard in second place. Leading the polls for the opposition coalition’s candidacy is Senator Xochitl Gálvez.
In the coming weeks, Morena will carry out a series of surveys to select López Obrador’s successor. Experts have expressed concern that this bypasses electoral laws that prevent the early promotion of political candidates. Following attempts at electoral reform over the last year, this appears to be López Obrador’s latest move to control Mexico’s democratic process ahead of the elections.
Countries across Latin America continue to step away from democracy, with the region experiencing the world’s worst democratic backsliding over the past two decades. Since the start of the year, we’ve also seen concerning headlines out of Brazil, Peru, Ecuador and El Salvador.
On regional trade, South American and European Union leaders met at a summit with hopes of making progress on the EU-Mercosur trade deal. Leaders committed to finalizing the deal — which has been in negotiations for two decades — by the end of this year.