CEO’s Executive Summary: On November 8, the people of the United States elected Donald J. Trump to be the 45th President of the United States. We write to share some preliminary reflections and analysis on how we view this election impacting U.S.-Mexico bilateral relations, with an emphasis on day-to-day commerce, trade and investment. We stress this is a preliminary assessment intended to provide guidance to our clients who are either doing business in Mexico already, or contemplating doing so in the near term. Our bottom line is that it is too early to know what impact a Trump presidency might have on U.S.-Mexico bilateral relations, but, despite harsh campaign rhetoric, one should not jump to the conclusion that the situation will necessarily deteriorate. To the contrary, there are indications that suggest scenarios where U.S.-Mexico bilateral commercial relations could actually be positioned to improve. Companies should take a cautious but steady approach as we follow developments closely.

The 2016 election placed Mexico and related issues—immigration, security and trade—at the epicenter of one of the most contentious and negative races in recent presidential history. As a nonpartisan firm, our objective here is not to judge or opine on the merits of the election or candidates, but rather to offer as objective an assessment as possible of what a Trump presidency might mean going forward for U.S.-Mexico relations.

Election Impact “Too Early to Call”

Our first and most important conclusion is that no one really knows what President-elect Trump will do with respect to Mexico after he is sworn in on January 20, 2017. While candidate Trump made fairly specific commitments during the campaign with respect to immigration and trade policy, it is simply unclear and too early to assess whether he will follow through on his statements. As a candidate, Mr. Trump offered several specific policy prescriptions that, if implemented, would clearly cause significant disruption in the U.S.-Mexico relationship, including:

• On Immigration: Trump promised to undo immediately Obama Administration policies granting administrative relief to certain categories of undocumented persons, especially undocumented children and their parents (known as Deferred Action for Childhood Arrivals (DACA) and DAPA). He also pledged to end the Obama Administration’s “catch and release” policy that prioritized enforcement and removal proceedings on aliens with violent or criminal records. Finally, he promised to accelerate and expand removal (deportation) proceedings against several million undocumented persons currently known to be living in the United States. Related to his position on immigration, Trump pledged, repeatedly, to build, at Mexico’s expense, a new border wall to impede illegal immigration—while facilitating lawful entry and trade. We assess that all of Trump’s immigration-related proposals, except for his position on the construction of a wall, could be pursued through executive action without the need for congressional approval. The President-elect will face significant fiscal and capacity constraints, however, if he does not successfully secure funding from Congress in pursuing these policies.
• On Trade: Trump repeatedly promised, within the first 100 days of taking office, to commence the renegotiation of NAFTA and, if Mexico did not negotiate in good faith, to provide formal notification of the United States’ withdrawal from the agreement under the provisions of the agreement. He also expressed his categorical opposition to the Trans-Pacific Partnership (TPP) and, presumably, other free trade agreements currently in process (such as the Transatlantic Trade and Investment Partnership). Trump pledged to aggressively review all existing trade agreements and to ramp up trade enforcement measures, unilaterally and through the WTO. He also threatened to impose unilateral tariffs on countries engaging in unfair trade practices under the authority conveyed to the President through various trade statutes. A recent analysis by the Peterson Institute affirms the President-elect’s authority to pursue most, if not all, of these measures through executive action (https://piie.com/system/files/documents/piieb16-6.pdf).
• On Outbound Foreign Investment: Trump pledged to levy tariffs or taxes on U.S. companies that choose to end manufacturing in the United States by taking such activity offshore, including to Mexico. It is not clear by what legal authority the President-elect could impose such taxes or tariffs, and to what extent such action would survive a legal challenge.
• On Taxing Offshore Income: Candidate Trump pledged to work with domestic companies doing business outside the country to lower the tax burden on profits earned abroad. Speaker Paul Ryan has long championed tax reform measures that would include a lower tax on profits earned abroad and repatriated to the United States. Repatriation of overseas income may be an area where the new Republican-controlled Congress and a Trump Administration can come together quickly.

While some see the foregoing list of promised actions as foreboding, we believe that both the likelihood and timing of any such actions are highly uncertain with the possible exception of lowering the tax rate on corporate income earned abroad. Moreover, there are important countervailing considerations which suggest that the President-elect may move slowly and carefully before pursuing many of these policies. Indeed, while it is very premature to forecast any action with any degree of certainty, there is clearly a plausible scenario whereby a Trump Administration would and could work very constructively with Mexico in a manner that actually deepens bilateral trade and investment.

First, in his acceptance speech, President-elect Trump signaled his desire to “build partnerships, not conflict” with our allies. His visit to Mexico preceding the election signaled his openness to dealing with Mexico in a respectful manner (despite the aggressive statements he made about immigration immediately following the visit). For its part, the Peña Nieto Administration has been measured and careful in its response to the election, reassuring the capital markets that the Mexican government is disposed to work constructively with the incoming Trump Administration. The President-elect has already spoken by telephone with President Peña Nieto, who has agreed to another meeting in the near future.

Second, Trump has pledged to create jobs for working class Americans, especially in the manufacturing sector, and to make significant investments, including in infrastructure, to stimulate job and economic growth. In this respect, Trump and his advisors are well aware of the extent that the U.S. and Mexican economies are highly integrated and co-dependent. He would face tremendous opposition from the private sector, including core elements of his own party and base, were he to initiate action that could trigger a trade war or otherwise damage the nearly trillion dollars in bilateral trade that currently exists between the United States and Mexico and that supports some 5 million U.S. jobs (many of them working class jobs supporting the North American supply chains). A quick look at the market’s reaction to Trump’s election, which has actually rallied since the election, suggests that the markets do not expect any short-term disruptions in the U.S.-Mexico relationship. That said, at least some U.S. and European companies with significant exposure to Mexico saw significant drops in their stock on the day following the election—for example, Kansas City Southern closed more than 10% down on the day.

Third, while anti-NAFTA sentiments figure prominently in Trump’s stated position, he has staked out an even more aggressive posture vis-à-vis China, indicating he will “on day one” instruct his Treasury Secretary to designate the country a currency manipulator and further instruct his trade-related agencies to ramp up aggressive enforcement actions, both domestically and in the WTO, against China. Many trade analysts expect a deep intensification of conflict in Sino-American trade relations, including the possibility of a bona fide trade war. As the Trump Administration pursues a more aggressive and antagonistic relationship with China, while also abandoning entirely the TPP, the strategic importance of North America could resurface. In this respect, Trump’s insistence on renegotiating NAFTA could work to the advantage of the U.S.- Mexico trade relationship if the resulting agreement, in effect, addresses many of the provisions already addressed in the context of the TPP negotiations (such as enforceable labor protections, provisions on state-owned enterprises, etc.). Again, it is impossible to know at this stage how these disparate and varied proposals will play out. Our point, precisely, is that the uncertainty necessarily precludes an assumption that it will work to the detriment of Mexico or U.S.- Mexico relations in the long term.

People Are Policy, and We Don’t Know Yet Who Trump’s People Will Be

Very little is known about who Trump will eventually appoint as his core economic and trade team. The identities of key members of his transition team are only beginning to surface. Inside U.S. Trade, among others, has reported that Dan DiMicco, former chief executive of steel producer Nucor and senior trade adviser for President-elect Donald Trump’s campaign, will lead the Trump Administration’s transition efforts for the Office of the U.S. Trade Representative.

Bill Walton, vice president of the conservative Council for National Policy, and David Malpass, a senior economic adviser to Trump who served as Deputy Assistant Treasury Secretary under President Reagan and Deputy Assistant Secretary of State under President George H.W. Bush, will jointly oversee “economic issues” on the transition team. Ray Washburn, a reportedly integral player in Trump’s fundraising efforts during the campaign, will head the Commerce Department transition effort.

While Trump has pledged to bring in top negotiators and businesspersons, experience suggests that pure size and scale of the demand for experience in the executive branch will result in the appointment of, at a minimum, a balance of seasoned and experienced officials and appointees from the private sector. Given that free trade has been a central pillar of Republican economic orthodoxy, we assess it is unlikely that we will see a dramatic change in philosophy among the leadership of the principal trade and commercial agencies. In the coming weeks and months we will be paying especially close attention to personnel-related appointments for clues as to what they may suggest about anticipated Trump policy.

The Response of the Mexican Government Has Been, and Will Likely Continue to Be, Measured and Cautious

Although President Peña Nieto was subject to excoriating criticism for hosting then-candidate Donald Trump during the campaign, the visit did make clear the administration’s intention to work constructively with any administration duly elected by the people of the United States. The President tweeted his congratulations to the President-elect and expressed his continued commitment to working together. Early in the morning following the election, Mexico’s Finance Minister and Central Bank Governor held a joint press conference, stressing the soundness of Mexico’s economy and ability to weather the uncertainty generated by the election. Finance Secretary Jose Antonio Meade further pledged the government’s determination to accelerate the implementation of structural reforms to keep the Mexican economy “dynamic.” While the Mexican peso has clearly taken a beating during the election, it has since hovered around 20, a far cry from the feared precipitous drop many had expected.

We assess it very unlikely that the Peña Nieto Administration will make any statements that might precipitate a reaction or predisposition from the Trump team. We expect the government will be focused primarily on dealing with the immediate foreign exchange and capital market fallout from the election results to ensure investors of the stability of the Mexican economy (an assurance with which we concur fully). We further believe, based on our own discussions and analysis, that the Mexican government is likely to take a wait-and-see approach to assess fully the new Trump team, its strength and support in Congress, and how it prioritizes the range of commitments it made during the campaign. This approach bodes well, we believe, for the U.S.- Mexico relationship.

Bottom Line Guidance: Don’t Rush to Any Quick Judgments or Decisions

Despite the heated rhetoric emanating from the campaign, we believe that the foregoing makes clear that it truly is too early to know exactly how things will play out with Mexico. What we do know, however, is that apart from the campaign rhetoric, the fundamentals of the U.S.-Mexico relationship are quite strong. The level of cooperation between the two governments, on a range of matters from security to immigration to commerce, is extraordinary and quite deep. The level of communication and cooperation at the working and political levels is very strong. We do not anticipate that changing in the near future.

Second, we know that the level and extent of economic interdependence is very high, and with over a trillion dollars of commerce and at least 5 million jobs at stake, we do not expect the new administration to risk so much without giving careful consideration to the consequences of such actions. The U.S. private sector, together with many influential members of Congress (especially free-traders in the Republican Caucus), will likely resist any hasty action that would put at risk the significant investment already made in Mexico and the U.S. jobs that depend on such trade and investment.

Important noneconomic considerations will also constrain the Trump Administration’s desire and willingness to antagonize Mexico, which is a critical strategic partner to the United States, especially in matters of homeland security. Although not widely reported, the United States depends extensively on substantial cooperation from Mexico with respect to the security of our southern border. While Trump will undoubtedly return the focus of binational border management to security issues, we expect he will quickly realize, through classified briefings and otherwise, the extent to which the protection of the border depends heavily on full cooperation with Mexico.

Despite Trump’s call to renegotiate NAFTA, the agreement remains in full force and effect for the time being. While uncertainty undoubtedly exists, we do not currently assess that an abrogation of NAFTA is either likely or probable. NAFTA continues to offer important investor protections and certainty that will not be going away anytime soon, if ever.

Finally, the coming months will undoubtedly be critically important for those companies doing business in Mexico. Companies with Mexican exposure should consider how they can communicate persuasively to the new administration how the benefits of trade and investment with Mexico outweigh the perceived costs. We think it’s especially important for Mexican and U.S. companies to identify specific, factual examples of how bilateral trade and investment supports the growth and development of jobs and the economy in both countries and, conversely, how restricting trade and investment with Mexico (and the world at large) will only hurt the United States and its workers in the long term.

In a similar vein, it will be more important than ever for U.S. companies to maintain strong and open lines of communication with senior officials in Mexico, especially for those companies operating in regulated industries.