Mexico GDP Likely to Fall by 0.45bp

Mexico’s gross domestic product is expected to fall by 0.45 basis point in the event of a North American Free Trade Agreement breakup. Long-term growth would likely decline to 2% from 2.5% currently. Nevertheless, a permanent real depreciation of the peso could also offset this effect, Barclays Research reported.

In particular, Mexican authorities have made clear that it will not concede these proposals and the government is working on a “Plan B”, in case President Donald Trump decides to pull out from the agreement. This plan includes expanding free trade agreements with Argentina, Brazil and Japan, and to continue the Trans-Pacific Partnership discussions, Econotimes online reported.

In a scenario of a US exit from NAFTA, the likely scenario for Mexico would be the application of Most Favored Nation tariffs agreed on by the World Trade Organization. It is highly unlikely that the US would deviate from WTO rules by imposing generalized tariffs on Mexican imports. This action would make the US vulnerable to retaliation from other nations leading to a situation out of the scope of NAFTA.

The textile production sector would be hit the hardest; Mexican exports to the US could potentially fall 4.8% in the short run and 9.7% in the long run. However, this subsector represents only 0.7% of the GDP and exports with 62% of Mexican value added. Processed food exports could decline 2.6% in the short run and 3.8% in the long run, which would be a more notable drag on the economy (4.5%), the report added.

NAFTA, which went into force in 1994, eliminated almost all tariff and quota barriers on trade among the United States, Canada and Mexico. The agreement also simplifies cross-border investment and expands cooperation on environment and labor issues.

If the renegotiation of the NAFTA encounters trouble, it could affect other areas of cooperation with the US such as security and immigration, Mexican Foreign Minister Luis Videgaray said, Bloomberg reported.

“It’s good for Mexico that we cooperate with the US on security and also on migration and many other issues,” Videgaray said Saturday on the sidelines of the Asia-Pacific Economic Cooperation summit in Vietnam. “But it’s a fact of life and there is a political reality that a bad outcome on NAFTA will have some impact on that,” he said. “We don’t want that to happen, and we’re working hard to get to a good outcome.”