The truth is Mexico’s new president will be neither socialist nor savior

BY JOHN PRICE AND JERRY HAAR, Miami Herald

Mexico’s newly elected president, Andrés Manuel López Obrador, is the personification of how Churchill described Russia–a riddle, wrapped in a mystery, inside an enigma. How will AMLO / Peje (his nicknames) govern? Even Mexican political analysts seem mystified.

Mexico has lived a century of political stability, dominated by one party, the PRI, and opposition from two established parties: the conservative PAN and leftist PRD. The election of López Obrador is remarkable because his Morena party is new and anti-establishment in nature. AMLO himself is a maverick, whose popularity has grown despite abandoning his own party affiliation three times en route to the presidency. Such irreverence frightening to Mexico’s elite ands exciting to the disenfranchised who thrust him to power.

Fed up with corruption, frustrated by the violence of organized crime, and humiliated by the rhetoric of its gringo neighbor, Mexico is ready to experiment with a leftist president. But can López Obrador deliver the changes voters expect of him? The simple answer is “no”. AMLO will neither destroy the prowess of Mexico’s private sector nor rescue the country from its greatest ails–corruption, insecurity and inequality.

To many, AMLO is an old-school leftist whose ideas were formed in the 1970s oil- rich heyday of the PRI. However, his big government instincts will be constrained by the market economy, by fledgling institutions and by the Mexican voter. Mexicans want justice and security, not socialism. In a global socialism survey conducted by IPSOS in 28 countries earlier this year, Mexicans consistently chose individual rights, competition and capitalism over social justice and collectivism– and they did so well above the global average. Mexicans voted for AMLO to spite the political establishment, not demonize capitalism. In Mexico, disdain for the pro-business PRI or President Trump is not synonymous with a hatred of capitalism or even American enterprise.

When López Obrador narrowly lost the 2006 presidential election, the swing vote belonged to the middle-class Walmart voter who rejected AMLO after he was effectively painted as the next Hugo Chávez. On the campaign trail in 2018, Peje changed tactics. To break through the 25% ceiling of his ardent supporters, he moderated his economic message while doubling down on promises to fight corruption and stand up to Donald Trump. AMLO has sought to assuage voter fears by naming a team of technocrats and business leaders in his future cabinet, and has promised: “no expropriations, no nationalizations”. Furthermore, AMLO pledged to accept the NAFTA that he inherits as president and keep in place Peña Nieto’s energy reforms. As mayor of Mexico City from 2000 to 2006, AMLO formed a successful alliance with Carlos Slim, the nation’s capitalist icon, to rejuvenate the city’s dilapidated historic center. He embraced the private sector while also expanding infrastructure and financing a progressive welfare program.

AMLO inherits a national budget that still relies on Pemex oil receipts for a third of its revenue. US fracking and Saudi-led OPEC acquiescence will keep oil prices low in the near-term, depriving AMLO of any tax bonanza.

In stark contrast to Hugo Chavez’s oil backed bolivar currency, Mexico has no choice but to float the peso, which trades each day at volumes of US$90bn. F/X traders can and will punish the peso at the first sight of reckless policy-making. Both the Central Bank and Supreme Court have evolved into autonomous institutions that serve as useful brakes on presidential power.

Too much concern is paid to the specter of a socialist AMLO. What should really worry investors is his naivete when it comes to tackling Mexico’s Achilles heel: a weak rule of law. AMLO’s proposal to offer amnesty to criminal leaders in exchange for peace is neither politically nor logistically feasible. After 12 years of a narco-decapitation strategy by the Calderón and Peña Nieto administrations, there are literally hundreds of splintered criminal groups reigning chaos in Mexico. Worse still, AMLO has no strategy in place to strengthen federal prosecutorial infrastructure, the most essential weapon for fighting corruption and crime.

Unveiling the enigma of AMLO will take some time, and longer still to judge his tenure as the 58th Mexican President. We predict that Mexico’s sizeable wealth will not be plundered by Morena policies. But disappointment is likely to be felt when voters realize that they elected a president ill-equipped to combat the very issues upon which he successfully campaigned: corruption & security.

JOHN PRICE IS MANAGING DIRECTOR OF AMERICAS MARKET INTELLIGENCE. JERRY HAAR IS A BUSINESS PROFESSOR AT FLORIDA INTERNATIONAL UNIVERSITY AND A GLOBAL FELLOW OF THE WOODROW WILSON CENTER IN WASHINGTON, D.C. THEY ARE AUTHORS OF “CAN LATIN AMERICA COMPETE?”

Price

Mexico’s newly elected president, Andrés Manuel López Obrador, is the personification of how Churchill described Russia–a riddle, wrapped in a mystery, inside an enigma. How will AMLO / Peje (his nicknames) govern? Even Mexican political analysts seem mystified.

Mexico has lived a century of political stability, dominated by one party, the PRI, and opposition from two established parties: the conservative PAN and leftist PRD. The election of López Obrador is remarkable because his Morena party is new and anti-establishment in nature. AMLO himself is a maverick, whose popularity has grown despite abandoning his own party affiliation three times en route to the presidency. Such irreverence frightening to Mexico’s elite ands exciting to the disenfranchised who thrust him to power.

Fed up with corruption, frustrated by the violence of organized crime, and humiliated by the rhetoric of its gringo neighbor, Mexico is ready to experiment with a leftist president. But can López Obrador deliver the changes voters expect of him? The simple answer is “no”. AMLO will neither destroy the prowess of Mexico’s private sector nor rescue the country from its greatest ails–corruption, insecurity and inequality.

To many, AMLO is an old-school leftist whose ideas were formed in the 1970s oil- rich heyday of the PRI. However, his big government instincts will be constrained by the market economy, by fledgling institutions and by the Mexican voter. Mexicans want justice and security, not socialism. In a global socialism survey conducted by IPSOS in 28 countries earlier this year, Mexicans consistently chose individual rights, competition and capitalism over social justice and collectivism– and they did so well above the global average. Mexicans voted for AMLO to spite the political establishment, not demonize capitalism. In Mexico, disdain for the pro-business PRI or President Trump is not synonymous with a hatred of capitalism or even American enterprise.

When López Obrador narrowly lost the 2006 presidential election, the swing vote belonged to the middle-class Walmart voter who rejected AMLO after he was effectively painted as the next Hugo Chávez. On the campaign trail in 2018, Peje changed tactics. To break through the 25% ceiling of his ardent supporters, he moderated his economic message while doubling down on promises to fight corruption and stand up to Donald Trump. AMLO has sought to assuage voter fears by naming a team of technocrats and business leaders in his future cabinet, and has promised: “no expropriations, no nationalizations”. Furthermore, AMLO pledged to accept the NAFTA that he inherits as president and keep in place Peña Nieto’s energy reforms. As mayor of Mexico City from 2000 to 2006, AMLO formed a successful alliance with Carlos Slim, the nation’s capitalist icon, to rejuvenate the city’s dilapidated historic center. He embraced the private sector while also expanding infrastructure and financing a progressive welfare program.

AMLO inherits a national budget that still relies on Pemex oil receipts for a third of its revenue. US fracking and Saudi-led OPEC acquiescence will keep oil prices low in the near-term, depriving AMLO of any tax bonanza.

In stark contrast to Hugo Chavez’s oil backed bolivar currency, Mexico has no choice but to float the peso, which trades each day at volumes of US$90bn. F/X traders can and will punish the peso at the first sight of reckless policy-making. Both the Central Bank and Supreme Court have evolved into autonomous institutions that serve as useful brakes on presidential power.

Too much concern is paid to the specter of a socialist AMLO. What should really worry investors is his naivete when it comes to tackling Mexico’s Achilles heel: a weak rule of law. AMLO’s proposal to offer amnesty to criminal leaders in exchange for peace is neither politically nor logistically feasible. After 12 years of a narco-decapitation strategy by the Calderón and Peña Nieto administrations, there are literally hundreds of splintered criminal groups reigning chaos in Mexico. Worse still, AMLO has no strategy in place to strengthen federal prosecutorial infrastructure, the most essential weapon for fighting corruption and crime.

Unveiling the enigma of AMLO will take some time, and longer still to judge his tenure as the 58th Mexican President. We predict that Mexico’s sizeable wealth will not be plundered by Morena policies. But disappointment is likely to be felt when voters realize that they elected a president ill-equipped to combat the very issues upon which he successfully campaigned: corruption & security.

JOHN PRICE IS MANAGING DIRECTOR OF AMERICAS MARKET INTELLIGENCE. JERRY HAAR IS A BUSINESS PROFESSOR AT FLORIDA INTERNATIONAL UNIVERSITY AND A GLOBAL FELLOW OF THE WOODROW WILSON CENTER IN WASHINGTON, D.C. THEY ARE AUTHORS OF “CAN LATIN AMERICA COMPETE?”

Haar

Offsets: One answer to International Trade Imbalances

Offsets: One answer to International Trade Imbalances

Michael R. Czinkota

When foreign governments shop for defense supplies, they are not solely motivated by price and quality. In light of the trade balance effects of major acquisitions such as aircraft or defense products, international customers often require U.S. vendors to purchase goods from them in order to “offset” the trade balance effects large purchases have on their trade flows. In light of enormous U.S. trade deficits, it is time for the United States to reciprocate with offset demands of our trading partners. Frequently we find ourselves in conditions where foreign sales to us are major and our sales to importers and their nations are minor. This leads to trade relations which are out of kilter.  U.S. firms have accommodated foreign offset demands for decades. Now is the time when some give-back by our trading partners is the right medicine to improve world trade imbalances.

Offsets are industrial compensation arrangements demanded (so far only) by foreign governments as a condition for making major purchases, such as military hardware. Sometimes, these arrangements are directly related to the goods being traded. For instance, the Spanish air force’s planes – American-made McDonnell Douglass F/A-18 Hornets – use rudders, fuselage components, and speed brakes made by Spanish companies. U.S. sellers of the planes have provided the relevant technology information so that Spanish firms are now successful new producers in the industry. Under offset conditions, U.S. companies also often help export a client country’s goods go international, or even support the performance of tourism services. For example, the ‘Cleopatra Scheme’ allowed foreign suppliers to Egypt to meet their agreed upon offset obligations through package tours for international tourists.

In 2015, U.S. firms entered into 38 new offset agreements where they agreed to cause purchases  with 15 countries valued at $3.1 billion. In 2017, the total U.S. trade deficit was $566 billion after it imported $2.895 trillion of goods and services while exporting $2.329 trillion. No country has a bigger trade surplus with the United States than China. In 2017, the U.S. deficit with China climbed to its highest level on record, amounting to a gap of $375 billion.

Eliminating imbalances is a core component of the Trump administration’s international economic policy. One policy approach has been the threat of tariffs against China,.  One effective supplemental strategy could be the instigation of offset agreements with major trade surplus nations.

For instance, many American imports that contribute to the trade deficit are capital goods, such as computers and telecom equipment. An offset agreement between China and the United States could require China to use American-made components, perhaps even from Chinese owned plants.  An example could be the export of Smithfield ham from the U.S. to be served in company cafeterias in China. Then there are excellent opportunities for Chinese tourists, particularly if equipped with high-spend budgets.

The American trade deficit is not easily resolved. Government would be well served to explore non-traditional options in order to develop more than one fulcrum for leverage. New use of  offset agreements – which have provided our trading partners with past success at our expense – could help revitalize American industries and  bring a new sense of balance to trade relationships. Our government should encourage offset commitments by foreign firms and countries who sell a lot to us. America deserves to reap the benefits!

Michael Czinkota (czinkotm@georgetown.edu) teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent, U.K. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE). Lisa Burgoa contributed to this commentary.

Free Trade Zones and Counterfeit Goods

The European Union Intellectual Property Office (EUIPO) and the Organization for Economic Co-opertaion and Development (OECD)’s recent report claims that free trade zones may be facilitating illegal activities, such as trade in counterfeit and pirated products, by providing good infrastructure with little oversight over its use.

Free Trade Zones (FTZs) encompass a broad range of activities, from tourism to retail sales. They typically represent duty-free customs areas, or offer benefits based on location, in a geographically limited space. Today, there are over 3,500 zones in 130 economies, collectively employing 66 million workers worldwide.

A number of benefits drive countries to embrace FTZs. In general, these areas increase a nation’s foreign exchange reserves and improve the balance of payments. On a local level, new supply chains increase business for domestic producers that sell inputs by zone-based firms. Finally, these areas provide jobs that bolster employment and, at least in developing countries, can lead to higher wages over time.

Apart from FTZ’s benefits to their host country at both a local and national level, there may also be economic exposure to criminal activities as a result of insufficient regulation. Research shows that the number of FTZs in an economy appears correlated with the value of exports of counterfeit and pirated products.

With less oversight, rogue actors are attracted to FTZs to engage in illegal and criminal trade. The OECD’s findings indicate that one additional FTZ within an economy increases counterfeiting by 5.9 percent on average. It also appears that FTZs tend to be overly permissive by letting companies get away with poor safety and health conditions. This limited oversight is particularly troubling when one considers the potential for exploitation in areas such as human trafficking.

The OECD and EUIPO both stress the need for future action to curb the misuse of FTZs. They recommend developing clear guidelines for countries to increase transparency and promote clean and fair trade in FTZs, based on the involvement of industry members and key stakeholder of the trade supply chain.

The organizations identify three areas for future analysis. The first is the measurement the role of FTZs in the trade of illicit and counterfeit goods. The next step requires a fuller quantitative analysis of counterfeit goods. Finally, further research needs to explore why counterfeit profiles differ from similar economies.

FTZs provide a number of advantages to economies, but without further regulation and research, they may induce heightened criminal activity. Both public and private actors must devise and apply strong deterrents to the establishment of criminal networks.

Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE).

Lisa Burgoa of the Georgetown University School of Foreign Service contributed to this comment.

Good Corporate Citizenry, No Longer a Choice But a Necessity

By Victoria Galeano & Jerry Haar

When queried at a 1909 business meeting about the choice of colors available for his automobiles, Henry Ford replied that customers could have any color they wanted as long as it is black. Fast forward to the late 20th and early 21st centuries and consumers today are now in the driver’s seat (no pun intended). Publications such as Consumer Reports, CNET, and a myriad of other independent professional and consumer reviews of goods and services empower buyers, dictating to producers the style, features, and price ranges that consumers seek.

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Global Business: Trade, Broken Down

In business, trade is a big word. Not in the sense of how you spell it, but rather how we use it, as there are many compartments to trading with different countries. From exports, to labor, to production and prices, trade isn’t just the exchanging of goods. Lets break it down and use the example of clothing.

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