Anxiety over NAFTA causing slide of the peso, and an increase in imports from Mexico
Last weekend’s round of negotiations in Washington, D.C., ended on a fairly sour note. As optimism about a reinvigorated NAFTA 2.0 fades, economic anxiety in Mexico is putting downward pressure on the peso, according to the Wall Street Journal.
As the Peso declines versus the dollar, imports from Mexico become cheaper. As a result, our bilateral trade deficit with Mexico will expand! In other words, even if we withdrew from NAFTA and tariff rates spiked, the bilateral trade deficit with Mexico could still increase.
As virtually any economist worth his or her salt will tell you, trade deficits are driven by larger macroeconomic factors beyond trade policy. It is unlikely that trade deficits matter at all, but it is certain that bilateral trade deficits do not matter. The United States, for instance, has a trade surplus with Australia, which has a surplus with China, which has a surplus with the United States.
The sooner the Trump administration and the leadership at USTR recognize that attempting to address bilateral trade deficits through trade policy is a futile exercise, the sooner real progress on negotiation will be made.
