Student (s) Number as per student card:

Tribhuwan Sharma 10355191

Course Title: Master of Business Administration

Lecturer Name:

Module/Subject Title: B9MG116 International Management

Assignment Title:
 MEXICO
United Mexican States, also known as Mexico is a federal republic located in the southern portion of North
America. It is the fifth-largest country in the Americas bordered by the US, on the south and west by the
Pacific Ocean, on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf
of Mexico, covering almost two million square kilometres. With an estimated population of over 113
million, it is the 13th largest independent nation in the world. Mexico is a federation comprising 31 states
and a federal district, having fifteenth largest nominal GDP and the eleventh largest by purchasing power
parity. The Mexican economy is strongly linked with its trade partners under the agreement, North
American Free Trade Agreement (NAFTA), especially the United States. Mexico is a member of the United
Nations, the World Trade Organization, the G8+5, the G20, the Uniting for Consensus and the Pacific
Alliance (Wikipedia, Wikipedia, 2017).

MEXICO: KEY PESTEL ANALYSIS

PESTEL analysis (political, economic, social, technological, Environmental and Legal) provides an inclusive
strategic analysis of a country from historical, present and future perspective. With the current situation,
Mexico is in and the future of various decisions lies in the pact of free trade know as NAFTA. For which
newly elected American President Trump has formed one committee, given a deadline of 200 days. The
outcome of the study done by the committee would result in end or revision of NAFTA as free trade deal.
Based on that, key PES form PESTLE has been analysed.

POLITICAL ANALYSIS:
Dawn of 21st century saw “Neoliberalism” as a new political and economic model in the world for an
economy to grow whether it’s a company or country, impacting every layer. Under the sense of belief, of
“modernization” and “growth”, the neoliberal model was built on such shaky grounds, resulting in
shrinking democratic spaces. The Majority of the world’s people are in an uncontrolled “race to the
bottom”- poorer than three decades ago. Any propaganda throughout the world is not capable enough
to hide the bare reality (Wikipedia, Wikipedia, 2017).

January 1st, 1994, North American Free Trade Agreement (NAFTA), one such important neo-liberal model,
defining future for America, Canada and Mexico was signed for free trade of goods and capital across
borders but with a limit on citizens crossing borders. Since then US-Mexico relationship is more than of
two decades. The neo-liberal form of friendship started on the border of US-Mexico under the program
of “Border Industrialization”, a “free trade zone”. Promises which both the government made, including
wages, employment, migration are important to understand the effect of NAFTA on Mexican economy as
this has been for the first time in the history of the world when two “relatively economically unequal
countries” tied with each other in such a huge pact.

Maquiladoras (Assembly plants in Mexico importing parts and assembling products for exports) have
become the mark of trade in Mexico. The sector contains assembly plants shifted to Mexico from U.S.
After the agreement in 1994, this sector has seen a jump of 15.5%. The total manufacturing has seen an
increase to 88.66% of total export to America (Relation, 2017). Which totally states the dependency of
Mexico on U.S. Mexico got affected by 2008 U.S great depression (financial crises) than any other country
in Latin America. Even America is one of the worst suffer because of NAFTA and trade deficit with Mexico,
682,900 American jobs fled across the border by2010.

Newly elected (January 20, 2017) property mogul, The United States of America, President Donald Trump
continuously vowed during his entire campaign NAFTA as “worst deal ever” (Lakhani, 2016). As per the
pledge of President Trump to “rip up the existing trade deal with Mexico” which is the cause of damage
to the U.S economy, Mexico could be in a serious trouble. Abandoning the deal (NAFTA) could turn U.S
Mexico relation to World Trade Organisation Rules (WTO). If instead of re-negotiating, abandoning or
withdrawing would be the case in the upcoming future then, taxes would be according to “most favoured
nation tariffs”, which ultimately will trigger the prices of goods on both the sides. Plus Mr. Trump’s threat
of imposing of 35% import duty on Mexican cars and machinery could disregard WTO rules which could
also lead U.S.A to leave WTO. Which in itself will be an atom bomb on world’s economy. Mexican
government over the last two decades has been a cooperating neighbour trying to build the relationship
with the world largest economy, sometimes overbearing (Porter, 2017).

But this is not a normal time for Mexico. The relationship is worth $580 billion a year for both the
countries. A blow up on the deal will have an impact on both the economies but particularly, devastating
for Mexico.

Figure 1 Value of NAFTA trade (Webber, 2017) Figure 2 US exports to Mexico (Webber, 2017)

To come out of this situation of threat, Mexico’s most important goal could be to use the “Deterrence
theory”. As said by a credible nuclear deterrent, Bernard Brodie “must be always at the ready, yet never
used” (Wikipedia, 2015). Convincing President Trump, the blow would also cost 6 million American jobs
totally dependent on the exports to Mexico (Porter, 2017). Once such strategy to defend the self-interest
of Mexico came at the end of January 2017 where Mexican President Enrique Peña Nieto declared future
of Mexico with U.S will not be only as a trade partner but rather “We will bring to the table all themes,”
he said in a speech. “Trade, yes, but also migration and the themes of security, including border security,
terrorist threats and the traffic of illegal drugs, weapons and cash.” (Porter, 2017).

The Mexico–United States barrier is a series of walls and fences along the Mexico–United States border
to prevent the trespassing of Illegal immigrant, Jorge Castaneda, a former foreign secretary, on a very
aggressive approach said, Let Mr. Trump pull the United States out of NAFTA. Instead of stopping Central
American migrants at its southern border, Mexico should let them through on their way to the United
States. “And let’s see if his wall keeps the terrorists out because we won’t (Porter, NY TIMES, 2017).
Many Mexican official and analyst sense that, the kind of change Trump wanted to have by either re-
negotiation or withdrawing from NAFTA could be a politically profitable issue, though for a short term
only, sending a tough signal to China “the biggest rival”.

But if Mexico stands firm on its ground and lets, Trump wish, dissolve NAFTA. It would send a signal to
China that there is no point in resisting in front of Uncle Sam. Now the main threat of raising tariff to 35%,
Mexico could easily challenge that under the rules of the World Trade Organization. Though it will be a
risky affair for Mexico but when Mr. Trump entered into the Presidential candidacy race in June 2015, 15
pesos were equivalent to a dollar, with NAFTA being the hot and controversial topic now it is 22. A further
series of dialogues could possibly take it to 40 pesos for a dollar. And that could be the card which Mexico
could play to attract investors or remain in the market.

Director of the Peterson Institute, C. Fred Bergsten has noted that the irony in President Trump approach
is weakening of Peso so that he could increase the bilateral trade deficit, which makes it even a better
habitat for American investors.

Mexico government needs to hold on to the situation, things are happening globally (like BREXIT) this
probably is not the worst time, yet things are to happen favourable or unfavourable. In addition to that
As Mr. Castaneda said North has enjoyed a very peaceful southern border for 100 years ‘Don’t mess with
that’.

ECONOMIC ANALYSIS:
Mexico being the second largest economy in Latin America is among the world's 15 largest economies.
Mexico’s trade took a rapid increase after NAFTA was signed with U.S as the destination for 86.66% of the
exports, making it as its biggest partner in trade and explaining high dependency on the United States.
Though Mexico economy has shown the same growth of 1.2 to 2.5% since NAFTA came into existence.
NAFTA paved way for billions of dollars of investment every in Mexico. Though trade has increased but in
some areas, Mexico has been badly effected for example subsidized agriculture in America has led to
cheaper products in Mexico such as corn, the result of which is an adverse effect on farming in rural areas.
Farmers are forced to abandon farming which has contributed in the form of 52.3% poverty rate in 2012
(Guardian, 2014). This also could be related to migration on such a large scale which is also one of the
main issues for the Mexican government.

Presidential, Mr. Pena, promised of ground breaking changes like, liberalization of the long energy
monopoly by going private, reviving the tax policies which in return would close the tax loop holes, fighting
against corruption, the long-prevailed issue of drug trafficking and rampant gang violence. But since 2012
when he has sworn as the President of Mexico, till date, nothing much has changed.

NAFTA as a deal did change many things for Mexico. It is now one of the biggest auto hub in the world,
creating thousands of jobs every year. This has overall impacted positively on the Mexican economy. On
the other hand, study shows that Mexico’s average rate of economy growth was 1.3 % from 1993-2003
when most of the Latin American countries were undergoing a major expansion. The most expected
“wage convergence” between both the countries didn’t happen, with at the rate of 1.2% per annum per
capita income was rising which was way slower than Latin American economies like Chile, Brazil (McBride,
2017).
This divergent outcome as explained by many analysts is referred to as “two-speed” nature of Mexico
economy, where the growth could be seen in FDI, technological manufacturing, and good wages hike in
the northern part of the country which is also the industrial hub. While the farming state, Sothern Part,
seems always detached with the policies and this new economy creating an imbalance in the system.

While closely watching the American Presidential election of 2017, the economy dropped to 0.2%
(Gillespie, 2016)in the second quarter of 2016 and the oil price drop globally led to a drop of 3% in oil
sector because of Mexico being a major oil exporter. Surprise win of Republican candidate Donald Trump
led to a huge currency drop, losing 20% on the exchange value (Database, 2017). Since President Trump
was a running candidate for the presidency, building barriers with Mexico have been his primary goal
(BOTTONI, 2017). Mr. Trump willingness to repeal or abolish NAFTA, which is in force since 1994, as per
analyst prediction, would slow & weaken the growth of the economy in 2017 as well.

SOCIAL ANALYSIS:
Labour and Migration

After more than two decades of the impact of NAFTA on both the country’s economy and civilization,
labour issue is most controversial than any. Even repealing of NAFTA is happening because of the jobs
shifting to Mexico, being a very low-cost country, especially in the manufacturing sector. But if apple to
apple comparison will be done then U.S had a negligible effect compared to Mexico on Labour because of
the size and economy of the Northerner. Mexico has seen the most dramatic influence of the trade on
labour. Between 1992-2002 there were 1.2 million workforces increasing every year out of which only 0.5
million were actually getting jobs per year, which ultimately created a huge gap in supply vs demand
resulting in deterioration of the social environment.

This deterioration resulted in Mexicans migrating to U.S.A (4 to 5 million in 1990’s) which reflects Mexico’s
failed policies and wage insufficiency for Labour. By early 2000’s there were almost 6 million Mexicans in
U.S. As per one estimate 9.4% of total new born Mexicans, lives in the States and made a total of 5% of
U.S labour force. An estimation also shows in (Migration Policy Institute) 2012 there were total 5.3 million
undocumented Mexicans in U.S. This to date has resulted in many personal harms and deaths of the
Mexicans in U.S (Zuloaga, 2001).

Trump’s “Great Wall” on the border of Mexico is among some initiatives, good or bad, only time can
explain but many political disputes have already started happening over Trump’s planning to expel two to
three million undocumented migrants and then to stop the flow via the construction of the ‘WALL’. Taxing
migrants is also one such decision which President Trump is keen in taking.

IMF in May 2016 has already granted a two-year flexible credit line for Mexico, as 56% of the GDP is in
Debt, if there will be any major external shock from amendment in Policies. Finance Secretary José
Antonio Meade in a press conference has promised a plan to limit the impact which wave of American
protectionism could create.
 President Pena Nieto's main priority would be to manage the negotiations on both NAFTA and rights of
Mexican migrants with Trump’s Administration. As per the belief of Amnesty International, Mexico is
suffering from "national human rights crisis", indicating journalist killing, clashes between law
enforcement agencies and cartels are on the rise.

BUSINESS IMPLICATIONS OF THE ABOVE PESTEL FACTORS.

An explosion of trade, the cross-border trade happened in North America when a 23 years old agreement,
NAFTA became a symbol of economic relations between 3 North American Countries. Elimination of the
cross-border tariff on goods traded between America, Mexico and Canada was the silver lining of the
agreement.

As the time passed, the ‘maybe’ unthinkable, realities came into the picture with a blame game on. NAFTA
was blamed for hammering both U.S manufacturing sector and jobs, with an increase in the flow of the
illegal Mexican Immigrants to the American Soil, making it even harder resulting in 5% of the total working
American population with illegal immigrants. Corporates/factories paying decent wages moved to South
where wages were less than $1/hr. and labour & environmental laws were there for the sake of policies
on papers. The wealthiest 5-10% of both North & South, capable enough of making and amending policies,
enjoys heavy profit, resulting in declining, jobs in U.S and standard of living Mexico.

The micro level analysis explains a bad impact on both the countries but overall if from a Country’s growth
point of view this trade agreement will be seen then it has evolved Mexico as one of the key economies
in the world with a growing Manufacturing sector. By 2050, Mexico could become the world's fifth or
seventh largest economy as per the analyst. This all had been the positive effect of NAFTA on Mexico
except, Mexico–U.S. agricultural agreement. This agreement along with Meat industry had been in the
dispute since the amplification of NAFTA. Where U.S subsidized eatable products has taken the control of
Southerner’s market. NAFTA as an overall policy and like most of the policy between states had positive
as well as negative effect in long run for both the countries.

But since the day, Dynamic President of U.S.A, Mr. Trump has the hold of the whip, NAFTA is in centrepiece
(Aleem, 2016), of his all missions and speeches. Let’s assume that what if, Trump decided to roll the dice
and try to change the deal his way, anyway. Since one of his goals, is also to penalize American businesses
for sending jobs and production plants out of the country, for example, on many campaign trail, he called
“absolute disgrace” on Ford Motors decision to build a $1.6 billion assembly plant in Mexico. The basic
intention is to reverse or stop every move which American business are taking as Mexico being the
destination. But if the intention is to pursue that goal only, then for the same number of other ways are
also there. Trumps’ by raising tariffs on imports from Mexico has already curbed future investment. Ford
Cancelling $1.6 billion-dollar plant in Mexico and will add 700 new jobs in Michigan (Autos, 2017) is one
such case. Along with Ford, Toyota and General Motors are some of the giants who had the plan of
investing in Mexico. But now the fate of Mexico’s blossoming Auto industry is in hands of President Trump
(Campbell, 2017).

But even President Trump knows that, withdrawal is a tricky business, knowing how deeply the countries’
economies rely on each other after more than two decades of trade. Bringing American business back
means bringing existing components and outsourced service back onshore to avoid penalties. This is a
very hectic process and would require a lot of money and time. Overall this, if in response Mexico raises
the tax on American goods then that will be a trade war. That could even cause a downturn for American
business plus economy. Though, the biggest fear could be 6 million jobs, which are directly linked to export
business with Mexico. So, in order to create few jobs, millions are at the stake. For one very reason, why
Mr. President shouldn’t think of withdrawing from NAFTA is because the domestic market is habitual of
cheap foreign goods, after imposing a tariff, the rates could be very high, resulting in American going for
fewer Mexican made products which is the main source behind filling of shelves of giants like Walmart
and another big retailer.

POTENTIAL EFFECTS OF A HALT OR REVERSAL OF GLOBALISATION

Any Trade agreement like NAFTA, GAFTA, EFTA, TPP etc. revolve around few vital factors.

 Regulatory regimes
 Flow of capital or Investment
 Control over resources
 Labour Market
These few vital factors are some basic and integral part in globalization as a process, creating the
dependency of states on each other. Nations maintain that interdependency on each other via strategic
agreements by controlling elements like labour standard & wages, making environmental policies, and
trade deficit etc.

NAFTA as a trading mechanism, facilitating all the factors, as agreed, benefited every countries economy
‘more or less’ equally on a larger scale. Between 1994-2004 Canada GDP grew by an average growth of
3.6%, Mexico 2.7% and U.S.A 3.3%.

Figure 3 Top 5 USA trading Partner (Webber, 2017)

Together all the three countries witnessed a trade of $865 billion dollars in 2006 which increased to $
2,493 billion accounting for 14 per cent of world trade in 2014 (WTO, 2016). NAFTA as a word is much
more complicated than some financial analysis. After more than two decades of operation, it is more of a
legacy than a mere export and import between states. It is more than an eerie sound of “jobs being pulled
out” or “illegal immigrants” as the honourable President of America Donald Trump will argue over press
conferences and international agendas. To which the former President of America Bill Clinton well argued
“has it turned out to be a rising tide then it would lift all the boats”.
Though it is a valid point that NAFTA as a policy has not treated every country or every layer in an economy
with the same fashion, for that modernizing and improving NAFTA could be the game changer but talking
about abandoning the treaty could cause some serious damage to every economy, again, more or less,
but could be devastating for Mexico.

It could be thought in a manner that, the formation of NAFTA was more of a geographical model than the
economic model, then in 1994. Though the focus was also trade, but this then was a model which
promotes social, economic and political liberalization to enhance capitalism. This was a role model for
decentralized capitalism amongst three countries sharing borders in a very virtual manner.
So, NAFTA as a treaty could be concluded as a well though the model of capitalism on very shaky grounds.
Development of any economy should go parallelly with the social class. An overall development of mass
should have happened instead of conglomerates or moguls. So, in that aspect, NAFTA has FAILED.

With the talks only, about abandoning or revisiting NAFTA analyst predicts that the GDP of Mexico will fall
by 1.4% in 2017 (Economist, 2017). The biggest danger is the exports which 80% goes to America. Without
free trade deal, Mexican made will be very costly which means very fewer buyers. Whatever Mexico has
gained in past 23 years is on the verge of getting bankrupted. American have though options if side-lining
Mexico is the biggest goal. Till things get settled Trump Administration can go with China, a potential
contender in cheaper goods. Cheap Corn and meat industry in Mexico is totally dependent on America,
which could badly hit Mexicans in terms of food also.

This economic war could take Mexico into a big recession, the recession which Mexico never thought of,
but Mexico is also preparing for its next Presidential election in 2018 (Economist, 2017). Andrés Manuel
López Obrador, a left-wing populist, chances of winning have increased. Mexicans believe that if things go
totally against them, then Andrés Manuel cold counter America protectionism with self-destructive
economic nationalism which in past has also saved Mexico.

Though it’s a game of Politics and minds where things happen overnight. So, predicting a worse on a scale
is merely possible. Resisting may not be able to help Mexico but as said in the beginning Theory of
Deterrence could.
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