IS CLAUDIA CAUTIOUS, OR CREATIVE?
The future of the U.S.-Mexico relationship might depend on the answer
Last week, Reuters reported that the government of President Andres Manuel Lopez Obrador bowed to intense U.S. pressure on Mexico not to offer subsidies and other incentives to Chinese electric vehicle (EV) manufacturers seeking to establish operations in North America. The news complicates two campaign promises in the June presidential election by ruling party candidate and front-runner Claudia Sheinbaum: to boost auto manufacturing jobs in Mexico and increase the supply of affordable electric cars in the domestic market. Shortly after the story broke, Sheinbaum said, as president, she is confident she’ll have good relations with whomever wins the U.S. presidential election later this year. “We have very strong economic integration” with the U.S., she said. “We’re now the principal trading partner, and that requires us to have a good relationship.”
Yesterday, senior Sheinbaum advisor Diana Alarcon was more circumspect, telling a Bloomberg Insights Summit audience that “the greatest part of our trade and interest” lies in the North American trade area, but there is “a need and an importance of diversifying trade based on the interests of Mexico.”
What is underneath?
Mexico’s decision was a direct reaction to the fact that letting Chinese EV factories into the trade zone is a political red line for Democrats and Republicans alike in the United States. That has been made abundantly clear in the stump speeches of former President Donald Trump as well as through official channels from the Biden Administration and its allies in Congress. Beijing’s heavy state subsidies to its EV companies would represent a clear anti-competitive threat.
If there are fights that AMLO shies away from, it’s logical that Sheinbaum will, too. But she has cast herself throughout her public life as a technocratic devotee of leveraging the green economy to boost economic development while reducing carbon emissions. Will Sheinbaum lean strongly towards caution over U.S. sensitivities, or will she be creative in working around them to achieve her goals? Either route is rife with risks.
Mexico’s transportation sector is the second biggest producer of greenhouse gases (GHG). As the mayor of Mexico City, Sheinbaum has crusaded for ambitious climate targets as a lofty political goal, while the densely populated city she was governing is still snarled with traffic and famous for its smoggy haze. The longer it takes to flood the domestic market with cheap EVs, the longer it will take to achieve any climate targets that Sheinbaum can hang her hat on as president. If she dallies too cautiously on solutions, she will look weak and ineffective.
But as I noted in March, Sheinbaum is also saddled with AMLO’s stubborn nationalism in energy policy. In a fit of pique against his predecessor, AMLO took back state control of power generation and shifted it back into burning locally produced oil and gas. This has cemented the power sector as Mexico’s top emitter of GHG. His ham-fisted nationalization push enraged foreign investors and alarmed Washington. Given that he also piled a mountain of debt on Pemex, Sheinbaum will be handed a mess should she win the election.
Sheinbaum also promises to maximize Mexico’s share of nearshoring North American manufacturing and supply chains. President Biden is committed to nearshoring, with incentives to industries linked to energy transition. Trump’s previous administration championed nearshoring to offset Chinese influence in the Americas, and engaged multilateral donor organization like the Inter-American Development Bank to play an important role. So she knows that “diversifying” trade beyond North America has its limits.
After she addressed a financial services industry conference last weekend in Acapulco, one senior banker told Financial Times that Sheinbaum is still “very scripted” and that “we don’t really know who she is yet.” She has paid lip service to AMLO’s energy nationalism during the campaign, but there is doubt that she agrees with it. Sorting out Pemex’s problems will likely require foreign capital, which means Sheinbaum needs to reassure investors. But she also needs to keep the MORENA party united to govern effectively, and Pemex has been a cash cow that the ruling party will not want to stop milking despite its mountain of debt.
Our take:
It is in everyone’s best interest, particularly Sheinbaum’s, that she prove herself to be a creative problem solver and not a cautious, scripted president.
The North American trade project has been immensely positive for Mexico and increased integration is in the country’s best interest no matter how it might rub old nationalists the wrong way. Furthermore, the political consensus in the United States about the threat that China poses to North American economic development is becoming air tight.
Washington is building a wall around the trade area to keep unfair and dangerous Chinese actors out, and if Mexico digs tunnels under that wall there will be consequences. She’d benefit from strategic messaging to American audiences that she is firmly on the North American team, even if she privately foresees squabbles later on that she’ll have to mitigate. Being cautious on this issue could become provocative.
AMLO has always seen himself standing alone on the world stage even if he conceded here and there to reality. It plays well with his base of poor and disaffected Mexicans, but it has diminished Mexico on the global stage, not elevated its power. Sheinbaum will better serve Mexico by projecting herself as a modern, creative thinker who is firmly grounded in the North American project. The opportunities to leverage long-term economic integration with the U.S. arising from tensions with China are huge, and AMLO’s outdated approaches would have largely squandered them if he’d continued governing. She’d do best not continue to wear AMLO’s political costume one day past the election.
What We’re Watching:
Ecuadorian President Daniel Noboa’s security measures won broad support in last Sunday’s referendum. The outcome gives him a mandate to escalate mano dura-type policies and suggests that his recent raid on the Mexican embassy in Quito played well with voters. Now, as America’s Quarterly writes, the open question is whether he can defeat organized crime while also avoiding democratic backsliding.