CEO Executive Summary: Tense is the word that best describes U.S.-Mexico relations during February. Mexican anger and frustration over U.S. immigration policy was palpable as the country braces and prepares for some hard-nosed trade negotiations. On the U.S. side, anti-immigrant and anti-NAFTA rhetoric continually alternated with the occasional outreach from an Administration that is still getting itself organized. The latest overture was the February 22–23 visit to Mexico City by Secretary of State Tillerson and Secretary of Homeland Security Kelly. Designed to extend an olive branch to an aggrieved neighbor, the events surrounding the trip transformed it into one of the most tense bilateral encounters in recent memory. Some analysts believe these contradictory Trump Administration actions are designed to keep Mexico off-balance in advance of trade negotiations, but they have instead profoundly frustrated Mexico, deepened nationalist sentiments and hardened the country’s determination not to be bullied by the United States. These bilateral tensions further weakened the Mexican economy, leading to anemic growth forecasts for 2017. Still, the peso strengthened during the month and investor interest in Mexican energy reform opportunities continued unabated. Political attention turned toward June 4 state and local elections, especially the all-important State of Mexico, where a three-way tie in the polls is creating concern for the Peña Nieto government.

U.S.-Mexico Relations

February was another difficult month in U.S.-Mexico relations during which Mexico made defensive preparations in anticipation of hard-nosed trade negotiations this summer. These included outreach to Asia, Latin America and the European Union to find new sources of imports (especially in the agricultural sector) and new markets for Mexican exports. The government also started the clock on a 90-day consultation period with the private sector to establish Mexico’s position in the forthcoming NAFTA negotiations.

Foreign Minister Luis Videgaray and Economy Minister Ildefonso Guajardo have kept up an active schedule of meetings and appearances designed to gain allies and make clear Mexico’s positions in those negotiations. This included talking up the benefits of NAFTA with U.S. auto executives and meetings with Canadian officials on trade and immigration matters during which the Canadian foreign minister committed her country to taking a trilateral approach NAFTA renegotiation rather than going it alone via dual bilateral talks.

Throughout the month, the tone of Secretary Guajardo’s comments became increasingly strident, insisting that 1) Mexico will not accept an outcome that is not win-win, 2) Mexico will walk away from any negotiation over raising tariffs or imposing quotas, 3) Mexico will respond in kind to any U.S. imposition of tariffs on Mexican exports to the United States, and 4) Mexico could retaliate by ceasing cooperation on drug enforcement, immigration, and security and intelligence. This was matched by Videgaray’s comment in Senate hearings that Mexico will stay in NAFTA only “if it suits Mexico.”

Although Mexicans doubt President Trump’s ability to impose harsh trade barriers any time soon, they are actively preparing for such an eventuality. Mexico is updating a retaliation strategy implemented during a NAFTA 2011 trucking dispute with the United States that targets politically significant and trade-sensitive U.S. electoral districts: Mexico would shift some of the 80% of its U.S. corn imports, accounting for 28% of all U.S. corn exports, to other markets. The Mexican Secretary of Agriculture will lead a business delegation to Argentina and Brazil in March to look for new sources of yellow corn. A Mexican senator promised to introduce a bill that will require Mexico to buy corn from Argentina and Brazil, rather than the U.S., and Mexico’s largest movie chain is looking to source popcorn from Argentina. The Mexican Business Coordinating Council has supported the effort, looking to source soy, wheat, and corn in those two countries.

These efforts are supported by nationalist sentiments that reinforce Mexico’s willingness to pay the costs of standing up to Trump. This is demonstrated by private efforts to diversify corn imports, a call to boycott American goods, polls that show 56% of Mexicans would be willing to take to the streets to oppose Trump and the loud and persistent opposition accusations that the Peña Nieto administration is weak and submissive before Trump. In short, the Trump Administration’s rhetoric and policy threats are succeeding in pushing Mexico increasingly away from the U.S. and are, undoubtedly, affecting the dynamics of Mexican internal politics—in a manner not favorable to the United States.

As for the U.S., the U.S. Chamber of Commerce, General Motors and corn-state Senators have spoken in favor of NAFTA and/or against border taxes, but these have been drowned out by U.S. government officials’ anti-NAFTA rhetoric and consideration of a controversial border tax.

The Trump Administration has yet to give Congress the required 90-day notice period before initiating a NAFTA renegotiation, in part because its commerce secretary Wilbur Ross was not confirmed by the Senate until February 27 and U.S. Trade Representative-designate Robert Lighthizer still awaits his confirmation hearing. Secretary Ross has recently indicated that such notifications will formally occur in mid-March.

The most significant event in bilateral relations during the month was the February 22–23 visit to Mexico by Secretary of Homeland Security Admiral John Kelly and Secretary of State Rex Tillerson. Although designed to reassure Mexico, the trip was marred by the February 20 release of Department of Homeland Security guidance memos calling for aggressive enforcement of U.S. immigration law. Mexico threatened to challenge any disorderly roundup of Mexican citizens as a human rights violation in the United Nations. What was particularly objectionable was the plan to return to Mexico all non-Mexican asylum seekers who entered the U.S. through Mexico to await their asylum hearing. President Trump added fuel to the fire by referring to the deportation of undocumented immigrants as a “military operation,” expressly contradicting the words of his cabinet representatives in Mexico.

In a very tense news conference, which journalists described as being more like a meeting between adversaries than a friendly visit between allies, it was clear just how much the immigration question had contributed to bilateral tension. Foreign Minister Videgaray highlighted the significant differences of opinion between the two delegations and bluntly stated that Mexico would never accept the unilateral imposition of immigration provisions. In an effort to defuse the conflict, Secretary Tillerson spoke of a close, cooperative U.S.-Mexico relationship, and Admiral Kelly publicly stated there would be no mass deportations and vowed not to use the military in immigration operations.

In the midst of these tensions, U.S. Treasury Secretary Steven Mnuchin and his Mexican counterpart, Jose Antonio Meade, agreed to meet in the coming weeks to discuss the bilateral economic agenda. This was followed, however, by Trump’s February 24 speech at the Conservative Political Action Conference in which he once again slammed NAFTA as “one of the worst deals ever made by any country” leading to the “un-development” of the U.S. economy. His newly minted Commerce Secretary Ross then vowed to “fix NAFTA and make it a fair deal, not just a free-trade deal”. President Trump renewed his interest in the controversial Border Adjustment Tax which would impose a 20% tax on all U.S. imports. And the Trump administration suggested it might ignore WTO rulings it sees as an affront to U.S. sovereignty.

Finally, on February 28, President Trump, in his first joint address to Congress, reiterated his call for a “great, great wall” to be built along the U.S.-Mexico border. Significantly, the President made no mention of Mexico paying for it, and, while he criticized jobs lost to NAFTA, he did not reiterate his call for the rescission or renegotiation of the agreement, raising at least the possibility that the President is toning down his rhetoric toward Mexico.

All told, February was a month of contradictory actions and statements from the U.S. Administration on immigration and trade. Some analysts interpret this as a reflection of confusion in the new Administration while others see it as an intentional strategy to keep Mexico off-balance in advance of trade negotiations. Whatever its intent, it has profoundly frustrated Mexico, deepened nationalist sentiments and hardened the country’s determination not to be pushed around by the United States.

In a final note, a new Gallup poll shows U.S. public opinion evenly divided on NAFTA’s impact, with 48% saying it is good for the United States and 46% saying it is bad.

Mexican Economy

The Bank of Mexico raised interest rates to an eight-year high on February 9 in an effort to anchor inflation expectations and strengthen the peso. The Bank reinforced its peso strategy later in the month with a new instrument that will allow investors to hedge the price of the peso for up to a year. The hedge is designed to reduce the volatility and increase the value of what the Bank believes to be an undervalued currency. The peso responded immediately, reaching three-month highs the following day, and the hedges sold briskly in their first auction on March 6, which indicates continuing market concern about the stability of the peso.

The government reinforced the credibility of the Bank’s actions by announcing that Bank of Mexico President, Agustin Carstens, would remain in his post an additional five months. He will now step down at the end of November. This combination of efforts backstopped the peso, pushing it to under 20 pesos per dollar, even as the U.S. dollar rose against most other currencies. The surge of the peso to a four-month high of 19.5 in the first days of March, however, came in response to a comment by U.S. Commerce Secretary Wilbur Ross: “if we and the Mexicans make a very sensible trade agreement, the Mexican peso will recover quite a lot.”

Foreign Direct Investment in Mexico fell 5.8% in 2016 according to the Economy Ministry, and the consensus among analysts is that it will fall more sharply in 2017 due in part to the anti-trade sentiment of the U.S. government. At the same time, Mexico’s current account deficit increased to $32 billion last year, the largest it has been in 20 years.

Together, rising interest rates, reduced investment and uncertainty surrounding NAFTA have taken a toll on Mexican growth. While new INEGI figures show that the economy grew faster in the fourth quarter than previously estimated (2.4%), the Bank of Mexico again cut its growth estimate for 2017 to the 1.3%-2.3% range. The Finance Ministry cut its estimate to between 1.5% and 1.7%, well below the 2.5% estimate contained in the 2017 budget. Moody’s cut its estimate to 1.4% and Bancomer expects just 1% growth, which would be the worst performance by the Mexican economy since 2009.

Core inflation in February rose to a seven-year high reaching a 4.2% annual rate, even though the expected February gasoline price increase did not materialize. The government reduced its tax bite on gasoline to prevent further price increases following the January social unrest after a 20% increase. And it initiated an experiment with daily price changes to smooth out future price increases.

Finally, while Moody’s warned that rising Mexican government debt could harm its credit rating, it joined Fitch and Standard & Poor’s in stating that Mexico’s investment grade rating is not at risk even if the U.S. were to withdraw from NAFTA.


In energy news, Pemex continues to report large losses, but according to its fourth-quarter report for 2016, the firm lost 58.5% less last year than in 2015. Pemex also issued 4.25 billion Euros ($4.5 billion) in bonds in February, the largest euro-denominated emerging market corporate-bond deal on record according to the Wall Street Journal. And while oil production hit a new low, PEMEX formally signed the agreement with Chevron to form the first international consortium in its history to explore and produce oil in the Gulf of Mexico’s deep waters, while also announcing plans for seven new deep water farmouts.

On the electricity front, a little more than a year after the inauguration of Mexico’s new wholesale electricity market, seven firms have already agreed to sell electricity in this market, another 23 received clean energy contracts on February 23, and the third electricity auction will be launched by April 28 with results expected to be announced in October. And the President of the Mexican Wind Energy Association said he expects to see $4 billion invested in new wind projects over the next two years.

On March 6, the Energy Ministry launched the electricity capacity market, which should guarantee availability of quality power to the industrial sector and prevent recurring blackouts around the country in peak hours.

Mexican Security and Politics

Organized crime-related homicides in Mexico are on the rise, driven by a battle among three criminal organizations for control of markets and territory. In 2016, Mexico experienced the most homicides since 2012. In January of this year, Mexico registered the highest single-month homicide total of the Peña Nieto administration, and the highest January total since 1997. A February 9 raid led by the Mexican Navy killed the leader of the Beltran Leyva cartel, one of the three said to be responsible for rising violence.

The upcoming June 4 state and local elections in four Mexican states have become the focus of political attention, with all eyes on the biggest prize, the State of Mexico. The PRI has governed the state without interruption for generations and has relied heavily on the state’s wealth to help finance its presidential campaigns. In early polls, the PRI is in a three-way tie with Josefina Vázquez Mota of the PAN and Delfina Gómez, the Morena party candidate who has benefited from campaigning on her behalf by party leader Andrés Manuel López Obrador.

Events, Speeches, Publications

MJGS President & CEO Michael Camuñez delivered keynote remarks on the state of U.S.-Mexico relations and its impact on the emerging tech sector in Mexico at the MITA Tech talks in Punta Mita, Mexico, February 12–13. MJGS Senior Director José Carlos Rodriguez Pueblita also delivered remarks at the Tech Talks on the emerging fintech sector in Mexico. On February 23rd, Camuñez was also a featured speaker at UC San Diego’s Center for U.S.-Mexican Studies’ symposium, “NAFTA Under Siege” where he participated in a panel moderated by The New York Times concerning the future of NAFTA.

MJGS Chairman Ambassador James Jones was twice interviewed by MSNBC about the bilateral relationship, on February 19th and 22nd. Amb. Jones also jointly penned a Washington Post Op-ed with five other former U.S. ambassadors to Mexico calling on the Trump Administration to treat Mexico as a strategic partner.

MJGS Senior Advisor Pamela K. Starr outlined a potential Mexican diplomatic response to Trump Administration policies in an article published in the March 2017 issue of Letras Libres magazine. (Mr. Camuñez also contributed to the same publication, advising Mexico to make a “moral case” against the proposed border wall.) She also was featured in a conference call sponsored by the Pacific Council on International Policy on the Future of U.S.-Mexico Relations, and she spoke at the Center for Strategic and International Studies on a similar topic as part of a panel discussion on the U.S.-Mexico Border. At the same CSIS event, MJGS Managing Director Andrew Rudman spoke about the planned public-private Otay Mesa East border port of entry.