Listen to the podcast:
Andres Manuel Lopez Obrador, Mexico’s president-elect, brings hopes of improved economic prosperity for his country, having won last week’s election on a nationalist platform. According to experts, he is a pragmatist but could be firmer than his predecessor, current president Enrique Pena Nieto, in battling the U.S. on immigration and renegotiating the North American Free Trade Agreement (NAFTA).
With an aim to more equitably spread economic gains and uplift disadvantaged sections of Mexico’s population of 130 million, Lopez Obrador has promised to root out corruption and crime; bring social gains such as universal health care coverage and care for the elderly; enact much-needed reforms to the country’s energy sector and agriculture; and forge closer ties with the business community. Along with coalition partners, his party will have a majority in Congress — a strength that many of his predecessors have not had.
Optimism runs high in the run-up to Lopez Obrador’s assumption of office in December. In the weeks before he won on July 1 with a 53% landslide vote, he had led exit polls and the Mexican peso gained strength, reversing some of its losses since early 2017. “There’s a lot of optimism and hope that the new president is going to change the whole atmosphere in Mexico,” said Guadalupe Correa-Cabrera, professor in the Schar School of Policy and Government at George Mason University. “He is going to fight corruption and have a good trade deal with the U.S., and he is going to stand up if President Trump continues his offensive approach to Mexico.”
Correa-Cabrera said Lopez Obrador, with his leftist leanings, would mark “a significant shift” from previous regimes. She expected him to focus more on domestic production, support for the agricultural sector, and maybe get the state more involved in the energy sector.
Energy sector reforms launched in 2014 dismantled state monopolies and allowed private investment in production and distribution of oil and gas, petrochemicals and electricity. Notwithstanding significant gains since then, controversies have dogged the energy sector reforms over alleged irregularities in awards of contracts. Lopez Obrador has promised to unwind the reforms and review those contracts.
Mexico is the world’s 13th largest oil exporter (it was the fourth largest in the early 1980s), and depends substantially on those revenues of roughly $15 billion, according to International Monetary Fund data. Crude oil prices are currently lower than levels in the years before 2014, although they have recovered since early 2016. Making it worse for Mexico is a steady fall in its crude oil production over the past decade.
The NAFTA Challenge
Renegotiating NAFTA to Mexico’s advantage is the top deliverable for Lopez Obrador. But it is not an easy one as much depends on how much ground Trump is willing to cede, according to Christopher Sands, professor at Johns Hopkins University and director of the Center for Canadian Studies.
“There are going to be changes [with NAFTA] and probably some tensions because [Lopez Obrador is] a nationalist and he will put Mexico first.” –Guadalupe Correa-Cabrera
Sands described Lopez Obrador as a “mash-up” of Trump and Canadian Prime Minister Justin Trudeau. “Like Donald Trump, he’s come into office championing those people that NAFTA left behind and being critical of an establishment in Mexico City that enriched itself in the post-NAFTA period but put the country second,” he said. “[Lopez Obrador] wants to put the country first. In that sense, I hear echoes of Trump. But with his progressive approach to trade policy, inclusiveness in working with women, and concern for poverty in indigenous communities, I hear Lopez Obrador sounding like Justin Trudeau.”
Sands said the big question is whether in his NAFTA renegotiations, Lopez Obrador would “take a Trumpian view and maybe even propose to Trump a bilateral deal that satisfies their core constituencies,” or whether he would “stay trilateral and try to bring Canada in as an equal partner.” He commended the Trudeau government for forging a partnership with the Nieto government to try to keep Canada and Mexico together “in the face of Trump’s provocations and challenges.” However, he said it is not clear at this stage if that alliance between Mexico and Canada would hold after Lopez Obrador takes over.
“Canada and Mexico have had their respectful relationships — very productive ones. The tensions have come from the U.S.” said Correa-Cabrera. “It’s too early to say, but definitely there are going to be changes and probably some tensions because [Lopez Obrador is] a nationalist and he will put Mexico first.”
Sands said he was impressed with Lopez Obrador selecting Jesus Seade as Mexico’s NAFTA negotiator. He noted that Seade is well known in Washington, D.C., has served for about a decade at the IMF, and was the original Mexican negotiator for the World Trade Organization’s predecessor, the General Agreement on Tariffs and Trade. Seade also happens to have known Robert Lighthizer, the U.S. Trade Representative, for more than 20 years “and actually likes him and thinks he’s got a good sense of humor,” he added. “All of that is an interesting X Factor. [Lopez Obrador’s] choice of NAFTA negotiator suggests that he’s serious about coming at this professionally and knowing what he’s doing. [He’s] a much more serious figure and perhaps not the crazy populist that some of the media have made him out to be.”
Meanwhile, NAFTA renegotiations between its three signatories have covered significant ground, especially in sorting out technical issues. Nine of the agreement’s 32 chapters “have been identified or wrapped up,” said Sands. The discussions were suspended after the recent G7 meeting in Canada where Trump and Trudeau had “a bit of a falling out,” he added. On July 1, Trump formally secured a three-year extension of his trade negotiating authority, and therefore he has until 2021 to construct a new agreement and bring it to Congress. In any event, Sands expected that agreement to be in place only after the U.S. midterm elections to Congress in November.
“The question is: Does [Trump] really want to give in? Does he really want a deal that badly?” –Christopher Sands
“The markets have seemed bullish on the potential of this relationship [between the U.S. and Mexico],” said Sands. “During the NAFTA negotiations, the Mexican peso took a real hit and it kept falling in reaction to every negative tweet that we heard from Donald Trump and signs that perhaps a deal wasn’t possible. But since the election, the peso has rallied — and that’s a positive sign that at least on the market side, they’re looking at high potential for some improvement in the relationship.”
At the same time, “a lot hinges on what Donald Trump ultimately decides is ‘a better deal,’” said Sands. “NAFTA’s critics have not had a manifesto or an agenda of specific changes. [Trump] has the ability to declare what he ends up with as being a better deal and maybe selling it to his constituency.”
Sands said the U.S. has made “some very maximalist demands for changes” that Mexico and Canada don’t accept. “We could do a deal relatively quickly, but it depends on whether the U.S. is willing to give on a couple of big demands,” he added. Those include removing the provisions relating to the so-called investor-state dispute settlement and procurement policies, where the U.S. must open up procurement channels and cannot insist on its “Buy American” agenda, he said. “If [Trump] gives a little bit on those things, he can have a deal. The question is: Does he really want to give in? Does he really want a deal that badly?”
Stand up and Stay Firm
Lopez Obrador will present a stronger face than his predecessors to the two other NAFTA signatories — the U.S. and Canada, said Sands. He noted that Lopez Obrador’s party, the National Regeneration Movement, or MORENA, and its coalition partners (the Workers’ Party and the Social Encounter Party), command a majority in both the Chamber of Deputies and the Mexican Senate, giving him effective control of Congress.
“That dramatically improves the odds of getting things done,” Sands said. “This is the first time that a Mexican president enters office with a solid majority of his party people in the Congress since Ernesto Zedillo (1994-2000) — almost 20 years. It’s a very dramatic shift, and it gives Lopez Obrador extra muscle at the negotiating table with the U.S. and Canada. They will have to take him seriously because if he makes a commitment, his odds of delivering are that much higher.”
Lopez Obrador and Trump have thus far treated each other respectfully without personal attacks. However, that could change if Trump revives talk of building a wall between the two countries and forcing Mexico to pay for it, Correa-Cabrera said. Lopez Obrador “has a mandate from the voters of Mexico to take a strong stance in case of an offensive statement or a continuation of the attacks [from Trump],” she added. “He does have a mandate from his constituents to reply in a very strong manner.”
Among the other challenges that Lopez Obrador faces is fulfilling his campaign promise to set right the deterioration of Mexico’s agriculture sector, said Correa-Cabrera. “He really wants to boost the agricultural sector and provide people an opportunity to develop better in this sector and not have to migrate to other parts [of the world] or internally,” she added.
“[The U.S. and Canada] will have to take him seriously because if he makes a commitment, his odds of delivering are that much higher.” –Christopher Sands
“Mexico badly needs to tackle the poverty, inequality and marginalization of large segments of the population so as to reduce the gap between the two Mexicos: that of the well-educated and empowered white population, and that of the poor, underprivileged, darker-skinned population (mostly southerners),” according to a report by the Brookings Institution. It added that the country also “critically needs to reduce its pervasive violence and corruption.”
Mexico’s economy has grown at an average of 2.3% since 1994, but it has kept out large sections of the population, Correa-Cabrera said. She blamed that on both population growth and “mediocre” gains from NAFTA. If Lopez Obrador increases the involvement of the state in the energy sector, that could provide more resources to fund his promised social programs, she added. She also noted that Lopez Obrador has said he would try to uplift the underprivileged in Mexico with the help of the business sector, and not by isolating it.
Even as optimism is high in Mexico, Correa-Cabrera pointed out that Lopez Obrador faces a tough job ahead. “It’s always good to be optimistic, but when we have optimism we run into the risk of not achieving,” she said. “[The new president] has a lot of challenges. Security is one of the challenges, and he has not been able to provide a clear message of how he’s going to deal with that because his economic agenda is tied to the security agenda.” Corruption is another major issue the president has resolved to deal with firmly, but he has also talked about not pursuing charges against some of Nieto’s cabinet members and alluded to “a reconciliation,” she pointed out.