Luis Rubio

The problem with bets is that they are binary: all or nothing. When a government plays the betting game, as when one plays with fire, it can end up badly. For three years, the Mexican president has placed odds on a series of factors that to date and despite the pandemic, have come out essentially well. What no one knows is whether those same factors will continue to be favorable. Bets can come out well, but they do not cease being bets. And they can also come out badly…

The government of President López Obrador has made three fundamental bets: first, the infrastructure projects (the refinery, the train and the airport), as sources of economic growth, to which one must add the attempted revitalization of Petróleos Mexicanos (Pemex). These initiatives have advanced against sea and deluge, the pandemic and recession, thanks to the conviction of the president that this is the way to the future to ensure the consolidation of his eagerly awaited transformation.

The second bet is on improving the standard of living of the population that has been his electoral base (not always the poorest or most needy), which he trusts will guarantee the politico-electoral continuity of his (historic) project of government. That population reiterated its support at the recent midterms, but proved insufficient for achieving the ultimate objective of underwriting the project’s continuity or its legitimacy.

The third bet is on the country’s economic and financial stability, measured principally by the steadiness of the exchange rate. What many consider this an obsession, particularly those who argue insistently (many of them with legitimate and persuasive approaches) for greater expenditure in the context of the pandemic, is the product of a cold political calculation summed up in the celebrated phrase “the president who devaluates is devaluated.” For the president it is obvious that this variable is transcendental for the entire Mexican society and that it, therefore, comprises a fundamental factor in his assessment.

Beyond the boos and ovations, the presidential project has been successful on its terms. While the issues that drove his candidacy have not been corrected (such as insecurity, corruption, growth or poverty), the mere fact that the country has been able to navigate the turbulent waters of the pandemic with the acute impoverishment that it implied, earned the president an infinitely less pernicious electoral result for his party than could have been.

The problem of the second half of the six-year presidential term is that it is the time of harvesting what was sown during the previous years and this government will not have many fruits to gather. The infrastructure projects are not particularly solid nor do they have multiplier-effect benefits for the economy as a whole, and it is even possible that they will end up as white elephants; for its part, instead of being a source of demand and growth as it was during in the seventies, Pemex is an interminable drain of fiscal resources and, in any case, it no longer entertains (nor will it ever entertain) the relative weight it had a half century ago and even less so in today’s, ever more digital economy. The complexity characterizing the Mexican economy of the XXI century is such that no government can pretend to control all its variables or conduct all of its processes. Worse still, the concentration of power that lies at the heart of the governmental strategy constitutes a damper on investment and growth. To top the overall picture, the government has done nothing to combat evils such as corruption or insecurity, factors that, had they diminished, would have held, in themselves, enormous political and social appeal for the country’s long-term development.

In addition to the latter, much of what facilitated the stability of the past three years has less to do with the internal management than with the international financial markets, which have been especially favorable. I have no doubt that much of the support that the president continues to enjoy depends on that economic stability, but this is combined with the deep-seated nature of the electorate. Mexicans understand how limited their options are; thus, they respond to the largesse dispensed by politicians with electoral motives (particularly transfers to the president’s base), corroborating the wisdom of Mexican voters, but not necessarily their convictions: it winds up being an exchange, pure and simple.

In a word, electoral support is more volatile than politicians suppose, and the president has acted under the assumption that he can eliminate much of the traditional expenditure (such as in health or childcare centers) to dedicate these monies to his clienteles while simultaneously expecting the international context to favor him. The question is: What happens if these premises turn out to be in error?

Today it is not inconceivable for the Federal Reserve, to begin to raise interest rates at some point, which would immediately have repercussions on the Mexican peso–U.S. dollar exchange rate. In the same fashion, remittances from Mexicans living in the U.S. may begin to diminish to the degree that the huge transfers that the U.S. government has made due to the pandemic begin to wind down. On the other hand, given the unfavorable environment for investment, there are no reasons to anticipate that the Mexican economy improve its performance. Furthermore, the issue security, which has not been a priority of the president’s, could further deteriorate.

At the end of the day, everything will continue to depend on bets, as always.

www.mexicoevalua.org
@lrubiof
a quick-translation of this article can be found at www.luisrubio.mx

Luis Rubio

Brexit is not the sole challenge that the European Union (EU) faces. Although the United Kingdom was always an awkward partner, there are other nations that engender permanent tensions. Some obvious cases include those of regions seeking autonomy, such as Catalonia, but in recent years it is the Eastern European nations that have become the headaches. Hungary long ago broke with the protocol of democratic civility, which is perhaps the heart, at least in the emotional sense, of the EU, but presently Poland is the nation that has been at the forefront in terms of challenging the key supports of the regional organization. To become a member of the EU, an aspirant must homologate its entire legal, even constitutional, structure, with the rules dictated by Brussels; however, of late, the Supreme Court in Warsaw (which no one considers independent of its government) emitted a decree that diverse European regulations were not in agreement with the Polish Constitution. The Polish government has no intention whatsoever of abandoning the EU but its ongoing permanence clashes with the essence of the European project. While the U.K. split off with a single stroke, Poland is seen as an increasingly awkward and incompatible partner. I wonder whether Mexico is beginning to appear this way to our two North American partners.

The European project is very different in structure and nature from the North American Trade Agreement. The explicit objective of the nations that made up the European Economic Community (EEC) with the Treaty of Rome in 1957 was that of advancing toward political integration under the premise that constant interaction on all planes -economic, labor, and political- would eliminate the propensity to incur in bellicose aggressions such as those the continent had already undergone twice in the 20^th century.

The North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA), espouses no greater pretension or purpose than that of integrating industrial processes, establishing clear regulations for commercial exchange and for investments among the three countries. To this end, the contract that unites the three nations establishes the mechanisms for the functioning of the border crossings, as well as the resolution of controversies and disputes.

The sphere in which both regions, Europe and North America, indeed do share a common aspiration lies in strengthening institutions and capacities for developing their newest and most vulnerable partners. Nations previously forming part of the Soviet bloc that applied for their incorporation into the EU perceived that access as a way of transforming themselves, consolidating their economies and securing an anchor for their democracy. In the same dimension, the Mexican proposal to negotiate a schema like that which the United States had agreed on with Canada was understood by the U.S. as an opportunity to serve as a bulwark for the transformation that Mexico had undertaken in prior years and to contribute to its consolidation.

Independently of the contrasting aims, the original nations that assumed these regional mechanisms shared a similar history and levels of development (Germany, France, The Netherlands, Belgium, Italy and Luxembourg, and Canada and the U.S., respectively). Notwithstanding this, both regions responded to the emergence of the right set of circumstances to underpin neighboring nations with eminently distinct characteristics. They did so out of self-interest: they also gained by having stronger neighbors.

The discussion among the original members within the European Union is what to do with nations like Poland and those that will accumulate over time. With the experience that already exists of a nation that withdrew from the bloc, the U.K., European politicians are starting to address the contrast between a bad marriage and a good divorce. Though many deplore the exit of England, they now are beginning to see it as a lesser evil when faced with the inherent complexity of a partner that does not take its leave but that constitutes a perennial pain in the neck, in addition to its being susceptible to infecting other nations in the vicinity.

For three decades, Mexico maintained, at least formally, the goal of expediting integration as a mechanism to elevate productivity and, with that, the population’s incomes, and the country’s development. Not much was done in this respect -not even providing incentives for ever more regions, activities and enterprises to actively participate in the regional mechanism- but, until recently, there has been no divergence in the general vision of the future.

Lopez Obrador’s government does not share this view of the future and each of its acts and initiatives points to an ever-greater divergence. There’s no doubt that legislation in matters like electricity could come to be the straw that broke the camel’s back, consecrating Mexico as the region’s awkward partner. No one is in search of a divorce, but they despise the inability and unwillingness of the Mexican government to confront and resolve its problems or of further adding to them. Inevitably, Mexico’s partners will protect their companies from the arbitrary (and counterproductive) measures of the government and will devote themselves to preventing insecurity, corruption and migration from crossing their borders.

Instead of respect that the Mexican President so much craves, Mexico will see blockages, and rather than cooperation a strategy of defense. Hand in hand will come further poverty and less economic growth. Some success.

www.mexicoevalua.org
@lrubiof
a quick-translation of this article can be found at www.luisrubio.mx

Luis Rubio

The confusion is justified because a good part of the population lives in a world of fear or anger, both poor counsels but that, in the era of social media, are not only ubiquitous, but dominant. Worse yet, while previously each of these -anger and fear, respectively- would allow the attenuation of the other, the effect of living in self-contained digital communities that do not communicate among each other to a great extent have the effect of reinforcing the emotions and the community.  How, in this context, can the great matters before the nation be elucidated?

The National Electoral Institute (INE) is an object of permanent criticism and opprobrium. From its formalization as an autonomous entity in 1996, there is practically no government that has not interfered in the electoral complex, usually to adjust the rules to their interests, for the exercise of vengeance against the members of the boards of the respective institutions (INE and the Federal Electoral Tribunal [TEPJF]) or to pacify a certain actor in particular. Now there comes along precisely that actor who wants to stick his nose in one more time.

The complaint with respect to the INE is a triple one: first, that it is very costly; second, that it applies the rules in a biased way; and, third, that it does not subordinate itself to whomever obtains the highest number of votes. Symptomatic of the profound nature of this third element is that then-president Felipe Calderón in 2006 like Andrés Manuel López Obrador in 2018 rebuke it exactly the same and for the same reasons. However much the clamor, this fact alone is a convincing proof of the impartiality of the electoral arbiter. In addition, compared with the federal government, INE is a model of efficacy and probity and is recognized thus by the citizenry.

On the financial side, it is evident that the cost of the electoral system is enormous, but one must remember that the reason why the system was created, that which led to its being consolidated in the constitutional text so that its financing would not be politicized. The cost of the electoral system encompasses the structure of the two entities as well as the subsidies to the political parties, the latter the product of replicating the European outline in which the government finances the parties, in contrast with that of the United States in which all financing is private. Under this rubric, one must not lose sight of that one consequence of the system financed by the State is that it renders it possible for the political parties to distance themselves from the citizens, in that they do not need them for anything, except on voting day. Not very democratic, but very real.

In countries with a high level of trust among the citizens and of these with their institutions (I’m thinking of the majority of European nations), the electoral systems are very simple and they work with already existing administrative apparatuses. In the U.S., each state has its own system and the disputes in recent years are   interminable, reminiscent of the eighties in Mexico.

The origin of the electoral framework lies precisely in the enforcement of the rules. The independent INE was the answer designed to guarantee clean elections and to confer certainty on the citizenry in the face of a sea of electoral disputes (usually post-electoral) that characterized the eighties and the nineties. The complexity of this framework was the product, as duly noted at that time, of the huge mistrust harbored by the diverse political parties among themselves, which AMLO has now brought back.

The tangible fact is that, except for the year 2006, there have been practically no disputes regarding this matter since 1997. Contrary to what the president asserts, the impartial application of the rules is what has avoided a political conflagration.

The nature of these circumstances explains the nature of the present attack: control and revenge. Vengeance due to the inflexibility of the IFE Board, that is, because of not giving in to the president; and control because that is what is compatible with the model of concentration of power that drives the president’s thrust. As the party in power, Morena and its head want to procure control of INE to stay in power, that is, to reproduce the old PRIist scheme of the XX century.

The problem is that this is the XXI century. The political dispute is increasingly complex, it is occurring in ever more arenas (including the digital ones) and involves many more actors, among these the “informal” actors (i.e., organized crime) who intervene without reserve to impose their will, all of this with the acquiescence of the president. Instead of the actors accepting the rules of the game, they compete to redefine them. In the extreme, this leads to the law of the jungle.

Przeworski,* a scholar in these issues, argues that elections are a civilized and pacific form of settling conflicts “that always take place in the shadow of a civil war.” Without the INE, Mexicans would be at the brink of war all the time, principally when each party, but especially Morena and its leader, which consider that Mexico is a democracy exclusively when they win.

The perception is understandable that it is necessary to reduce the cost of electoral institutions. Before our esteemed political heroes in the Congress proceed, it would be worthwhile to consider the scenarios of conflict (and violence) that could be unleashed. Governing an erupting volcano would be much more complex than they imagine and would provoke just what they say they fear.

*Why Bother With Elections?

www.mexicoevalua.org
@lrubiof

Luis Rubio

In the movie Life of Brian, John Cleese plays Reg, the leader of the People’s Front of Judea. In one memorable scene, Reg finishes the haranguing of his troops with the question “What have the Romans ever done for us?” One foot soldier in freedom-fighting outfit replies “the aqueduct?” Another says, “the roads.” John Cleese starts getting annoyed until the other foot soldiers add “irrigation,” “medicine,” “education,” “wine,” “public baths,” and “it’s now safe to walk the streets at night.” To which Cleese’s character replies “All right, but apart from education, irrigation safety, roads, sanitation, wine, public baths, and medicine… What have the Romans ever done for us?”

Mexico was not born yesterday nor was it invented in 2018. The past decades yielded innumerable benefits and gains that are now the sustenance of the economy from which the president profits.

When, in Reg´s style, the president accuses “What did neoliberalism do or what did those who designed neoliberal policies do for their benefit?” the answer is similar: they laid the foundations for an economy capable of channeling the forces and capacities of Mexican society in the turbulent era of globalization, the conflicts between the superpowers, and the digital dislocations of the 21st century. In addition, when the economy was liberalized to favor the free concurrence of the various economic agents, the mooring ropes that kept society controlled and subjected were eliminated, that is, they created conditions (consciously or not) for the democratization of the country. “Neoliberalism” allowed Mexico to survive in a changing world. Not a minor thing…

Of course, not everything that was done in those decades was spotless or successful. The list of errors, biases, bad decisions, corruption, and perversions in some decisions and in many implementation processes is legendary. But the result is infinitely more benign than it was when the much-talked-about reforms began, which the president disqualifies without rhyme or reason. In 1982, after two authoritarian governments dedicated to the destruction of public finances and the petrolization of the economy, reforms were inevitable. In those twelve years, the world had been transformed because the Arab oil boycott of 1973 had forced a comprehensive rethinking of the way of producing, led, to a large extent, by the Japanese automotive companies.

Lost in the mirage of an easy future that politicians imagined due to the oil discoveries (Mexico’s problem would be to “manage abundance,” said López Portillo) the country was absent from what was happening in the rest of the world. Paradoxically, the way the Japanese reengineered production opened opportunities for Mexico that had never been possible before. The Japanese created what is now known as supply chains where a car is no longer produced from A to Z in one place, but each plant specializes in the production of parts and components for a final assembly. Each gear in this process depends on local capabilities, the availability of skilled labor, and its geographic location.

In their essence, the reforms undertaken since the 1980s were an attempt to incorporate the Mexican economy into this global logic, which has happened in countless industries that now link Mexico with our two North American partners in a structural way, becoming the main engine of growth of the country’s economy. Unfortunately, a large part of the population and some regions of the country were left out of this logic due to all kinds of obstacles and political interests that continue to plunder and prey on ordinary Mexicans. This is the deficit that urgently needs to be corrected.

The liberalization of the economy, especially the negotiation of NAFTA, changed the face of the country because, once the floodgates were opened, the entire society had the opportunity to transform itself. Thus, different ways of thinking and being of the citizens began to manifest themselves, social organizations appeared to represent or attend to problems of various kinds and institutions that satisfy needs that the government cannot take care of. All that the president denounces are evidence of a society that grows, develops and matures: a society that acts on its own and that, in many ways, faces problems that the government is unable to solve.

In the president’s vision, the government should take care of everything, even if it does not take responsibility for anything. From his perspective, in the country there is no longer violence, corruption, poverty or deficiencies because the government acts and solves everything, all for the mere fact of wanting it. The problems that persist in this imaginary arise from everything that the government does not control, which is why the solution to the country’s problems lies in controlling, centralizing, and eliminating any manifestation outside the government domain.

Whether the president likes it or not, in an open society like Mexico’s, the population manifests itself in the various fields of the economy, society and politics because it cannot be otherwise, nor can it be reversed.

www.mexicoevalua.org
@lrubiof

Luis Rubio

When everyone is an enemy, no one is a friend. Thus began the end of terror in the French Revolution. Will the current Mexican government end the same? In 1793 the National Convention passed the Suspects Law that began the reign of terror. Ten months later, on the 8th of Thermidor, Robespierre denounced the existence of “enemies, conspirators and calumniators” and announced that a new purge of suspects would begin. Twenty-four hours later, all those suspects revolted against him and guillotined him in the Revolution Square, where more than two thousand people, including Louis XVI, had been executed. The systematic denunciation of enemies creates dynamics that later nobody can stop.

It is often difficult to determine when a chain process begins. Scholars of war, beginning with Clausewitz, try to find specific moments in which a decision unleashes a succession of circumstances, many of them stochastic, that end in war. Few examples are as clear as the First World War, an event that nobody wanted but that nobody did anything to stop. The conduct of a president in his day-to-day activity certainly does not qualify as something of the magnitude of a world war, but the mechanics of the process are similar. In colloquial terms, the question is Which is the straw that breaks the camel’s back?

Peña Nieto was already going badly when the corruption related to the so-called white house appeared and his government collapsed a few months later with the events in Ayotzinapa. No one at the beginning of 2014, the fateful year of that government, predicted such an outcome. López Portillo lost control of his government early in his sixth year, when he promised to “defend the peso like a dog.” Fox, who never controlled much, disappeared from the map when he asked “Why me?” regarding the unlawful actions by a supporter. Nobody knows when or how a process of deterioration begins and President López Obrador is extraordinarily astute to allow himself to be surprised, but in that chair, perspective and the floor are quickly lost.

In his daily monologue, the president uses the resource of confrontation and disqualification as a strategy to strengthen his political base. The assumption behind this process is that the president represents the population and, by confronting the “bad guys,” he magnifies the feelings (and resentments) of his political base to the level that it desires, thus reinforcing his sources of support and creating a virtuous circle. The discourse consists of “evidencing” various groups, people and organizations as traitors and enemies of the progress and development of the country, especially of the members of his own social base and the Fourth Transformation.

Attacking whom the president calls “fifi,” conservatives and neoliberals, to name some of his favorite categories, constitutes a platform to send messages, strengthen the base and maintain the climate of tension that, he assumes, will preserve the popularity and viability of his rule. In recent months he has been adding new lists to the catalog of enemies: he started with the “mafia of power” and then expanded it to include businessmen, former presidents, single mothers, parents and teachers. More recently he added the middle classes, the “aspirationists,” the civil organizations and now, the jewel of the crown, the UNAM, the National University. In his rhetoric there is no difference between one and the other: they are all enemies of his project because they are, in the end and in short, neoliberals.

In his invective, the president systematically expands the group of enemies, sweeping away growing portions of society and, what matters most to him, the electorate. Much of this is undoubtedly calculated, but it may also be the case that, given his success in maintaining a relatively high level of popularity, he finds it natural to move towards an ever-larger number of social groups that he despises, regardless of the way they voted in the recent midterms. Success breeds boldness and then hubris, the feeling that there is no limit, that everything is possible and nothing has a cost or consequence.

However, as with Robespierre, the question is what happens when members of his hard-core base begin to feel alluded to, leading them to join the ranks of the enemy? The attack on the middle classes after the midterm election was pure viscera: the president felt personally betrayed because that segment of the citizenry dared to join the ranks of his enemies. Instead of trying to understand the reason why that group, which voted overwhelmingly for Morena in 2018, changed its mind in 2021, the president set about attacking it. He has now potentially stepped into the void with his widespread and indiscriminate attack on the entire community of the national university. If there is a sector of society that voted en masse for him back in 2018, that was certainly his most recent victim.

His opponents will say that he should not be interrupted when he is making mistakes, but three years of lack of control would lead the country to total collapse. This is even more so when, in contrast with practically any of his recent predecessors, for whom the second half of their term was good or very good in economic terms, López Obrador has nothing to offer. Nobody knows when or how it begins, but no one should doubt it is coming.

www.mexicoevalua.org
@lrubiof

Luis Rubio

When the government of a country finds itself in financial trouble it has two possible solutions: it can reduce its excessive expenditures, or it can transfer the problem to the citizenry. The first course incentivizes growth because it ceases diverting resources to socially unprofitable projects, while the latter route undermines future growth in that it diverts existing savings toward unproductive ventures. A responsible government would procure causing the least damage to the society and the economy. An irresponsible or unenlightened government could think of nothing other than raising taxes.

When a family suddenly finds itself unable to meet its expenses or is deeply in debt, it has no alternative than reducing its consumption. A government is not the same as a family (because it can go into debt), but politicians never have the wish to grasp this basic logic, believing as they do that there is no limit to what they can squeeze out of the population via taxes. What they generally do not recognize is that their actions have consequences. Many unproductive expenditures, as well as various types of taxes, have the pernicious effect of hindering prosperity. Still much worse when the economy is in recession, savers are unwilling to divert their resources, and investors do not trust the government.

The notion of carrying out a “fiscal reform” is as old as the country. All politicians dream of finding novel tax-collection sources that allow them to spend more without their having to be accountable to anyone. That is why they love entities such as PEMEX, which they view as a cash cow that they can milk without limit and because the subsoil, in contrast with the citizens, does not complain. The problem is that years of overexploiting the oil and vast corruption have created a white elephant which is not only broke (in fact, it has negative capital), but one whose financial situation is not even being addressed. Under these conditions, all the money in the world cannot solve the problem: instead of PEMEX transferring resources to the Treasury, as always, it now consumes them. The greatest virtue of the reform of the oil sector that the previous administration carried out was that it was focused on a gradual stabilization of PEMEX without sacrificing investment and production in the sector. This is what the López Obrador administration destroyed, without understanding the nature of the problem or its costs.

Governments and the politicians who run them only like a fiscal reform when it is on the revenue side; they are disturbed when the other side of the coin comes up: the expenditure, always untouchable except when the president wishes to move monies from items he does not like to those for his favorite clienteles. Same when, under an electoral rationale and the logic of controlling the citizenry, they attempt to strip the tax-deductibility of donations to civil organizations. Fiscal matters in Mexico are managed as if they were the personal fiefdom of the president.

For a fiscal reform to be successful, legislators would have to recognize that anything they do entails consequences, many of these damaging.  Raising taxes –whether through a rate increase or inventing new forms of tax collection- implies draining the society’s resource to commit them to projects that often will not only not contribute to a greater development, but that will lead to greater impoverishment. There is no better example of waste than the new Dos Bocas Refinery, a project that will probably never enter operation, above all because by the time it is built, gasoline consumption will have begun to decline.

On the other hand, there are areas where higher tax collection possesses not only a logic, but also one in which this comprises a social and political imperative. The country requires a new tax base for its long-term development, a platform that would derive from the elemental principle that it is necessary to correct many of the dysfunctional structures and that these require financing.  The most evident example is that of security, a scourge that little by little destroys the essence of being Mexican, condemning the country to its gradual wrack and ruin. At present, the country devotes many resources to security at the federal level, but not at the local one, for which property taxes are the appropriate type.

The only security worth its salt is that which works from the bottom up because it is security that looks after the citizen. Federal resources -money, police, and the Army- are crucial for the development and consolidation of municipal capacity, but they fulfill their purpose only if these are considered as mechanisms for the development of security starting from the bottom. Those capacities cost money and should be financed, therefore the assurance must exist that the property tax rises to the level corresponding to this need and that it is collected effectively, in addition to its being employed for that purpose. This is solely one case in point of the sizeable levying of taxes oriented not toward satisfying presidential whims, but instead toward citizen necessities.

There is a fundamental economic tenet that the greater the tax the lesser the product. Congress can promote all the reforms it wants to, but if these end up being confiscatory, they will kill the machine that produces growth and with it, its taxable sources.

www.mexicoevalua.org
@lrubiof

Luis Rubio

At the end of the Cold War, Fukuyama wrote an article entitled “The End of History” in which he postulated that the world had arrived at a consensus about the way forward. Twenty years later, with wars in the Middle East in vogue, Jennifer Welsh published “The Return of History,” suggesting that war never ends. The equivalent for today’s Mexico could well be “The Return of Politics.”

The 1997 mid-term elections constituted a milestone in Mexican politics on being the first Congress since the Revolution where the PRI did not achieve a majority. The era of the power monopoly passed into history, or at least that was the nearly unanimous reading of the moment. The optimists trusted that the parties and their politicians would begin to negotiate consensual agreements on far-reaching matters for the future of the country. However, the following decades were characterized less by harmony than by bristling tensions, disagreements, and the impossibility of dealing with the challenges confronting the country on myriad fronts.

Everything changed with the advent of Enrique Peña Nieto in presidential office. Echoing his fame in effective executive prowess, President Peña Nieto structured the so-called “Pact for Mexico” with the PAN and PRD parties, with which accords were reached on the agenda of the reforms that the country required and that the three parties (including the PRI) committed to moving ahead without further ado. The infamous pact, of unhappy memory, was somewhat strange, above all for the PAN and the PRD, in that there was very little potential upside for them: were things to go extraordinarily well, those parties would remain the same, while the PRI would experience a virtually supernatural success; if things went wrong, all three parties would lose. It always seemed to me that the pact entertained a very rational sense in terms of the country’s well-being, but an inexplicable -absurd- sense from the perspective of the realpolitik of the parties assenting to it. And that is indeed how it turned out.

The pact had the effect of removing the components of the reforms from the public arena. Instead of venting and debating, everything was decided at the Department of the Treasury (Mexico’s Hacienda) with a small coterie of party leaders, to be later voted on without debate in the Legislature. PRI operators mobilized their legislators and bought the votes lacking – on Lozoya’s ipse dixit – to complete the required tally. The governors went to great lengths to be first in the ratification of the reforms by their local legislators, for whom “contributions” were also likely employed.

The benefit of the operation being conducted “in smoke-filled rooms” was obvious: the country was finally able to count on modern and necessary legislations in diverse rubrics, but especially in those of labor-related issues, education and energy. The cost of that feat is from whence derive to a great degree the disputes of today: reforms that were not socialized, that did not obtain legitimacy from the citizenry and are now being dismantled because they were not perceived as relevant and transcendent. Arrangements among a certain few are now being disarranged by another certain few. Politics can be onerous, haphazard and delayed, but without politics the costs are vast and disproportionate.

Because, additionally, these reforms were not mere adjustments to the existing legal framework. The three emblematic reforms of the Peña administration disrupted the three cardinal pillars of the Mexican Constitution of 1917. From my point of view the reforms were necessary and urgent, but no one quit understanding those who believed, with unease, that the core and essence of the country’s key document, the Constitution, had been denaturalized, if not in reality annulled. All for not taking into consideration the need to win over and gain popular support for conferring permanence and legitimacy on the reforms.

All that went through in the Peña administration was operated in executive, even aseptic, fashion, as if the matter involved nothing more than having the nerve (and money) for things to advance. And, of course, compared with the three prior administrations, things did move ahead and with enormous efficiency and celerity. But now one can see that, with the same efficiency and celerity, the house of cards is nearing collapse. Two so far: education and labor.

The last of the reforms is still pending, the most outrivaled of these in the economic ambit and perhaps the most complex to dismantle due to the number of interests and issues involved and the lawsuits to come, but it is nonetheless the reform dearest to the President’s heart. It will be the first test of the new Congress, in which the Morena party and its allies do not pose a constitutional majority. It will be the first test for the PRI, which holds the key to making or breaking the reform. Next would come the Senate, the last threshold.

Whatever the outcome, the reading is absolute: the great changes in a society must come from the society itself: the changes cannot be imposed on it because this is not about technical decisions, but rather political processes that entail consequences, affect emotions and throw interests, as well as ingrained dogmas, into disarray.

Mexican society has before it the dilemma of buoying up the dismantlement of the energy reform or rejecting it. It had best decide on this soon because, if not, changes will be imposed upon it that will affect the lives implicated, certainly for the worse. Time for politics, at all levels and in all spaces.

www.cidac.org
@lrubiof

Luis Rubio

Luis Rubio

For every action (force) in nature there is an equal and opposite reaction. Newton’s Third Law of Motion is similarly applicable to physics and politics. Governments define their objectives and means to achieve them and the population has to deal with the consequences: nothing and no one can avoid this elemental principle. The situation becomes worse and deepens when the distance between the rhetoric and the world of concretion widens till all sense of reality is lost, which is what daily early-morning press conferences are all about. When the President utters his famous retorts –“I have other data” or “I am not going to fall into provocations”-  he disqualifies any criticism or alternative view, confirming his self-centered attitude. The results of his administration -or the absence of same- and his inability to build a consensus will not be long in coming.

The consequences of a government that resides in its own stratosphere will have to be paid for by each and every Mexican, but there are three that seem to me especially transcendental due to their harshness, preeminence and seriousness. The first of these has to do with destruction of human capital inherent in the Fourth Transformation. The strategy of the government has consisted of eliminating all of the technical capacity that it had; promoting a brain drain; the termination of an enormous amount of research projects; the cancellation of scholarships to students and to those studying abroad (and thousands of others that will no longer have access to this); the judicial prosecution of scientists; and, in general, a prodigious waste and the spending of resources on unnecessary and retrograde projects, such as that exemplified by the president himself on promoting his famous juice-producing sugar mill similar to those invented in the 17^th century, clearly an already surpassed technology and one that would not contribute, before or now, to diminishing poverty or to improving the population’s standard of living.

The second consequence derives from the distraction of the governmental monies toward undertakings and budgetary items that are not only not profitable, but that in many cases imply systematic and long-term losses, reducing resources for future administrations. The cancellation of emblematic projects such as the airport, the brewery and, more recently, the exclusion of the Talos Energy enterprise from exploiting the Zama oil field are all cases-in-point of decisions on the part of the present government that sent the unmistakable message that private investment, national as well as foreign, is not welcome. In addition to this, the insidiousness and contempt for the importance of the relationship with the United States triggers decisions and brings impacts, perhaps not immediate, but undoubtedly unmistakable.

Each of those decisions will entertain its explanation and political rationale, but all will have consequences, and all imply additional expenditures as well as a cost of opportunity. The price of the airport will be double: on the one hand, what was lost and what is owed to bond holders and other participants; and, on the other hand, the new investment in an airport whose successful operation will be difficult. The case of Zama will be infinitely greater because of the income that the government will cease to perceive, as well as the indemnities that will have to be paid to Talos, as well as the resources required for an attempt to develop the oil field (for which Pemex has no experience). This concerns a self-inflicted cost that generations of Mexicans will defray in the future. Worse yet, a totally unwarranted cost.

The third consequence, the one that the President pretends does not exist, is that of the destruction of any source of long-term certainty, that which engenders trust among the citizenry, avoids extremisms and generates opportunities for economic development.  The president may believe that his words and his clienteles are enough to create a promising future, but he is wrong: as you sow so shall you reap and, in his case, the latter occurs more that the former. Not by chance has he fired the head of his project of manipulation and political control after the election, thus confirming that his priority is not development but control and the permanence of his personal agenda. The president may be bringing new talent to his Cabinet but, in that his words and actions convey the contrary, the benefit gets diluted and what is left is closed-mindedness, polarization and disdain.

The students who saw their studies truncated will seek other options, many will not return and all will end up frustrated and resentful. Mexican scientists, professors, researchers and social leaders -those of today and those of the future- will see this stage as what it is: one of destruction and the cancellation of opportunities. The Americans will not stay with their arms crossed.

The project that he promised would end poverty, corruption, violence and inequality will conclude in accentuating each and every one of these scourges. The applauses of today will be the burnt fingers of the future: the eternal history of Mexican administrations. Instead of improving the reality, it will have worsened.  Another six-year term lost, but worse.

“There are some things,” wrote Hemingway, “that cannot be learned quickly, and time, which is all we have, must be paid heavily for their acquiring.” Time lost has no substitute and this government will have delayed the development of the country much more than the six years corresponding to it, all for merely scratching the itch of trying to reinvent the wheel, that which in the XXI century is digital. Nothing more distant to it than the much-alluded-to sugar mill.

www.mexicoevalua.org
@lrubiof
a quick-translation of this article can be found at www.luisrubio.mx

https://www.wilsoncenter.org/article/expert-take-usmca-rules-origin-disputes

 WILSON CENTER
MEXICO INSTITUTE

By Christopher Wilson, Francisco de Rosenzweig & Luis Rubio on September 23, 2021

The USMCA Rule of Origin for automotive products not only sets a high threshold of regional content to qualify for tariff-free treatment (75 percent, up from 62.5 percent in NAFTA) it also adds requirements specific to steel, aluminum, and labor value content. Auto companies protested when U.S. officials claimed a stricter formula for tallying content than the firms, the Canadian and Mexican negotiating teams, and many Members of the U.S. Congress had understood when the USMCA was approved. The U.S. position on the automotive rule of origin, if adopted and implemented, would require dramatic and expensive changes to current supply chains, and some companies argued that it would drive them to abandon the USMCA and bring components across the border paying the WTO bound tariff of 2.5 percent. In August 2021, the governments of Mexico and Canada formally requested consultations with the United States on the issue.

This dispute marks an important test of the USMCA and its mechanisms for resolution.  Challenges to requirements could lead to disruption of the North American automotive industry. To highlight the importance of this dispute and the implications for coordinated economic policy, the Mexico Institute presents insight from our global fellows Christopher Wilson, Francisco de Rosenzweig, and Luis Rubio.

• Analysis from Luis Rubio

NAFTA was born out of a geopolitical imperative and its content, practices and interpretations fit that point of departure. USMCA was born out of a wish to restrict trade and investment across the US-Mexico border and that thrust, conceived of by Trump, has remained part of the Biden agenda. The issue is not whether there are differences of interpretation among respectable trading partners, but that these differences are taking place at an extremely sensitive moment in Mexican politics, just the scenario for which NAFTA was sought after in the first place.

NAFTA came into being with two contrasting objectives which sealed its fate. For Mexico, NAFTA was meant to be the end, the seal of approval as it were, for a series of reforms that had been carried out over the previous decade (mid-1980s to 1994). For the United States, the trade agreement was meant to be the beginning of a process of a thorough Mexican transformation (which never happened), but for which the US was willing to invest major political capital. It is no wonder that the results of greatly increased integration, as transcendent as they were for Mexico two decades later, were underwhelming for the US, which made it possible for Trump to call for its demise.

Mexico’s objective in NAFTA was to provide certainty to Mexicans and foreigners that there would be no unwarranted changes in the rules and no capricious expropriations, regardless of who governed Mexico in the future. The goal was to initiate a new era for the country, an objective with which the American government not only identified but saw as in the best interest of the US. A prosperous Mexico would be the best guaranty of a strong southern border.

The problem with NAFTA was that it was replaced with a very different type of trade arrangement, one devoid of the geopolitical thrust of the original, at the precise time in which Mexico’s government was taken over by a president who would rather distance Mexico from the United States and, to the extent possible, diminish trade and investment interactions.

The consultation on rules of origin for the automotive industry is a critical issue for Mexico, for it involves the largest share of the country’s exports, which themselves constitute the main engine of growth of the economy. A decision to accept the American interpretation of these rules would greatly affect exports and, in so doing would impoverish Mexicans. How such impact manifests itself would depend on the specific circumstances, but there is no question both nations would be harmed.

Where are the statesmen when they are most needed?

• Analysis from Francisco de Rosenzweig

The USMCA Parties agreed to overhaul the NAFTA’s rules of origin for automotive goods, largely in response to the United States’ push to limit the amount of foreign content in vehicles that receive duty-free treatment.  In addition to requiring that a higher percentage of a vehicle’s components originate in North America (75% under USMCA, versus 62.5% under NAFTA), the USMCA requires that a vehicle’s “core” components, such as its engine and transmission, qualify as originating in order for the vehicle to benefit from tariff preferences. 

The dispute between the United States and Mexico concerns the interaction between these requirements.  In Mexico’s view, when “core” components qualify as originating in North America, the entire value of the core component should count as originating when determining whether a finished vehicle meets the 75% threshold – even if the core component contains some content from outside the region.  The United States considers that a core component’s foreign content should not count towards a finished vehicle’s regional value content, even if that core component contains enough North American content to qualify as originating itself. 

These interpretations reflect divergent views about the optimal level of regional content requirement for promoting North American automotive production.  Rules of origin must strike a balance between ensuring that an agreement primarily benefits regional producers and, on the other hand, providing enough flexibility that tariff preferences remain accessible, and that producers can manage their supply chains.  The United States considers that its interpretation promotes regional economic activity by encouraging automakers to source core components made mostly or exclusively with North American content.  Mexico and many industry stakeholders believe that this approach will have the opposite effect.  That is, by penalizing the use of components that contain any foreign content (even if they are manufactured in the region primarily from North American content), the US interpretation will make it costly and difficult for vehicles to qualify for USMCA benefits.  This may prompt some automakers simply to import core components, paying the relatively low most-favored-nation duty rates, rather than undertaking the complex sourcing and monitoring process that will be necessary to qualify for the USMCA tariff preference.  Some may even believe that they can lower their costs by paying the import duties, rather than pay the higher prices for regionally sourced components. 

The resolution of this dispute will have important implications for producers throughout the automotive supply chain, who may see demand for their products rise or fall depending on which interpretation prevails.  More broadly, the outcome may affect the competitiveness of the North American industry as a whole, particularly when compared to Asian and European competitors whose trade agreements utilize more flexible rules of origin than the USMCA.  

• Analysis from Christopher Wilson

The normal US tariff (MFN rate) for car imports is just 2.5%. This affords the countries of North America very little room for error in the articulation and implementation of the new USMCA rules of origin for the auto sector. The rules are meant to encourage suppliers to beef up their supplier base within North America, but if the rules become too stringent—too complicated and expensive to meet—the opposite could easily happen. Once companies decide to forgo USMCA benefits and simply pay the 2.5% rate, they are free to grow their supply chains wherever they like, including Asia or Europe.

If there is little room for error in an economic sense, the same is true for the politics of the situation. The USMCA was groundbreaking in attracting union support for the trade deal, and U.S. unions are now holding the Biden administration’s feet to the fire when it comes to issues of compliance. The United Auto Workers union has voiced support for the stricter interpretation of the auto rules of origin put forward by the U.S. Trade Representative, making movement from its initial stance more difficult for the U.S. Government.

Despite the challenges, there are two main reasons to be optimistic. First is the timeline. The difference in U.S. and Mexican interpretations have to do with the calculation of regional content once the transition period ends in July, 2023. This gives the countries of North America ample time to find an amicable solution before turning to formal dispute resolution. The second and more important cause for hope takes us back to the economics of the situation. While we’ve grown accustomed to seeing the U.S. and Mexico haggle over rules and compete for investment in the auto sector in recent years, in a much more important way the U.S., Mexico and Canada are all on the same team. A smooth transition from NAFTA to the USMCA will encourage greater investment across North America and a more competitive North American auto sector, creating jobs and growing exports from all three countries.

https://www.wilsoncenter.org/article/expert-take-usmca-rules-origin-disputes

ABOUT THE AUTHORS
 Christopher Wilson
Global Fellow, Mexico Institute

Francisco de Rosenzweig
Global Fellow;
Partner, White & Case LLP; Former Undersecretary for Foreign Trade, Ministry of the Economy, Mexico

Luis Rubio
Global Fellow;
Mexico Institute Advisory Board Member; Chairman, México Evalúa; Former President, Consejo Mexicano de Asuntos Internacionales (COMEXI); Chairman, Center for Research for Development (CIDAC), Mexico