Good Neighbor

An Interview with Andrés Rozental

 U.S.-Mexico relations are at a historic low point, says Andres Rozental.

Flickr. U.S.-Mexico relations are at a historic low point, says Andrés Rozental.

Octavian Report: How do you see Mexican relations with the U.S playing out under Trump?

Andrés Rozental: I can start by saying that in the first seven or eight weeks that this administration was in office, I think almost everything that could have been done to — I won’t say destroy, because it’s probably a little early to say destroy — but almost anything that could have been done to harm the relationship was done. Not only in the time that Mr. Trump has been President, but during the campaign as well and during the transition period, where Mexico has for some inexplicable reason become a target. Some people feel that it might be because he had a misadventure in Mexico with two of his projects that didn’t pan out. One in Baja California and one in the Yucatan. For some unexplained reason, he has got Mexico on the brain and has decided that almost all of the issues that have to do with Mexico are going to be issues on which he takes a very extreme and very insulting and unfriendly position.

What’s going to happen in the medium term is very difficult to tell. I think it’s even difficult to tell for you in the U.S. how this is all going to work out. But in the meantime he has done a lot of damage. The fact is that in Mexico public opinion about the U.S. and about the administration is so very negative by now, after almost two years of Mexico-bashing, that the situation that Obama left, (which was very positive and good) has now turned 180° towards what I would call a tense and unfriendly relationship on the part of the United States.

OR: Is the view widespread in Mexico that Trump’s posture is reflective of the United States in general? Or is there an understanding that a significant part of the population here is uncomfortable with his insulting rhetoric?

Rozental: No, I don’t think it extends to the United States as such. Most Mexicans in one way or another have ties to the U.S., either because they travel there or because they have family members there or because they’ve worked there. So no, I would think it’s really very targeted to Trump personally, and in some cases to members of his administration, such as Attorney General Sessions, who has also pretty much been on record over the years that he was in Congress as being very anti-immigration and in favor of the border wall.

I think it’s more of an individual issue. I think people identify Trump as someone who has taken political advantage of bashing Mexico over the years. Now that he’s President, he has proceeded to do things — no more rhetoric, just to do things that are extremely unfriendly and not what I would consider to be appropriate for a neighbor, a partner, and an ally.

OR: How do you see any renegotiation of NAFTA playing out?

Rozental: I think from the very beginning of the campaign, both from the Democratic and the Republican sides, there were calls that fundamentally looked negatively at some of the free trade agreements that have been negotiated or that are enforced. Trump immediately stepped out of TPP and made NAFTA also to some extent a campaign issue: he argued it was not fair,  that it was not in the interest of the United States.

I think Canada is — as I know Mexico to be — convinced that NAFTA has been good for all three countries, that it has certainly not been unfair. That the U.S. has benefited from this probably as much or if not as much close to as much as both Canada and Mexico. That both Canada and Mexico make the U.S. more competitive, and give the U.S. an added advantage in terms of its own production and economy. But, we also recognize — and I think the Canadians do as well — that a 25-year-old agreement might need some updating. Partly because there are issues after 25 years that we recognize can be improved, and also because there are issues that were not on the agenda back 25 years ago, because they really weren’t part of the trade agenda. Things like e-commerce or energy — a big question for Mexico because we had a state monopoly and therefore we were unable to involve any energy negotiations in the original NAFTA — or other things like intellectual property and dispute settlements.

When the U.S. has pressed for Mexico and Canada to be amenable to sitting down and looking at all of these issues, we have said that that’s fine. What we won’t accept — and that’s on record from the President, and the trade minister, and the foreign minister — is any fundamental change to the principles governing NAFTA. I.e., the principle of free trade, the principle of tariff-free movement of goods between the three countries, the protection of investments.  As long as the basic principles are kept intact, and as long as the NAFTA is what its name implies — a free trade agreement — then we’re perfectly happy to sit down and look at issues which either could be improved or which aren’t in NAFTA and that could be included. I think that’s basically where we are. I think the Canadians have perhaps not been as direct about the redlines, but I would assume that they also feel that NAFTA has been good for them, and good for the U.S., and good for Mexico, and so again would be probably willing to look at how to improve it.

The same holds true for issues within NAFTA like rules of origin, which perhaps after 25 years can be revisited. We have rules of origin in NAFTA that were tailored for the situation back two-and-a-half decades ago, and it’s very possible, and I’d say almost even useful, to look at those again and see whether we can’t have higher regional content for the goods that travel tariff-free between and among the three countries than those levels that were fixed back then.

As a matter of fact, in the 25 years of NAFTA’s existence, rules of origin have already been changed seven times in order to raise regional content and thus stimulate more investment in all three countries for sourcing things that are made in the three and that move between and among the three. On those issues I think there’s no problem as far as Mexico is concerned. Obviously the devil is always in the details, and we’ll have to see exactly what it is that the U.S. wants.

Mexico has already started a period of consultation with its private sector. The U.S. has still not formally notified Congress. The executive branch has still not formally notified Congress of its intent to renegotiate or to look at NAFTA. In order to do that the executive has to send to Congress a formal notice, and then there’s a 90-day period in which Congress has to examine the issue in the Ways and Means Committee and in the Finance Committee to determine the costs and what the pluses and the minuses are, and at the end grant the executive what’s called Trade Promotion Authority — what used to be called fast track — in order for whatever comes out of the negotiation to be voted up or down as a whole in Congress without any amendments.

But we still do not know, and there have still not been any public disclosures by the Americans of what it is they don’t like about NAFTA. Trump in his speeches talks about it being unfair to American workers, and he blames it the way Ross Perot did, saying it’s taking jobs away from Americans, that manufacturing has left the United States for other countries including Mexico.

He never talks about the comparative advantage that a Mexican platform affords to U.S. companies in order to make them more competitive and more productive. He never talks about the fact that jobs have been lost in certain sectors in the United States not so much because of free trade or because of Mexico but rather because of changes in production methods and new technology. That he never talks about, and the jobs that he’s promised to “bring back” to the United States from Mexico are simply not going to come back for that reason. Even if he does threaten companies with penalties if they invest abroad.

That is one of the issues which Mexico has said is a redline. We believe that free trade and the protection of foreign investment are fundamental to the North American idea, and threatening companies that they will be taxed or in one way or another punished if they source things outside of the United States is totally nonsensical. Just like the idea of jobs being lost to free trade is nonsensical. The reduction of a trade deficit through abolishing free trade agreements is equally nonsensical.

China, the E.U., and Japan account for about 70 percent of the total U.S. trade deficit, and with none of those countries does the U.S. have a free trade agreement. To blame any of these things on NAFTA or on free trade is totally counterintuitive. I think many, many economists in the United States, as well as companies and their CEOs, have told this to Trump and to his people, so we don’t know what’s eventually going to be put on the table.

We’ll have to see, but if it’s anything that changes the fundamental nature of NAFTA, Mexico will not accept that, and if the U.S. then decides that they are dealbreakers if we don’t accept them, then most probably the U.S. will leave NAFTA, withdraw under the terms of the agreement. But we will not accept any major change to the fundamental underlying principles.

I think that the redlines, which have been fairly clearly announced by our trade minister and our foreign minister, are public and well known, and if the U.S. arrives and says “Take it or leave it,” most probably the decision would be to leave it. Mexico has obviously something to lose by not having NAFTA, but the U.S., we think, has much more to lose, because the rules that would govern trade between Mexico and the United States or between Canada and the United States would be WTO rules under most-favored-nation treatment. And in that case, Mexico would have tariff access to the U.S. with probably an average tariff across the board of no more than three percent to 3.5 percent. For the U.S. to enter Mexico — and we are the second-largest customer of the U.S. — under those rules, the tariffs would be much higher because we are not a developed economy.

We are the second-largest customer of the U.S. after China, and it’s many hundreds of billions of dollars of stuff that Mexico buys. With things like the exports that we do to the U.S., what we sell to the United States, on average about 40 cents out of every dollar is U.S. content which is brought into Mexico, transformed, sent back to the U.S. This is mainly in the automotive sector and in the white-goods manufacturing sector — and all of that would be put in jeopardy if the U.S. were to leave NAFTA.

I’m hopeful, and I think many of us are hopeful that some reasonable and sensible economist will explain this to the administration, and that therefore they will come, whenever they do come to sit down to look at NAFTA, with a different attitude. Because at the end of the day Mexico, as I say, has benefited enormously from NAFTA — but we have alternative markets and alternative sources of supply. Already some of the customers in Mexico that buy things from the U.S. have been looking around for alternative sources, because they fear that Trump’s rhetoric, and his threats to companies might eventually interrupt their supplies.

To give you an example in the grain sector, Mexico’s agricultural minister and trade minister have already been traveling around to Australia, to Brazil, to Argentina — all big producers of grain — and looking at alternative sources of supply. All of this is eventually going to hurt the U.S. and that’s why I think that hopefully somebody with a reasonable understanding of the economics of NAFTA, the economics of free trade, and the economics of the highly integrated supply chains and value chains that the U.S. has with Mexico and Canada will eventually prevail over the rhetoric. But I have no idea whether that’s ever going to happen or not.

OR: How do you think — assuming Trump doesn’t change course — that Mexico’s presidential election, upcoming in 2018, plays out? Is there a realistic likelihood that López Obrador gets elected?

Rozental: López Obrador right now leads in the polling among the various options for the 2018 elections. He is relatively far above the next most popular party, which is the PAN. The PRI is in third place, but it’s early going and it’s difficult right now to know whether it’s a fait accompli that López Obrador would win.

However, the big question here is how much Trump’s rhetoric and anti-Mexican speeches and actions potentially affect the election. The answer to that from my perspective is it would affect it a great deal.

López Obrador is a populist from the left (unlike Trump, who is a populist from the right). López Obrador is anti-American, anti-free trade, anti-opening-up of the economy. If he wins, all of the things that have benefited the U.S. and Mexico over these last two and a half decades would be put at risk or even reverted. I do think that it would give López Obrador an enormous political plus to have Trump continue doing what he’s doing and to have NAFTA put into question or eliminated.

Those would be things that he would capitalize on politically without any doubt. He already has done so to a great extent, mainly on the migration issue where he has been extremely loud and very clear about the fact that it is not only undocumented Mexicans, but also permanent residents, DREAMers, and others who are in the U.S. with proper authorization who are being harassed by Homeland Security and by police forces, ICE, and the border patrol.

All of that will play enormously into López Obrador’s political campaign. This doesn’t seem to bother the Americans very much, because I have a feeling that they don’t realize the potential damage that this could do to the relationship, even beyond the damage that’s already been done.

OR: If NAFTA falls apart in the wake of a López Obrador victory, do you see a scenario where Mexico would look to China as a partner?

Rozental: I think that’s easy to say, but I don’t think it’s that realistic. To replace the close to three-quarters of a trillion dollars of trade that goes between Mexico and the United States every year, and to replace the tens of billions of dollars of U.S. investment in Mexico or Mexican investment in the United States through finding alternatives at best would be a very lengthy process, and most probably one which does not offer the same advantages that the geographic proximity between the two countries offers. I don’t think that that’s viable, to threaten to buy everything we buy elsewhere.

I think the laws of economics will continue to favor U.S.-Mexican economic relationship, but it will be on a very different level if NAFTA goes — and if the U.S. administration continues to beat up on NAFTA and on Mexico it’ll go elsewhere or it’ll just diminish. What’s already happening in Mexico is that there is a growing sense, which isn’t bad as far as Mexico’s concerned, that Mexico needs to become more self-sufficient. We need to create our own supply industries, our own value chains, our own investments in the country, and not rely so much on the United States. That is already happening.

A NAFTA de-accession will impact Mexico’s economy and Mexico’s economic growth. It already has. Our growth prospects for this year have been downgraded considerably since Trump has been in office, because there are investments and issues between the two countries that are being put on hold.

As far as China is concerned, China went into Latin America in a fairly big way, but not into Mexico. They were never really interested much in Mexico because what they wanted at the outset of their big push were raw materials. And Mexico — because of constitutional limitations in the energy sector at the time, together with the fact that we are mainly a manufacturing country, not an agricultural/raw material producing country — they never found particularly interesting. So they went to countries like Brazil and Argentina where they were better able to get the types of things they needed.

Today the Chinese have moved a bit, and they are now looking more at manufacturing, and they’re looking more at sourcing, and being able to build platforms in Latin America that make them more competitive in the region than having to bring things all the way from China. That will probably happen to some extent in Mexico as well, but their main interest in investing in Latin America was always access to minerals and raw materials, and in the case of Mexico that’s not a major component of our economy.

OR: If the U.S. and Mexico continue to have a strained relationship, what are the ramifications you see for border security?

Rozental: Mexico has some cards that it can play in the discussions of the bilateral relationship. The first thing that has happened already is that Mexico, the President and his Cabinet, have stated clearly, publicly, that the bilateral relationship with the United States is going to be looked at as a whole whenever we sit down to talk about whatever the Americans want to talk about. That it’s not going to be a compartmentalized or segmented silo-type relationship, which is to some extent what’s been happening for the last years: the migration agenda is looked at independently of the trade agenda, which is looked at independently of the security agenda.

Mexico has said it’s one agenda, one relationship, and we will negotiate on that basis. What that means really is that Mexico has cards to play on the security agenda that it may not have to play, say, on the migration agenda. On the security agenda, which is one that the U.S. has been most interested in over the years since 9/11, Mexico has been very collaborative. If the relationship with the U.S. becomes not only tense but very negative, then obviously I think there will be lots of calls in Mexico politically to stop co-operating. So issues like the joint efforts of combating crime cartels and drug trafficking in the United States, on which Mexico has collaborated very strongly over the last years, are, I would say, in jeopardy — as are things like cooperating in not allowing third-country migrants to come to Mexico through its southern border. If the Guatemalans, or the Hondurans, or the Haitians, or the Cubans want to go to the U.S., why should we be stopping them? Things like that — the presence of armed DEA agents in Mexico, the issues of preclearance of goods across the border — are all on the table.

But it’s not just the negotiations. It’s also the speeches, the rhetoric, that will determine how Mexico looks at this issue. Right now the fundamental priority of the Mexican government is protecting Mexicans in the United States who are being either harassed or deported or apprehended. The U.S. government has determined that anybody who’s in the United States without proper papers is a criminal, and has violated the law and is therefore subject to deportation.

That was never the case up until now. They always concentrated on deporting precisely the type of people that Trump said should be deported, but now they’re going against young kids. John Kelly, Trump’s head of the DHS, has said that he intends to separate children from their mothers at the border. These are fundamental violations not only of human rights but also of the due process and constitutional guarantees that the U.S. affords to people who are in the U.S. Our consulates, all 50 of them in the U.S., are being strengthened in personnel and in finances in order to be able to hire lawyers and protect the Mexicans who are in the United States. Make sure that they get due process if they are apprehended. As you can see, it’s a very complex relationship with lots of little pieces here and there, and all of them are intertwined.

OR: Other countries around the world seem to be trying to challenge the United States. Why wouldn’t Mexico develop some sort of security ties with them?

Rozental: I don’t think that Mexico would consider doing something other than continuing to try to work as closely as possible with the Americans on the security agenda. But it’s important for the U.S. to understand that the security agenda is also part of the whole bilateral relationship, and the way in which Mexico will look at it, negotiate it, both under this government as well as under any future government, will enormously depend on the overall climate in the relationship.

If the climate in the relationship continues to deteriorate significantly, then there are areas in the security part of the relationship which will most probably be subject to being changed in a major way. Mexico’s not a big recipient of U.S. money or assistance for its own security issues. It does get some, but not much compared to other countries. I basically have always felt that if Mexico didn’t get that assistance it could work things out on its own. It doesn’t need that assistance as badly as maybe some other countries might.

OR: How radical a candidate is López Obrador?

Rozental: It’s difficult to tell. López Obrador has been campaigning now for 15 years. He ran in two presidential elections and lost. In the interim period, he was running around the country campaigning. His rhetoric and his political messages have not always been the same. He started out with a very radical point of view, very much like the one Steve Bannon has: let’s deconstruct the establishment, let’s get rid of the institutions that we have because they’re no good, and let’s replace them. That’s how he started his political campaigning.

Over the years, I think, he has understood that that type of political position did not get him the presidency. It scared a lot of people. It made a lot of people feel very uncomfortable, so over the last few years he has moderated his rhetoric at least in his speeches to a great extent. Whether that means that he would govern as a radical or as a gradualist reformer is anybody’s question. Very difficult to answer.

Unlike the PRI or the PAN, he doesn’t have a big support base from which one could extrapolate what kind of government he would like. He’s anti-establishment. He is anti-free trade, anti-U.S. That he’s on record as being. How one behaves when one gets to sit in the Presidential chair is a very difficult thing to predict. A lot of people predicted that Mr. Trump, once he sat down in the White House, would be a different individual, more “presidential” — that he would see the logic or illogic behind a lot of his positions.

That hasn’t been the case. He has governed more or less as advertised. Whether López Obrador does something similar is very difficult to tell.

The other political parties have not yet named their presidential candidates. The only one that is for sure is López Obrador. The PRI will probably name its candidate sometime towards the end of this year in the late fall. The PAN will probably do that as well, maybe a little earlier, and the PRD we don’t know because it’s in tremendous disarray right now. But in the case of the PRI there are the usual suspects as potential candidates: the Secretary of the Interior, the Secretary of Foreign Relations, the Secretary of the Treasury, a governor or two. There’s nothing at all today that would indicate who would be the choice.

In the case of the PAN there are two, maybe three people vying to be the party’s candidate 2018. One is the wife of former President Calderón. The other one is the head of the party, Ricardo Anaya, and there’s a third dark horse, the just-outgoing governor of the state of Puebla. In the case of the PRD, they’re in the middle of a huge problem internally. They have different factions vying for control of the party, and although the person who’s most mentioned as possible candidate is the current mayor of Mexico City, it’s not clear that he would necessarily be the one who is chosen: he’s not even a member of the party.

Right now it’s still I think premature to figure out who’s going to be on the ballot. We have state elections this year. Three state elections and two of the governorships that are up for grabs are in states that have never had anything other than a PRI government: the state of Mexico and the state of Coahuila. Were the PRI to lose either of those two in June of this year, that would probably be something of a harbinger about what might happen in 2018.

There the candidates have been chosen. The PRI has chosen the son of a former governor, very much a PRI party person. The PAN has chosen a former unsuccessful presidential candidate, Josefina Vázquez Mota. The PRD has chosen its candidate and the MORENA party has its candidate. Those elections will take place in June, and right now everybody’s out there already campaigning. The results of that election and the election in the state of Coahuila, which is a northern border state, will certainly influence the way that the presidential election might go in 2018.

OR: Is this the worst you’ve seen U.S.-Mexican relations?

Rozental: Yes, without a doubt.

OR: Do you think there’s anything that can be done to repair the damage?

Rozental: I think many Mexicans compare the current situation to the worst times in the bilateral relationship, back when we lost a third of our territory to the U.S. in the Mexican-American War.

I don’t look at it that way. I think that today we have so much at stake between the two countries that making as if Mexico didn’t matter to the United States or the U.S. didn’t matter to Mexico is not in the cards. The relationship is bad right now. It is tense. I think the Mexican government is doing its very best to try to keep it on an even keel, notwithstanding very strong public-opinion pressures.

I think that as the political campaign heats up towards the end of this year and the beginning of next it’ll be very important for the Mexican government — as well as for the U.S. — to take into account what I mentioned about the effect that a continuation of this type of a relationship could have on the Mexican elections and on the Mexican economy.

There are of course things that could be done to improve the relationship. I think the first one that could be done would be for the U.S. to categorically say: “We believe in NAFTA. We believe in continuing NAFTA. We want to improve it. We want to see how we can make it more useful to all three countries, but we categorically state that NAFTA is here to stay.” That would make a big difference, because that would quiet down the uncertainties around foreign investment into Mexico that have hammered the Mexican peso.

The other thing which I think is extremely important is the treatment that the U.S. authorities are giving Mexicans in the U.S. We have now dozens of cases of legal permanent residents and green-card holders in the United States being harassed at the borders, detained for hours, questioned, and in some cases even having their cellphones and their laptops examined.

Fixing all of these things is very important in signaling to Mexico that the U.S. understands the importance of Mexico to its economy, to its social structures, even to its politics, and that we are friends. We are neighbors. We are not enemies. We haven’t talked at all about the proposed border wall, but I can certainly tell you that that has done more to inflame anti-American sentiment and anti-Trump sentiment in Mexico than almost anything else.

I think all of those things need to be tempered now with some rational way of looking at the relationship. If it’s not the most important relationship the U.S. has it’s certainly one of the most important. It’s one of the relationships that benefits the United States, not only in terms of Mexico’s consumption of U.S. goods and services, but also in terms of the contribution that Mexicans make within the United States to the U.S. economy. The fact that Mexicans are afraid of coming to work and are lying low has led to disruptions in the agricultural sector within the United States. All of these things at the end of the day define the type of relationship that we have. It is an inextricably integrated relationship. We built it up over these 25 years since NAFTA was negotiated, and although I sometimes struggle to find how one could deconstruct it, the U.S. is doing everything it possibly can to show that it would like to.