Mexico’s government is preparing a macroeconomic response in case U.S. President Donald Trump makes good on threats to quit the North American Free Trade Agreement (NAFTA), an event which could wreak havoc on the Mexican economy and hurt the peso.
Mexico’s Foreign Minister Luis Videgaray said on Monday the government and central bank were preparing a plan to address the possibility of a future without NAFTA, but gave few details.
The government has said it is examining how it could adjust Mexican legislation to give investors certainty about their investments if the almost 24-year-old NAFTA collapses.
Underpinning some $1.3 trillion in annual trade between the United States, Canada and Mexico, NAFTA has been a central pillar of recent Mexican economic development. Nearly 80 percent of Mexican exports are shipped to the United States.
Trade negotiators from the United States, Mexico and Canada meet in Mexico City this week to continue talks on overhauling the accord, and Videgaray reiterated the government’s position that the expectation was that talks would ultimately succeed.
Mexico would continue to work on diversifying trade, protect foreign investment, review possible changes to tariff barriers, and prepare a macro-economic response from the finance ministry and the central bank, Videgaray added.
“These are the four lines a plan B must include,” he told Mexican radio. “We have to be prepared for all the scenarios and one of the scenarios is that the United States leaves the treaty, and as we have said, that is not the end of the world, the Mexican economy is much bigger than NAFTA.”
Separately, the International Monetary Fund said in a report on Monday that ending NAFTA would bring back World Trade Organization “most-favored nation” tariffs, which would disrupt Mexican-U.S. trade, and could crimp economic growth, dampen capital inflows and raise risk premia.
The IMF suggested that among various policy responses at Mexico’s disposal, “temporary foreign exchange interventions and liquidity provision could help smooth extreme volatility.”
Concerns that Trump could follow through on his threats to dump NAFTA have battered the Mexican peso in recent weeks.
Additionally, Mexico should continue to implement its structural reforms and boost efforts to diversify trading relationships, which would increase competitiveness and help economic growth over the medium-term, the IMF said.
The IMF sees Mexico’s economy growing 1.9 percent next year after projected expansion of 2.1 percent in 2017.