The Effect of the Trump Impeachment Inquiry on the Mexican Economy

The President of the United States of America is seen by many as the most powerful man in the world. However, what happens when this man’s right to power is challenged by his own country? An impeachment inquiry has been filed against current President Donald Trump with the belief that he has had unlawful dealings with Ukraine and its President Volodymyr Zelensky, an event that has dominated American politics.

There are vital financial ramifications of an impeachment inquiry due to the changes it could cause in the American government. There are significant impacts on the Russian and Ukrainian economy as a result of allegations of Trump’s association with these countries; there are also potentially detrimental effects to the Mexican economy, one of America’s largest trade partners.

Because a large amount of trade occurs between the United States and Mexico, Mexico’s economy is highly dependent on the economic forecast for the United States, mainly regarding the trade outlook for the two countries. This is not immediately apparent considering Mexico is the holder of the most amount of free trade agreements in the world. Despite efforts to secure more free trade partners, Mexico still allocates approximately 80 percent of its exports to U.S. consumers as of March 2019. However, what is particularly troublesome for Mexico is that its economy is far more volatile than the massive American economy. According to numbers from the World Bank, from 2001 to 2017 the standard deviation of the annual per- capital real-GDP growth for the United States was only 1.5 compared to Mexico’s 2.3.

These phenomena are clear when looking at the XAU (Gold) to peso and dollar ratios. On February 26, 2019, reports came that Michael Cohen was to testify against Trump in Congressional hearings regarding payments to Moscow. In the days following, the U.S. dollar value fell about ten dollars relative to the price of gold. Mexico’s peso, however, fell almost seven- hundred Pesos relative to gold prices. Then again, on January 4, 2019, Trump gave news that the government shutdown could last months or years. This resulted in a drop in the value of the dollar relative to gold, while the peso dropped even further.

Mexico’s recent diversification of free trade agreements to other economies, spurred by liberalization, has put increased competition on American businesses doing business with Mexico. This was one of the catalysts for the Trump administration to abandon NAFTA (North American Free Trade Association) in search of a revised free trade agreement that would reflect the current status of the world economy better than NAFTA does, signed over two decades ago.

The replacement for NAFTA is the USMCA (US-Mexico-Canada Agreement). While the U.S. and Canada could benefit from the ratification of the USMCA, Mexico needs it and in need of the advantages of free trade for two of its biggest trade partners again. This is not lost on the people of Mexico. A recent poll by Forbes magazine reflected that seventy percent of Mexicans believe that USMCA will support their economy. Unfortunately, the same poll reported that approximately forty percent of Canadians and fifty-five percent of Americans believe that the USMCA will be beneficial for their economies. Fifty-five percent is not enough to pass ratification in Congress, especially with the Democrats holding a 235-197 majority in the House of Representatives and Pelosi stalling voting as she can bring the bill to vote at any time. Prompted by the lack of progress of the bill in government, Trump has stepped in to help propel the ratification process forward. In June 2019, he reconciled relationships with Canada by inviting Justin Trudeau to the White House to lobby for the USMCA. Without Trump’s intervention, the polarity of the American economy might have left talks of free trade with Mexico stagnant, putting unnecessary costs on exports.

In recent months, faith in Trump’s administration towards economic policy has fallen by a noticeable amount. Before the announcement of the Trump impeachment inquiry, the mean spread on Trump’s economic approval rating spread was relatively high. Following September 24, when the inquiry was announced, Trump’s mean economic approval rating spread fell by a decent margin. A lack of faith in the President’s word translates to a lack of faith in his policies, in turn making it harder for Trump to get economic legislation passed and creating a stagnant government that Wall Street dislikes. This phenomenon was demonstrated when the U.S./World equity ratio fell during news of the Monica Lewinsky scandal and upon Clinton’s confession. Therefore, it is clear that the American economy can be significantly affected by a loss of faith in the President’s character, not just because of the unpopularity of his policies.

Consequently, Mexico’s economy would be attacked in two ways. Firstly, the Mexican economy is reliant on exports to the United States. An attack on the Trump administration and the U.S. market will lead to a fall in U.S. equity values relative to the world economy which would lead to a fall in Mexican equity values due to the correlation between the two markets. Secondly, consumers losing confidence in Trump’s character would lead to increased polarization in the U.S. government, which will lead to Pelosi and House Democrats calling Trump’s views on the USMCA into question and spark calls for renegotiations. This will increase the amount of time needed to find a replacement for NAFTA, making Mexican markets undesirable for U.S. and Canadian economies and vice-versa.

The Trump impeachment inquiry could lead to a decrease in American confidence in the U.S. government, especially as more details are released about Trump’s activities. There is potential that this uncertainty could create a two-pronged attack on the Mexican economy that would cause Mexican stocks to fall along with American equity relative to the rest of the world, wreaking havoc on Mexico’s economy.