Can Mexico survive a trade war?

"Poor Mexico, so far from God, so close to the United States," said President Porfirio Diaz, who was Mexican president up to 1911.

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His successor, Enrique Pena Nieto, is surely muttering the same words a century later.

A trade war looms with Donald Trump threatening to slap a 20% border tax on Mexico, which is not only illegal under the current NAFTA treaties, but illegal under World Trade organization (WTO) rules as well because it is discriminatory. (Under WTO rules the US needs to slap the 20% tax on Canada, China and Europe as well in order to be non-discriminatory).

Lets assume that Trump manages to not only scrap NAFTA, but back out of the WTO system, to which the US is a signatory (and authored most of the rules).

Can Mexico survive?

Mexico has been planning for this moment for decades

Mexico has more free trade agreements than any other nation on earth.

Successive governments have been desperate to diversify Mexico's economy and trade balance, and have negotiated trade agreements with Japan, the European Union, Israel, the South American nations (Chile, Uruguay, Brazil, Argentina, Colombia, Paraguay, Ecuador, Bolivia and Peru), plus the Central American nations (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua).

Governments can only do so much though - some businesses in Mexico have ignored the opportunities provided by the network of trade agreements and have concentrated on selling to the United States. However others have been quick to see the opportunities.

Businesses will start to adjust in the era of Trump

Part of the reason Toyota decided to move Corrola production from Mississippi (USA) and Ontario (Canada) to Guanajuato, in Central Mexico is because of the free trade agreement Mexico has with Japan.

Parts can go from Japan to Mexico tariff free. The final car is then assembled in Mexico, and can then be exported to all the countries that Mexico has a free trade agreement - not just the USA and Canada via NAFTA, but to all of Central and South America.

Brazil is now the world's third largest car market, after China and the USA and Toyota sells it's Mexican Corrolas there.

Robert Shanks, who was the chief financial officer of Ford, admitted that they too had set up a plant in Mexico specifically because of Brazil's free trade agreement with Mexico, which allowed it to escape Brazilian tariffs.

The fall in the value of the Peso helps

The web of Mexico's trade agreements means that manufacturers will likely keep their production in Mexico, and use the exchange rate to offset the barrier tax.

The Peso has fallen 13% since the November 8th election day. It only needs to fall a bit furrther to completely offset any barrier tax Trump imposes. Which means Mexicans won't see any change to their sales in the US, the only people who will get hurt will be American buyers who won't get the full benefit of the strengthening dollar.

Mexico was the fastest growing economy in the Americas in 2016

Mexico grew by 2.3% in 2016, beating the economies of South and Central America, as well as growing faster than the USA (which grew by 2.0%). It also has low public debt of just 46.5% of GDP (American public debt is 104% of GDP).

It therefore has room to weather the Trump storm through a mixture of it's network of free trade agreements, the exchange rate and some public stimulus.