The Trade Numerologist: Trade and the Mexican Election

There's less than a week to go before Mexico's July 1 presidential election, and polls indicate that the favorite is the leftwing populist Andrés Manuel López Obrador. He leads the National Action Party's Ricardo Anaya and the Institutional Revolutionary Party's José Antonio Meade by over 10 percentage points.

Mr. Lopez Obrador's likely election could further complicate the ongoing renegotiation of the North American Free Trade Agreement, or NAFTA. The 64-year-old veteran pol has criticized new US tariffs on steel and aluminum as unreasonable, and endorsed recent retaliatory measures by Mexico. Mr. Lopez Obrador has said that, if he wins, he wants representatives on the committee renegotiating the treaty with US and Canada.

To be sure, no Mexican politician, even Mr. Lopez Obrador, can ignore the hundreds of thousands of new jobs NAFTA helped create, especially in Northern areas alongside roads heading to the US.

Exports to the US have increased to $327 billion in 2017 from $166 billion 2000, according to IHS Markit's Global Trade Atlas. And the US is Mexico's biggest export market. The second largest market, Canada, is one-twentieth the size.

Top markets for Mexican exports, 2017

• US $326.9 billion
• Canada $11.4 billion
• Germany $6.9 billion
• China $6.7 billion
• Spain $4.2 billion
• Japan $4 billion
• Brazil $3.7 billion
• South Korea $3.5 billion
• India $3.4 billion
• Colombia $3.2 billion

However, there are a couple areas, where Mr. Lopez Obrador's campaign rhetoric sounds more protectionist than the trade policies of current President Enrique Peña Nieto, who is not allowed to seek reelection and must retire when the transition takes place on December 1 this year.

One is Mr. Lopez Obrador's populist advocacy for Mexico's southern agricultural states. As it liberalized its economy, Mexico cut tariffs on agricultural goods this decade, according to its latest World Trade Organization review.

The average overall tariff fell from 6.2% in 2012 to 5.5% in 2016, and "this reduction is principally due to the lower protection afforded to agricultural products, which decreased from 20.9% in 2012 to 14.3% in 2016," the WTO said. And under NAFTA, this decade Mexico has dramatically ramped up imports of cereals from the US.

Mexican cereals imports from US, kg

• 2012: 14.3 billion kg
• 2013: 11.4 billion kg
• 2014: 14.2 billion kg
• 2015: 15.7 billion kg
• 2016: 18.1 billion kg
• 2017: 19.5 billion kg

Opening up agricultural imports has proven destructive to millions of poorer farmers in the country's south, helping to fuel emigration to the US in the 1990s and 2000s. The US government heavily subsidizes its production of corn and other cereals, so expect Mexico to demand cuts in subsidies, or something in compensation in return.

Something else Mr. Lopez Obrador has said is that he doesn't want a trade deal without "equality in wages." Despite massive foreign investment in Mexico since NAFTA was implemented, poverty rates are still roughly the same. Unemployment has not fallen. The wage convergence promised by economists has not occurred. Increasingly, the economy appears to be running on two speeds; the industrialized NAFTA-fueled North, and the agrarian South.

The upshot is that Mexican workers typically make only one tenth of what their US counterparts make.

Using government policies, such as minimum wages, stricter overtime rules and strong collective bargaining laws, to force up wages for Mexican workers could increase cost, and prices, for key Mexican exports to the US, and, eventually, drive US manufacturers to relocate.

Top US exports to Mexico, first four months, 2018

• Industrial parts, machinery $14.7 billion
• Electronics $14.5 billion
• Oil, gas $10.9 billion
• Cars, trucks $7.2 billion
• Plastics $5.9 billion
• Optical, medical equipment $2.5 billion
• Organic chemicals $2.1 billion
• Articles of iron and steel $1.8 billion
• Iron and steel $1.6 billion
• Aluminum $1.5 billion

Mexico's dependence on the US as a market explains why Mexico couldn't afford to impose tariffs on goods worth in the tens of billions, the way China has done. Instead, Mexico slapped duties on $3 billion worth of goods, including steel, pork, cheese, bourbon, cranberries and apples. It picked niche, strategic markets designed to hurt producers with vocal political engagement, Mexican officials said. For example, Mexico is the US's biggest market for fresh apple exports.

Top markets, US fresh apple exports, 2017, kg

• Mexico 281.7 million kg
• Canada 149 million kg
• India 101.8 million kg
• Taiwan 59.4 million kg
• Indonesia 34 million kg
• Hong Kong 32.9 million kg
• UAE 30.3 million kg
• Vietnam 25.9 million kg
• Dominican Republic 20.7 million kg
• Saudi Arabia 19.1 million kg

The tariffs are meant to remain in place until the US lifts the metals duties. If Mr. Lopez Obrador, as expected, wins this week, analysts will be watching his rhetoric on trade closely. EU officials have said they might look at coordinating their response to US tariffs with Mexico and Canada.