CEO Executive Summary: Early April felt almost normal. There was no blowup in U.S.-Mexico relations and the Mexican economy performed well. Then came President Trump’s renewed broadsides, insisting that Mexico will pay for the border wall, referring to NAFTA as a disaster for the United States, and this time threatening to go nuclear—to officially announce the U.S.’s withdrawal from NAFTA. Money markets reacted rapidly and strongly, driving the peso-dollar exchange rate to 19.6. A handful of key cabinet secretaries, U.S. businessmen, the Canadian Premier and the Mexican President quickly pressured President Trump to reconsider. Once again, the President backed down, but not without issuing another executive order directing the Commerce Department to determine why U.S. trade agreements have failed and how to fix them. But this time rhetorical attacks on NAFTA and suggestions that Mexico pay for the wall persisted. The Mexican response continues to be measured, but efforts to diversify agricultural imports to gain leverage in the NAFTA renegotiation persist as well. Now, with the U.S. Trade Representative finally confirmed, it appears that Congressional notification for NAFTA negotiations is imminent, and we may finally be getting some much needed clarity on the Trump Administration’s negotiating priorities.

The Mexican economy has held up surprisingly well despite the rhetoric from D.C. It registered strong growth in both March and the first quarter, the peso regained almost all of its lost value by early May, and the energy reform continues apace, albeit outside of the headlines. The U.S. Senate finally confirmed Robert Lighthizer as U.S. Trade Representative, but the delays mean that the NAFTA negotiations are apt to carry over into the 2018 Mexican presidential campaign. In Mexican politics, partisan wrangling in advance of the June 4 gubernatorial elections helped keep significant legislation stalled in Congress as the winter session ended. Meanwhile, a new poll pointed to the vulnerabilities of Andrés Manuel López Obrador as a presidential candidate, and two corrupt governors and a drug kingpin were thrown in jail.

U.S.-Mexico Relations

Early April was deceptively quiet in U.S.-Mexico relations. This seems to have reflected developments in Syria and North Korea that occupied Administration attention and the Congressional recess which prevented progress on the NAFTA renegotiation. Whatever the reason, the second half of the month was “todo lo contrario.

On April 18, President Trump turned up the heat when he revived a campaign promise that had taken a back seat for weeks. He once again referred to NAFTA as “a disaster for the United States” and promised to “get rid of NAFTA once and for all.”

Two Treasury statements, issued on April 20 after Secretary Mnuchin’s meetings with Mexican Treasury Secretary José Antonio Meade, and Central Bank President Agustín Carstens, tried to walk back the President’s newly aggressive tone, only to have Trump revive another anti-Mexico campaign promise. He demanded that money for the border wall be included in the must-pass budget resolution and tweeted on Sunday April 23 that “Mexico will be paying, in some form, for the badly needed border wall.” Although Trump backed down on the border wall funding after receiving limited support in Congress, a draft executive order on trade leaked to the media three days later. Set to be signed Saturday, April 29, the order would have officially announced the U.S. withdrawal from NAFTA, triggering a final withdrawal six months later.

Under severe pressure from several cabinet secretaries, U.S. businessmen, Canadian Premier Justin Trudeau, and Mexican President Peña Nieto, who made it clear that such an act would prompt Mexico to withdraw from a NAFTA renegotiation, Trump backed down once again. Still, the wording of the draft order was eye-opening and worth quoting here: “It is the policy of this Administration to renegotiate, or withdraw from, every trade agreement that does not serve the interests of the United States … [and NAFTA] has not met any of these conditions. Instead, NAFTA has led to a massive transfer of wealth, an exodus of factories from our shores, successive waves of illegal immigration, and a surge in the United States trade deficit.”

The administration issued a different executive order on April 29. It calls for a detailed, systematic review of all U.S. trade agreements to determine, in the words of Commerce Secretary Wilbur Ross, “what went wrong … [and] what could be done to fix them.”

The early days of May brought more uncertainty. First came word that Congress had reached an agreement for a temporary spending bill that excludes funding for the border wall, but the very next day, in an interview with CBS, President Trump again insisted that the wall would be built and that Mexico will foot the entire bill, and “They’ll be very happy to pay.” Then Wilbur Ross weighed in.

At the Milken Institute Global Conference, Secretary Ross stated that the U.S. objective in the NAFTA renegotiation will be two symmetric, bilateral agreements with Mexico and Canada, adding another dose of uncertainty to the renegotiation process. In response to the U.S. trade deficit with Mexico reaching its highest level in 30 years during the first quarter of the year, Ross insisted that “the United States can no longer sustain this inflated trade deficit with our closest trading partners.” And he turned up the heat in the bilateral sugar dispute, announcing the U.S. will impose anti-dumping and countervailing duties if there is no agreement by June 5.

On a positive note, on April 25 the Senate Finance Committee unanimously approved Robert Lighthizer to be the next U.S. trade representative, and approved his congressional waiver. This cleared the way for the full Senate to confirm his nomination in an 84-12 vote on May 11. Unfortunately, the delays in getting to this vote pushed back the earliest start date for the negotiations into early August, suggesting that the negotiations might overlap with, and thus directly impact, the 2018 Mexican presidential election. Lighthizer wasted no time getting to work, making the rounds on Capitol Hill the week of May 15 with key congressional leaders to solicit input and feedback in advance of the Administration’s formal notification under the Trade Promotion Authority to commence NAFTA re-negotiations. Early feedback from those meetings suggests that the Administration is committed to a “trilateral framework,” at least according to several Senators who met with the newly minted USTR.

Also during the month and with the blessing of President Trump, the United States, Canada and Mexico announced a shared bid to host the 2026 World Cup soccer tournament.

Mexican Economy

April presented a tale of two Mexican economies—with and without the Trump effect. The first half of the month looked good, so good that one economic analyst felt comfortable asking “where is the crisis?” and another declared the worst to be over for the peso. Country risk fell to levels not seen since before Donald Trump’s election and reports on the economy’s monthly performance in March were largely positive. Consumer confidence and retail sales rose, industrial production inched up in spite of declining petroleum production, and unemployment hit record lows. First quarter growth came in well above estimates leading economists to upgrade Mexico’s growth prospects for the year to 1.6% to 2.0%, and the peso to dollar exchange rate to strengthen to 18.5. Meanwhile, Mexico surpassed Turkey to become the world’s #8 tourist destination.

The only negative economic news was on the inflation front, with price increases nearly reaching eight-year highs. Still, the IMF managing director singled out the Bank of Mexico’s policies for praise, and the minutes from the Banks’s March 30 policy meeting show the Bank focused on the problem. There was even good news on the fiscal policy front, with the IMF estimating that the country will register a small primary surplus for 2017. Then came the Trump effect.

The uncertainty and confusion in North American relations created by the contradictory statements coming out of the Trump Administration took the Mexican peso on another wild ride in the last two weeks of April. The peso suffered its worst fall since early January, reaching 19.6 before recovering to 19 pesos per U.S. dollar at the close of April following President Trump’s latest NAFTA about-face. In early May it strengthened further, reaching 18.7 on May 2 before retreating again due to falling oil prices and settling in at 19 pesos per dollar. Beyond Trump, the peso was helped by the surprising strength of the Mexican economy, another large monthly increase in remittance flows, and Moody’s decision to ratify rather than downgrade Mexico’s credit rating. This in spite of Pemex’s continuing production decline and the uncertainties surrounding U.S. policy toward Mexico.

There have also been small but tangible changes in Mexican economic relations with the United States due to the Trump effect. Not only is Mexico shopping for wheat and soy in Argentina and Brazil, it is now shopping for dairy products in the European Union and New Zealand. Mexicans are also buying less Starbucks coffee and beginning to vacation in Canada and Europe instead of the United States. And after years of tension, Mexico and China are developing energy, highway and telecommunications projects.


Turning to energy, the country’s proven petroleum reserves fell nearly 8% in 2016 and Pemex is expected to announce in early May that its crude production has fallen below two million barrels per day for the first time since 1980. Crude shipments to the United States also continue to fall, hitting a new low in mid-April.

On the plus side, Pemex announced its first quarterly profit in five years, and restructuring efforts continued to move forward. Pemex announced plans for a new deepwater farm out in the Maximino and Nobilis areas of the Gulf of Mexico near the U.S. border and the National Hydrocarbons Commission approved Pemex’s first two onshore oil and gas joint ventures. The firm is also continuing to sell gasoline stations to private operators, including BP which announced plans to convert 1,000 Pemex stations to the BP brand over the next 10 years. For the first time in over a decade, Pemex hedged oil prices to stabilize its revenues. And for the first time in generations, gasoline prices have begun to fluctuate as the transition to market-based pricing moves forward.

In electricity news, the third auction for long-term generation projects launched on May 8 and will focus on renewable projects. Eligible bidders will be announced July 31 and the auction results will be announced in late November. Yet, despite active private sector interest in the Mexican electricity market, it is estimated that the Mexican Federal Electricity Commission will retain more than a 50% share of the market for the next 15 to 20 years.

Mexican Politics

After a month of campaigning, including two candidate debates, polls in the State of Mexico show the gubernatorial race remains a dead heat between Delfina Gomez of the left-leaning Morena party and Alfredo del Mazo of the governing PRI party. This is a must-win election for the PRI in order to remain competitive in the 2018 presidential contest.

Meanwhile, a new poll for the 2018 presidential contest shows Margarita Zavala, the wife of former president Felipe Calderón and one of the possible candidates of the PAN party, overtaking Andrés Manuel López Obrador (AMLO) for the lead. As is his tendency with negative media coverage, López Obrador denounced the poll as part of an organized effort to undermine his candidacy. In fact, the result appears to be due to a video apparently showing an ally of Lopez Obrador, the anti-corruption candidate, taking money on his behalf. Given the volatility of voter preferences this early in the electoral process, this single poll result must be taken with a very large grain of salt. Still, it is a reminder that, just as in 2006, López Obrador may be well-positioned but he is far from unbeatable.

Earlier in the month, thousands of AMLO supporters convened at Mexico City’s Revolution Monument to celebrate the signing of a political agreement among politicians and a handful of business leaders in support of AMLO. And following a statement by U.S. Homeland Security chief John Kelly, in congressional testimony that an AMLO victory would be bad for the United States, in his spoken remarks AMLO warned the United States to not meddle in the Mexican presidential election.

The weight of these electoral contests was evident in the meager results of the current Congressional session which closed at the end of April. Focused on gaining the electoral advantage and loudly criticizing the rhetoric and actions of President Trump, legislators failed to approve pending legislation to modernize Mexico’s state police forces and left Mexico’s national anti-corruption system without its centerpiece—an anti-corruption prosecutor. The congress did, however, legalize the medical use of marijuana in Mexico, and Congressional leaders are reported to be considering calling a special session, most likely after the June 4 elections, to address anti-corruption initiatives and other pending legislation.

On the upside, April saw the arrest of two ex- governors wanted on charges of corruption and collusion with organized crime, Tomas Yarrington of Tamaulipas and Javier Duarte of Veracruz. Yarrington was captured in Italy, Duarte in Guatemala, and both await extradition to Mexico, or in Yarrington’s case potentially to the United States. And the presumed leader of the Sinaloa drug cartel, the successor to “El Chapo,” was captured in Mexico City on May 2.