FORECASTS & TRENDS E-LETTER
By Henry Rohlfs
June 11, 2024

IN THIS ISSUE:

1.  About the New President

2.  Challenges Ahead

3. Nearshoring Could Make Mexico a Destination

4. The Mexican Loophole

5.  A Final Thought

I was tempted to write about the stunning May jobs report released last Friday. US employers added 272,000 nonfarm jobs in May, exceeding economist estimates of 190,000. However, the unemployment rate rose to 4%, the highest jobless level since January 2022. Economists had expected the rate to remain unchanged from April's 3.9%. 

The Federal Reserve meets this week, but don’t look for movement in the fed funds rate. These data again lower the likelihood of interest rate cuts by the Federal Reserve until late 2024.

Instead let’s turn to the presidential election. Not the U.S. election, but the election that just concluded in Mexico. Claudia Sheinbaum (pron. SHANE-bowm) was elected in a landslide as the new president, and is the first female Mexican president.

We’ll meet the new president and take a look at the challenges ahead for her administration, policy towards the United States and the “nearshoring” of foreign companies in Mexico.

About the New President

Claudia Sheinbaum is accomplished. She has a Ph.D in energy engineering, participated on a Nobel prize winning United Nations panel on climate change and has governed Mexico City since 2018. She is also fluent in English, which her presidential predecessor and mentor Andres Manuel Lopez Obrador was not. As mayor, she was known to be an exacting boss with a sharp memory for detail.

Perhaps most importantly, she has been under the wing of Lopez Obrador for over 20 years, groomed to replace him first as mayor of Mexico City and now president of Mexico.

Analysts believe Sheinbaum appealed to voters by promising to continue the policies Lopez Obrador championed, such as higher wages and social reform. But she has a complicated path ahead. She must balance promises to increase popular welfare policies while inheriting a hefty budget deficit and low economic growth.

Challenges Ahead

Among the new president's challenges will be tense negotiations with the United States over the huge flows of U.S.-bound migrants crossing Mexico and security cooperation over drug trafficking at a time when the U.S. fentanyl epidemic rages.

Mexican officials expect these negotiations to be more difficult if the U.S. presidency is won by Donald Trump in November. Trump vowed to lock down the border and said he would mobilize special forces to fight the cartels.

At home, Sheinbaum will be tasked with addressing electricity and water shortages and luring manufacturers to relocate to Mexico.

The new president will also have to wrestle with what to do with Pemex, the state oil giant that has seen production decline for two decades and is drowning in debt.

Lopez Obrador doubled the minimum wage, reduced poverty and oversaw a strengthening peso and low levels of unemployment - successes that made him incredibly popular.

Sheinbaum has promised to continue the former president’s expanded welfare programs, but it will not be easy with Mexico on track for a large deficit this year and sluggish GDP growth of just 1.5% expected in 2025.

Nearshoring Could Make Mexico a Destination

According to the U.S. Commerce Department, Mexico is now our #1 trade partner, surpassing China as the leading importer of goods to the United States in 2023. The value of imports from Mexico rose almost 5%, to more than $475 billion, from 2022 to 2023. At the same time, the value of Chinese imports to the U.S. plummeted 20%, to $427 billion.

Expect the upward trend in Mexican imports to continue. Mexico has become a popular destination for U.S. and foreign companies to “nearshore” manufacturing due to lower labor costs and proximity to the U.S.

Nearshoring to Mexico isn’t only attractive because of localization.  When the U.S., Mexico, and Canada Agreement (USMCA) replaced NAFTA in 2020, tariffs on most goods manufactured in Mexico were eliminated. Both the Trump and Biden administrations have also substantially raised tariffs on Chinese imports and consider China to be a much higher geopolitical risk.

Also, as millions of Mexicans get good jobs nearshored from Asia, crime, corruption and drug smuggling will likely decline.

Those factors could also make Mexico a destination for immigrants seeking escape from poverty and violence. This may help to substantially ease the flow of immigrants through Mexico to the United States.

The Mexican Loophole

Chinese electric vehicle manufacturer BYD surpassed Tesla’s Q4 2023 sales for the first time. Their cars are inexpensive – around US$14,000 – and also of pretty good quality.

There is bipartisan concern that if those cars were sold in the U.S. at such cheap prices – "unfairly underpriced," as White House economist Lael Brainard put it – they would undercut U.S.-made vehicles and result in catastrophic job losses at American factories.

So in May the Biden administration announced a 100% tariff on electric vehicles from China. The move is designed to bolster U.S. jobs and manufacturing in the EV sector.

However, China is using a workaround. Chinese investment into Mexico represents a rerouting of trade from China through Mexico. Products that have been partially manufactured in China are shipped to Mexico, then finalized and exported to the U.S. with zero USMCA duty and no Chinese tariffs.

The White House says it is considering ways to close this Mexican Loophole. “We are all paying attention to the fact that there are Chinese industries, state owned-companies, that are buying up land, establishing facilities” in third countries “and looking for other ways of accessing the US market,” said U.S. Trade Representative Katherine Tai.

A Final Thought

I spoke with a friend of mine who is the head of manufacturing for a tech firm based here in Austin, asking him how he thought the new Mexican administration will affect his operations in Mexico. (He asked to remain anonymous.) His firm recently brought a new facility online near Monterrey and has a second under construction.

He too has heard that Sheinbaum wants to continue “business as usual” but is also advocating higher wages and benefits for workers beyond that passed during the Lopez Obrador presidency. His firm already pays well above minimum wage but he is concerned that the money for these proposed benefits will come from much higher taxes on foreign businesses operating in Mexico.

“That money has to come from somewhere. No better place than taxation without representation, in other words nearshore companies.”

The USMCA is up for review in 2026, so look for possible changes to Mexican import policy then. If Trump is elected president, we’ll see changes before that.

All the best,

 

Forecasts & Trends is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.