The New Equilibrium in the Global Economy under Trump Will Affect Mexico

Mexico is in a position of weakness for confronting the challenges that lie ahead, particularly considering the current economic slowdown.

As expected, following Donald Trump’s victory as the next U.S. president, changes are underway, both in how Mexico will be governed and in the global economic equilibrium, even before he takes office. Just a few hours after the election, Trump was already naming cabinet officials, announcing concrete economic policy measures, talking with leaders from other countries and more. In addition, the Republicans had a very important win in Congress, which will give them the power to make significant changes.

It is clear that Trump intends to carry through with the various promises to strengthen his country’s economy that he made during his campaign, among which are 1) encouraging domestic manufacturers to invest in the U.S., for example by lowering the corporate tax to 15%; 2) modifying and extending the term of the Tax Cuts and Jobs Act; 3) imposing across-the board tariffs; 4) reversing current environmental and energy policies, favoring the petroleum industry; 5) eliminating the Department of Education; and 6) implementing an array of measures to strengthen border security, including completing the border wall with Mexico, among others.

The Committee for a Responsible Federal Budget estimated that these measures would raise the federal deficit, consequently increasing the national debt to close to 120% of GDP in the four years of Trump’s term, and it could be 150% in the next 10 years.

Europe is worried because Trump has announced the suspension of financial and military support for Ukraine, which would allow a Russian victory in its invasion of that country. In addition, he has said that he would suspend financial support for NATO, which has worked to contain Russia’s expansionist stance toward Eastern Europe and the militarization of these countries. In Asia, China is preparing to adapt to the increased tariffs that Trump has said will take care of imports from that country. Consequently, China has dedicated itself to searching for new markets to compensate for the losses this will cause. An example is the number of new Chinese auto brands that are being sold in Mexico and other Latin American and African countries. In addition, China has reduced its sales to and its trade deficit with the U.S. to improve its image with U.S. citizens. Today, Mexico is the principal exporter to our neighbor to the north, which is not popular there.

U.S. companies are also looking into how they can benefit from the measures that will be announced to strengthen its economy. For its part, Texas has started a campaign to attract companies that have been thinking about setting up in Mexico to benefit from nearshoring and have been having second thoughts about it.

The financial markets and stock exchanges had a very positive initial reaction to the election results. It was clear that while stocks of companies that might be affected by the various measures had significant losses, a large number had significant gains. However, it is possible that long-term interest rates may stay high for longer than anticipated, owing to the risk of higher inflation.

Mexico is in a position of weakness for confronting the challenges that lie ahead, particularly considering the current economic slowdown. For its part, the Mexican government has a significant fiscal deficit to correct, with low tax revenues and social programs it cannot eliminate. Mexican companies already have an elevated tax burden, higher than their foreign competitors; much higher interest rates; and pressures on labor costs from wage increases, cuts in working hours and unfavorable competition from the informal economy. For its part, the army is involved in activities that do not fall within its jurisdiction. In brief, it would be naive to think that the U.S. election won’t have a negative impact in Mexico, and it is necessary to think about strategies to overcome it.