By Inigo Guevara on 19 April, 2017

Mexico Reacts to a New Economic Reality

By Inigo Guevara
Mr. Guevara specializes in Latin American defense and security forces analysis, arms procurement, defense industries, arms trade trends, and offsets.
It’s been an interesting year for US-Mexico relations. The election pulled out a lot of questions for the Mexican side, and a lot of questions for the American side, particularly in the domain of immigration, trade, issues surrounding NAFTA, and the US-Mexico relationship generally. What effect has President Trump had on Mexico?

It has been quite emotional. I was in Mexico in late January to appear on a panel discussion about security in Mexico. The panel didn’t specifically revolve around the Trump narrative or initiatives and rhetoric, but they were difficult to ignore. Currently, Mexico is in a state of awe, trying to figure out what its response to Trump needs to be. Mexico also needs to identify how much of President Trump’s message will actually develop into specific policies and actions. About half of the recent marches in Mexico were a protest against President Trump’s rhetoric, with the other half being a protest against the current Mexican government’s policies and the need to fight corruption in Mexico.

Is there a link between corruption in the Enrique Peña Nieto Administration and Trump, or was this a more general expression of dissatisfaction?

General dissatisfaction. There is not a corruption scandal that links Nieto and Trump. This was partially dissatisfaction with the Peña Nieto Administration’s position, but also with the administration’s execution of economic policies –specifically the gasolinazo (government decision to free float price of gasoline) within Mexico, as well as corruption scandals that have been pretty much constant since 2014.

There has been talk of how this will influence Mexican elections in July 2018. Does this strengthen Andrés Manuel López Obrador’s hand, and could this catalyze a shift to the left for Mexico?

The initial reaction was very clear, because nationalistic saber rattling is usually met with more of the same, leading to an emotional expression of nationalistic pride and authoritarian views. There is of course, a more rational reaction as well, where people will settle down and analyze the impacts of various policies. What I saw when I was in Mexico was that initially, there was a surge toward Andrés Manuel López Obrador as a symbol of resistance. However, I was there when Carlos Slim gave a two-hour press conference in which he stated he was not interested in dealing in politics, but this move couldn’t be categorized as anything but political. The everyday people I spoke to -- taxi drivers, restaurant patrons, and others -- were staunchly in favor of Carlos Slim. Of course, this was not a formal poll, but rather informal conversations with about a half dozen people. Even still, it was interesting to hear about how common Mexicans perceive strength, and the mere fact that Slim had stood up for Mexico evoked a feeling of “well, here is our billionaire, and he is much, much wealthier than Trump.”

“I think Mexico will strive, at least initially, to show how good an ally it is, and how important Mexico is to North American security.”

What do you think this means as far as psychological and social fundamentals in Mexico?

It’s a sign of a society trying to adapt to a completely new reality. The intelligentsia and academics in Mexico who are traditionally left-wing would probably strike down any idea of Carlos Slim becoming president, but it’s not clear that common Mexicans feel this way. We’re seeing a society rapidly trying to adapt to new global conditions.

Looking at changes since January 20, what do you think the security dynamics will be like inside Mexico for American companies? Specifically, how do you think Trump’s proposed policies toward Mexico will impact security in Mexico?

Mexico will strive, at least initially, to show how good an ally it is, and how important Mexico is to North American security. It will likely tighten up security just to make a point that continuing with Mexico as a security partner will be beneficial to the United States. After that, Mexico may look for the Trump Administration to acknowledge this effort. Such acknowledgement could diminish tensions on both sides. There is a whole set of established rules that are difficult to ignore. It goes far beyond contacts between US and Mexican companies; it includes relationships between both congresses that can’t be shrugged away with an executive order. What will be key is that Mexico differentiates its economic and cultural relationship with the United States from the political relationship with the Trump White House.

American companies should probably pay very close attention to political dynamics here at home. What else should they focus on?

I don’t see anti-American sentiment growing at all. The people in Mexico who are anti-American have tried to raise their voices, but this will largely be rhetoric that will not materialize into action. At this point, it is still business as usual, and the more American companies realize that, the more they will continue to see how attractive it is to continue to invest in Mexico. As much as American companies have tried, and are trying to respond to President Trump’s calls to reinvest in the US, they are increasingly realizing this will increase their manufacturing costs by as much as eight times. Many companies in the security sector have twenty or thirty year footprints in Mexico, so it is highly unlikely that most of these companies are even thinking about divesting and reinvesting back in the US manufacturing sector.

"I don’t see anti-American sentiment growing at all"

Switching gears, what do you see as the greatest opportunities for aerospace and defense in 2017?

Everyone is looking to see how President Trump will raise the defense budget for FY 2018 and which programs will be funded. So far, the big five defense companies [Lockheed, Boeing, Raytheon, General Dynamics, Northrop Grumman] have been both encouraged and discouraged by the administration’s behavior. The Trump Administration has signaled to all of them that the defense budget will increase over the coming years, which is a main driver of their business, as there are multiple platforms that need to be replaced in the US inventory. At the same time, there have been calls for them to reduce prices significantly, so it has been a bit of a roller coaster.

What about foreign domains?

There are two large, fast-growing markets: the Middle East, and the Asia-Pacific region. In both cases, we have threat-based defense spending, which has kicked up significantly, particularly in the Arabian Gulf area with the Gulf Cooperation Council (GCC) significantly increasing its aerospace and defense spending. More than ever, they are looking into offset programs to go along with defense procurements. We see countries that are trying to develop local defense and aerospace industries to go along with procurement plans. Countries like Qatar that are small in size and population but economically powerful have set off historic defense buildups that are now requesting billions of dollars to be channeled back into their local economies.

What does that mean for American companies, particularly outside of the big five?

Outside of the big five, there is a great deal of room to grow, because tier-two and tier-three companies can become part of these offset arrangements. These companies will find a very lucrative market to provide services in, because they have a great deal of funding, but lack the required local service industries to cater to these requirements. The ability to develop joint ventures throughout the region will be very attractive to tier-two and tier-three companies.

What does this mean for manufacturers outside the big five?

It also presents a large opportunity for manufacturers because they can plug into regional supply chains

What about Asia?

Asia is a little bit different because even though it also has a growing market with a need for modern defense equipment, we are seeing this emergence of local manufacturers that have progressed to become original equipment manufacturers (OEM) for second generation platforms.

How have they accomplished this? I know Japan has been interested in buying American industry.

Over the past couple decades, Japan has been initially buying American products, and then tailoring them for specific requirements or developing localized production processes. This means they will assemble aircraft or ships themselves using foreign components, then, through a localization agreement, will have local companies build into their own supply chains. This ultimately enables them to develop components as sophisticated as avionics, engines, and radar locally. This is the end product of national development policies being linked to defense spending.

What do you see as the hottest markets for foreign manufacturers and service providers in the Asia-Pacific region.

South Korea, India, and Southeast Asia generally, with a focus on Singapore, Malaysia, Indonesia, and Taiwan.

What are the trends from last year that you expect to continue?

We’re going to see a much more vigorous Japan stand up and become a more assertive regional player. We’ll also see some diverging dynamics in places like the Philippines, where there seems to be a radical policy change as to their security partners. South Korea will be even more concerned with threats to its security from North Korea.

What are some 2017 priorities for Jane’s and yourself personally?

Personally, I’m going to be quite vested into trying to figure out how to support a balanced US-Mexico defense relationship, which has matured to its highest level over the last one hundred years in many ways due to a change in mindset and posture on both sides. As a subject matter expert in this area, this will be one of my personal areas of focus.As far as Jane’s is concerned, we are taking large steps to become the premier voice for information analytics to support global decision makers in the aerospace, security and defense sectors, and I am very proud to be a part of that effort and that family.

Topics: GetGlobal Experts, GetGlobal Guide, Interview Series, Trump, Defense, Mexico, Intelligence

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