The week that the United States sworn its newest president in Washington, D.C., my colleague Christine Murray was further south, walking around Mexico City.
Christine CFT's Mexico and Central America correspondent. She lives in Mexico City. And she was curious how people were feeling about their country's economy in such a moment of transition. See, Mexico elected its own new president, Claudia Sheinbaum, just a few months ago. Okay.
I spoke to a man named Anastasio Perez Pelicastre. So Anastasio basically told me that he sees a lot of movement in the economy, that there are jobs on offer, that the government is helping people with social programs. And this is broadly what lots of people feel in Mexico.
Sheinbaum took office last autumn from her massively popular predecessor, who upended Mexican politics and made a lot of changes. But he also pushed Mexico's public finances to the brink.
So do you feel like Anastasio's response was typical among people in Mexico? Yes, and I think it reflects what polls show in terms of how people feel about the economy, consumer confidence. Most people, particularly lower income people, are doing a little better because of higher wages and more government social programs.
But not everyone feels the same way. I also spoke to César Morales, a 54-year-old marketing consultant. He said that while lower-income workers were doing better, the economy for people on middle and higher incomes was stagnant.
and that there was high uncertainty because of the relationship with the United States. This high uncertainty that Christine's talking about here, that's because President Donald Trump has for a while now been threatening tariffs against Mexico as well as Canada. We're thinking in terms of 25% on Mexico and Canada. I think we'll do it February 1st. February 1st is later this week, of course. And at this point, that's all we've heard about Trump's plan.
But if tariffs are implemented,
They have the potential to upend Claudia Sheinbaum's plans and Mexico's entire economy, especially its ability to attract outside investment, which it really needs. Any investor wanting to invest in Mexico right now will have to ask themselves, do I think these tariffs are coming? And do I think that the new political and economic system that is being built domestically in Mexico is changing?
going to offer me the certainty that I need to invest for the long term. I'm Michaela Tindera from the Financial Times. Today on Behind the Money. Mexico's President Claudia Sheinbaum has promised to stick with her party's reforms. But many of those are raising questions for investors. And with Trump's tariff threats looming, will she be able to get her country's economy to grow at all? ♪
Hey, Christine, welcome to the show. Hi, happy to be here. Yeah, glad to have you here. So first I want to hear about Mexico's Claudia Sheinbaum. Who is she and where did she come from? So President Claudia Sheinbaum took office in October. She's a longtime left-wing activist who worked as an academic on energy and climate issues before she entered politics and
in 2000 at the invitation of the previous president, Andres Manuel López Obrador, when he ran Mexico City's government. She took the helm with multiple problems across different fronts in Mexico, a complicated security situation, deteriorating public health services, but the economic situation she inherited was particularly delicate.
So tell me a bit more about her predecessor. And, you know, they had this close relationship, as you said. But what was the state of things when she took over? So López Obrador, or AMLO, as he's known to most people in Mexico, is a woman who was
won the presidency in 2018 after trying several times. His basic policy offer to people was, you know, higher social programs. Initially, he cut government spending a lot and built mega infrastructure projects in different parts of the country. He also was and is a very popular politician.
Lopez Obrador is a massive figure in Mexican politics. He's the founder of the Morena Party, and when he became president, he promised a new era in Mexico's history. But he also introduced some changes that have left investors scratching their heads. The one he's best known for is his judicial reform, which requires Mexico to elect all judges instead of appointing them. Christine says it's hard to overstate what an experiment this is.
I'm just curious, how many judges are we talking here? So it's 1,600 federal judges, but the law...
also makes it obligatory for states to replace their judges. So, yes, no country of Mexico's size has ever tried to elect all of their judges. And Mexico is trying to do it in a very short space of time, under conditions that many don't feel are fair. And free election is guaranteed because of the dominance of Morena in this election.
In Mexico, a president can be in power for only one six-year term. So when López Obrador's term was set to end, Shainbaum ran and took his place. And as Christine mentioned, when Shainbaum took office, the economic situation she inherited was delicate. Basically, the economic legacy that he left after initially being very...
careful with government spending. His final year, he blew a deficit of almost 6% of GDP, the highest since the 1980s. Investors have some real concerns about her party's reforms. So from the moment that Mexico's election results came in,
Mexico's peso currency started to slide against the dollar because investors realized that the ruling party, Morena, President Sheinbaum's party, was going to have a super majority in Congress, which would allow them to change the constitution. So investors immediately became worried that a series of proposals that López Obrador had made early in the year would actually become reality.
I mentioned judicial reform already, but the second reform worrying investors has to do with how Mexico's regulators are set up. Right now, the regulators of multiple industries like telecoms and energy, they're independent bodies. But Shane Baum wants to bring them inside of government ministries.
So why are those two so concerning to investors? Any company that invests money in Mexico, whether they are Mexican or foreign, hopes that they never have to use the judicial system. But of course, disputes happen and often companies will end up in court for different reasons. And this is a last recourse that a lot of companies rely on when things go wrong because
And the fear is that the new judiciary will be less independent of the government, less technically competent, and therefore increase the risk of bad decisions, uncertainty, corruption, even corruption.
And the second one with the regulators, for similar reasons, these are bodies that interact with companies on a daily basis, trying to keep sectors functioning, competitive. And if they are less independent of the government, the fear is that there will be more arbitrary decision-making that again increases uncertainty for companies that are investing in Mexico.
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So Mexico's in a tricky place. Claudia Sheinbaum has her government's domestic agenda to overhaul the country's institutions. But she also needs to attract foreign investment. And this means the U.S., because American companies make up 40% of Mexico's foreign investors.
And in the midst of all this change within Mexico comes Donald Trump from the outside. So President Trump has said that he wants to implement a 25% tariff against Mexico and Canada starting February 1st. That's very soon. Christine, can you help me understand why is this, you know, this is seen as kind of a wild idea, implementing such a high tariff,
Why is that and what would that mean to implement such a tariff on Mexico?
So Mexico is one of the most vulnerable countries in the world to Trump's promise to put tariffs on imports. So more than 80% of Mexico's exports go to the United States. So this could be devastating for Mexico's economy overall. And some people have estimated that it could shave several percentage points off of Mexico's gross domestic product.
So it's fair to say that, you know, if these tariffs do come into existence, it could be kind of a make or break moment for Mexico's economy. Yes. Mexico's tariff free access to the U.S. market is a key reason why investors invest money in Mexico. So without that, it changes the game completely. The thing to know here is that Mexico's economy has been deeply enmeshed with the United States for many years.
Things became even more enmeshed after the U.S. imposed tariffs on China back during the first Trump administration. That's when Mexico became the largest trading partner for the United States. Take, for example, the car manufacturing industry. Mexico, the U.S., and Canada all play an important role in the supply chain. Parts are started and finished in different places in North America, and they cross the U.S.-Mexico and the U.S.-Canada borders multiple times before they become a real vehicle.
So a 25% tariff on Mexican goods into the United States would cause major disruption across different sectors.
For the car industry, where car parts cross the border multiple times, the cost of those cars would go up significantly. In agriculture, there are huge exports of agriculture from Mexico into the United States of berries, avocados, other products where the price in the US would go up significantly. And of course, it would be devastating for Mexico's economy because all of the jobs in those sectors
are there on the basis of tariff-free access. Let me pause here to say that Mexico also has some long-term problems that have spooked investors before. That's things like corruption and issues with security, violence and extortion. But despite all this, the U.S. and Mexico have an economic relationship that seems to be working smoothly. So why does Trump want to upend it now? What he said this time is that the tariffs are...
conditional on Mexico doing more to stop migrants and drugs, particularly fentanyl, from crossing the border.
So in kind of like the carrot and stick approach, this is the stick approach to getting Mexico to do these other things that Trump wants. Yes, but in parallel, he has begun a process of reviewing the free trade agreement called USMCA between Mexico, Canada and the United States. So there's sort of a two track process.
approach happening when it comes to Mexico's economy. Now, two things stand out to me here. One is that the tariffs are supposed to be conditional, which in theory means that they could be temporary. So if Mexico fulfills these conditions, maybe, possibly, the tariffs could go away. The second thing is that these tariffs both are and aren't about economic issues. That, of course, sounds kind of weird.
But we're talking about Donald Trump, and ambiguity is a big part of his brand. So in Trump's first term, he threatened Mexico with tariffs in a similar fashion as he's doing now. But in the end, in his first term, he also renegotiated NAFTA, which is the free trade deal between U.S., Mexico, and Canada that's been in place since the 90s, and was updated and given a new name, USMCA-LMCA.
Really, it's the point that he's just coming back for more. I think most people don't think he wants to tear up the agreement, but he is really doing what he did in the first term and trying to get better conditions or a better deal from the trading partners using threats. So Shane Baum has to decide how she's going to deal with Trump.
So far, Shane Baum has been one of the world leaders who has pushed back more obviously against Trump, perhaps more than people expected. Initially, she wrote a letter to Trump that
hinted at retaliatory tariffs if he goes through with his threat of 25% tariffs on the country. And since then, they've spoken on the phone and she has said that she doesn't want to respond to every public declaration. But the two certainly have different communication styles. So after Trump signed his executive orders, once he came into office...
The next day, Shane Baum did a presentation where she went through each of the orders that affected Mexico, explaining what was new, what wasn't new in a very academic way,
And basically her message was, let's keep a cool head and look at the detail of what's written in the orders rather than what is being said. Do you feel like her style of communication and how she's handling things so far will be to her and Mexico's benefit ultimately? Or is this a clash that won't work in her favor? That's really the big question that everybody here is asking is,
Mexico has a lot on the line here. So how Shane Baum's style and substance goes down with Trump is going to be very important in determining how Mexico comes out of this situation. So if Mexico really needs foreign investment and investors are already feeling skittish because of Shane Baum's domestic reforms...
And these tariffs are looming. What does that mean then if these tariffs do go into effect? So Mexico at the moment is under a cloud of uncertainty, both because of the domestic reforms that Shane Dunn is pursuing and, of course, because of Trump. But there are reasons that some investors think it's well positioned for a continued U.S.-China trade war and uncertainty.
Those who basically believe that the United States will need Mexico to remain competitive with investors, manufacturers looking to put factories closer to the United States, but in a place that has lower wages and cheaper operating costs like Mexico. Christine, if you were Claudia Sheinbaum...
What are the three things that you would be most focused on right now for leading Mexico's economy forward? The threat of tariffs from the United States is really the most important immediate question, without a doubt. And so the dialogue that Shane Baum's team has with Trump's team over migration and security
is fundamental, as well as the professional trade teams that are beginning to talk about the future of USMCA and what changes might be made in the review process. That clearly is the priority for Mexico right now. And in the medium term, the questions about Mexico's fiscal situation are very important. And what rules
she decides to put in place for encouraging private investment while trying to maintain the central tenets of López Obrador's political philosophy, those are going to be the big challenges for her now and in the coming years.
Christine, if you were to go back out, say, in a few months, let's say April or May, you go back out into the city to talk to people on the street about how they're feeling about Mexico's economy. Do you have any guesses as to what you might hear?
So what happens next really depends on Trump's tariffs. If he imposes them, it would knock the economy into recession, several points of GDP and generally significantly worsen the economic outlet. But even if Mexico manages to muddle through without them, there would certainly be some relief. But if
The fiscal situation is expected to get more complicated and the economy is still slowing down. So I think most economists expect this year to be economically more difficult than last. So you might find some more kind of disappointed people on the street.
Possibly. I mean, the government's fiscal support and like social programs have made a big difference to their popularity and how people feel. But yeah, they've put a massive strain on the government budget. And unless they attract investment and grow, they won't be able to do that endlessly for the next decade. Right. So we'll see. Behind the Money is hosted by me, Michaela Chendera.
This episode was produced by me, Safiya Ahmed, and Katya Kamkova. Sound design and mixing by Sam Giavinco and Joseph Salcedo. Original music is by Hannes Brown. Topher Forges is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
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