Select Page

Let the negotiations begin! On one side U.S. President Donald Trump who wants to build a wall between Mexico and the United States (and have Mexico pay for it) and to renegotiate NAFTA (among other things.) On the other side the Mexican government of President Enrique Peña Nieto, who, to generalize, doesn’t.

Until today the two leaders were scheduled for a January 31 face-to-face meeting in Washington. Then came a flurry from the U.S. side of tweets about The Wall and an executive order directing the head of the Department of Homeland Security to prepare to move ahead on the construction of the Wall. This included continued assertions by President Trump that Mexico would pay for The Wall. Mexico pushed back on that with tweets and other statements saying that Mexico, categorically, would not pay for The Wall. Those exchanges culminated last night in a tweet from President Trump saying that if Mexico wasn’t prepared to pay for The Wall maybe President Pena Nieto shouldn’t bother coming to Washington. And this morning the Mexican President picked up that challenge and called the meeting off–for the time being.

Mexico’s peso, which has been battered by Trump’s pre- and post-election comments, fell again after the announcement that the meeting had been cancelled. The peso fell by 1.1% to 21.29 to the dollar on the news and now, at 3:40 p.m. New York time trades at 21.2061 to the dollar. Mexico’s peso-denominated government bonds saw prices fall again with the yield on the benchmark bonds due in 2024 climbing 1.43 percentage points to 7.53%.

Both sides have now sent tweets demanding respect for their countries, their governments and themselves (in some order), which suggests that this is already personal and likely to be extremely contentious. Both sides have turned the issue of The Wall and who will pay for it into a test and the domestic base of both presidents is demanding that their guy hang tough. The picture is complicated by the deeply intertwined nature of the two economies. Mexico has become the manufacturing base for a huge swath of U.S. industry, including, especially, the auto industry. I’d certainly expect those interests to push back against any Trump initiative that threatened that investment.

On the other hand, the Mexican economy is already reeling so Pena Nieto will feel under pressure to not undermine growth further–even as domestic Mexican opinion demands that he stand up to what large numbers of Mexicans see as another example of U.S. bullying. In an effort to support the peso and to fight inflation, the Bank of Mexico has raised interest rates by 2.75 percentage points in 2015 and 2016, including five 50 basis point increases in 2016. That hasn’t stopped the peso’s decline or the upward trend in inflation, which hit 3.3% in November, breaking above the central bank’s 3% target. Higher interest rates, though, have slowed the Mexico economy. GDP grew by just 2.1% in 2016 and recent forecasts call for 1.8% growth in 2017.

Economists are divided about whether the central bank should continue to raise interest rates to damp inflation and support the peso. (The Bank of Mexico moved earlier this month to directly support the peso by buying the currency on the open market.) Some economists see another 100 basis points in interest rate increases from the central bank in relatively short order. Others think the bank has already overdone rate increases.

Mexico’s Foreign Minister Luis Videgaray and Economy Minister Ildefonso Guajardo have been in Washington since January 24 meeting with Trump administration officials to set the stage for president-to-president talks. Those discussions are now in limbo as both sides posture before, I think, returning to the table. Mexico is the third-largest trading partner with the United States (after China and Canada.) Total U.S.-Mexico trade hit $531 billion in goods and services in 2015. Mexico ran a $60 billion trade surplus with the United States that year.