Daniel Lacalle

Forget the Wall… The Opportunity for Mexico and the EU is elsewhere

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Keep calm. The controversy around the US wall with Mexico – the one that Bill Clinton, Bush Jr. and Obama reinforced without anyone saying anything – has set off again the fear of a trade war.

The media focuses on the risks and impact of a disruption of US-Mexico trade relations, but they have fallen into the magician trap. “Look at the hand” while the trick occurs elsewhere. The trick is the UK-US tax and trade superstructure.

The figures at stake are relevant, but we must be cautious.

The US exported to Mexico 267 billion dollars in 2015 and imported 316.4 billion. Therefore, the trade deficit with Mexico was 49.2 billion dollars. According to other sources, 60 billion in 2016.

First point: $ 12.5 billion comes from crude imports. In fact, that figure has been cut by half due to the fall in the price of Mayan crude oil and the increase in local production in the United States.

Second: Almost 40% of that trade deficit comes from North American companies that produce goods in Mexico and sell them back in the United States.

Therefore, we can say that the risks for the two economies are relevant. Another completely different thing is that the trade agreements are renegotiated with a mutually beneficial solution, which is what I expect.

Let us talk about opportunities. They are not small. Mexico has one of the largest commercial networks with the world. It has twelve Free Trade Agreements with 46 countries. It is an important difference with other countries that have less trade options.

But the biggest opportunity for Mexico is to dust off the sadly forgotten energy reform and recover oil production by attracting foreign investment, granting licenses to efficient international operators, strengthening and opening PEMEX to foreign investment, and reducing costs to become a high added value operator withincreased productivity.

This “wall” episode should be an opportunity to revive reforms to improve the economy, taking advantage of the existing trade agreements to guide the Mexican economy out of rent-seeking and inefficiency, to prevent Pemex from becoming another PdVSA (the Venezuelan oil company, ruined by Chavez) and to open up the economy with more attractive contracts and concessions for investment … Any geologist knows that the energy potential of Mexico is spectacular -reactivating Cantarell, boosting exploration, more effective recovery-. In shale gas, the potential of Mexico is enormous as well.

The Opportunity for Europe

Theresa May was applauded in Philadelphia when she recalled that the US-UK relationship is special and will continue to lead the world. But we must not miss an important element. President Trump stated that “getting permits in the country was quick and efficient”, but the EU is a “bureaucratic and meddling consortium”.

Theresa May promises to convert the United Kingdom into the Singapore of the West. The words of Moscovici and Schaeuble telling the UK that it “cannot lower taxes” nor “close bilateral treaties” do not help the EU image or those in the Remain camp too much. A good friend in London said to me ” it seems that in the EU they have joined the Brexit campaign”.

The strength of the United States and the United Kingdom, if the announced fiscal revolution is launched, lies in attracting more than $95 billion out of the European Union and becoming global investment centers. Any analyst in the world can see that it is not difficult to take advantage of the weaknesses of the European Union -bureaucracy, high taxes and political risk- to capture global investment opportunities.

With a challenge like that, the European Union cannot use its traditional “ostrich policy” and enroute itself in a model that goes against logic. The undoubted advantages of the single market and the Union must be taken into account, focusing on job creation and attraction of investment. Not because a committee says so, but because the EU shows that it is more attractive.

The European Union has shown that replicating French dirigism and being a tax hell is not precisely the path to growth. It has torpedoed itself by making energy costs almost twice as expensive as those in the US, but all of it can change. The same with the bureaucratic and fiscal obstacles.

Using the “external enemy” is very tempting for the bureaucrat. But global challenges can become big gains if we think about families and businesses.

The European Union, like Mexico, has a huge trade surplus, excellent companies and great professionals. It’s time to change the chip. More freedom, more business. There is plentyh of room in the EU to lower taxes and stop drowning businesses and families in bureaucracy.

Forget the wall. It already exists. It is a subterfuge. The important thing is the fiscal and commercial alliance that is being woven between the leading powers. To meet this challenge, we need less bureaucracy and more competitiveness.

Daniel Lacalle is PhD in Economics and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

Article published in Spanish in El Espanol

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