If you think the American presidential campaign rhetoric has pulled the rug out from under Mexico’s currency, think again.
Ever since Donald Trump entered the race promising a more confrontational approach with our southern neighbor, commentators have been watching the peso-dollar exchange rate closely — as if every little twist and turn in our campaign changed the fundamental state of the Mexican economy. “Mexican peso: the hot proxy bet for the US election,” declared The Wall Street Journal last month. “When Donald Trump rises, Mexican peso falls,” said CNN Money around the same time.
All this sudden interest in Mexico’s currency is misleading, because it ignores the big picture: In fact, the peso has been weak for decades, for reasons that far predate “Make America Great Again” or “#NeverTrump” — but have far-reaching effects in the United States.
While supporters of the North American Free Trade Agreement might be surprised to see the trade deal re-emerge as a campaign issue 23 years after its passage, the consequences of the weak peso made controversy all but inevitable. When NAFTA became law at the beginning of 1994, a peso was equivalent to 32 cents. Today, it’s about a nickel.
That decline has been hard on everyday Mexicans, who watch the value of their savings erode year after year. But the devaluation lowers the cost of goods made in Mexico, so it’s great for companies — including American ones — that manufacture and export from there. It also lowers the cost of Mexican labor, giving US companies a stronger incentive to send jobs southward.
Ford Motor Company recently made waves when it announced it was moving all small car production to Mexico. For Rust Belt auto workers, the move was simple deja vu. Mexico, once a minor player, is now the seventh-largest vehicle producer in the world. Mexico’s rise in the auto industry is a story of what happens when capital is allowed to flow freely. Businesses go where capital is most efficient — or where labor is cheapest.
Two policies made that possible. One was a tax reform under former President Vicente Fox. He established a 17.5 percent corporate tax rate for manufacturers between 2003-13. He figured it would stack up favorably against the 35 percent US corporate tax rate. Mexico always had cheaper labor, but it could then lure manufacturing with lower tax rates, too. Everyone set up shop south of the border, not just Americans. Between 2010 and 2015, Japan, South Korea, and Germany invested more than $13 billion to build state-of-the-art production facilities in Mexico. Additionally, free trade agreements with 44 countries make Mexico a premier low-cost producer that can export worldwide, often duty-free.
The other key policy is that Mexico’s government simply let its currency drop. Since NAFTA, the peso has weakened nearly every single year — compounding the advantages on price that Mexico already has over US manufacturers. During 1993 NAFTA hearings, Democratic Representative John LaFalce of New York warned that the treaty had “no mechanism to coordinate monetary policy between the United States and Mexico.” The big fear was that Mexico would weaken its peso for competitive purposes once it joined NAFTA, and the United States would be unable to do anything about it.
The warning was prescient. Within NAFTA, there’s no way to address exchange rate risks. Since 1994, the peso has devalued more than the Pakistani rupee — despite that country’s many troubles. (Canada, the other NAFTA member, has seen its currency strengthen against the dollar during the same period.) Year-to-date, the peso is weaker than the Ukrainian hryvnia, a country busy fighting the Russians.
Hillary Clinton has begun to rethink her position on a host of free trade deals, including NAFTA. She admitted in March that she would like to renegotiate it — without saying exactly how.
Here’s how: The United States should insist that chronic devaluations have no place in a what is supposed to be free-trade deal.
Doing nothing, it’s possible to see a scenario where four years from now, the Mexican peso could be weaker still; at 4 cents rather than 5, Ford could be sending the rest of its auto production to Mexico.
Vladimir Signorelli is president of the investment research firm Bretton Woods Research LLC in New Jersey. Follow him on Twitter @Vladimirth.