Mexico preparing contingency plans if Trump exits NAFTA

The IMF has suggested that Mexico should go ahead with structural economic reforms, including diversifying its economy. Currently 80% of Mexican exports are shipped to the U.S. A Macro-economic response that reassures investors appear to be Mexico’s best bet out of this crisis, on the short run.

Mexico’s government is preparing for a macroeconomic response in case U.S. President Donald Trump decides to cut the cords that binds the U.S. economy from the North American Free Trade Agreement (NAFTA).

If Trump were to act on his threat, it would have a significant long term and short term impact on not only the U.S. economy but on the Mexican economy as well. The peso could see a free fall.

Mexico’s Foreign Minister Luis Videgaray has stated the government and the country’s central bankers are preparing for a plan that will kick-in in Trump was to follow through with his threat.

The Mexican government said it is examining scenarios and making contingency plans on to tweak Mexican legislations in order to reassure investors and provide a degree of certainty to them if the nearly-24 year treaty was to collapse.

The agreement underpins nearly $1.3 trillion in annual trade between Mexico, Canada and the U.S. and in recent times has acted as the central pillar for economic development in Mexico, with almost 80% of Mexican exports being shipped to the U.S.

Trade negotiators from these three stakeholders are set to meet this week in Mexico City to discuss ways on how to overhaul the landmark accord.

Conveying the Mexican government’s position, Videgaray said he is confident that the talks will ultimately succeed.

He was however quick to add, Mexico will continue working on diversifying its trade and protect foreign investors, as well as review potential barriers to tariff changes. Its macro-economic response will be the fruit of a collaboration between its central bank and its finance ministry, said Videgaray.

“These are the four lines a plan B must include,” said Videgaray on Mexican radio.

“We have to be prepared for all the scenarios and one of the scenarios is that the United States leaves the treaty, and as we have said, that is not the end of the world, the Mexican economy is much bigger than NAFTA.”

In a report, the International Monetary Fund (IMF) has stated, in the absence of NAFTA, the World Trade Organization ‘s (WTO) “most-favored nation” tariffs would come into play. This eventuality has the potential to disrupt Mexican-U.S. trade, significantly stem the flow of foreign capital into Mexico, raise risk premiums, and cripple the Mexican economy.

As a potential way to mitigate this probable crisis, the IMF suggested that Mexico should have various responses as part of its negotiations strategy, including “temporary foreign exchange interventions and liquidity provision could help smooth extreme volatility.”

The Mexican peso has been battered over concerns that Trump could follow through with his threat of dumping NAFTA.

The IMF report suggested that Mexico should continue to implement its structural reforms and boost its efforts to diversify trading relationships.

The report sees Mexico’s economy slowing down to 1.9% from an earlier projected of 2.1% for 2017.

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