January 8, 2018

The United States’ Inescapable Place in Mexico’s Election

By Allison Fedirka

Presidential elections are almost always internal affairs. In the case of Mexico’s forthcoming election, however, it’s impossible to separate the vote from Mexico’s relationship with the United States. The election will take place July 1, but public discourse over its themes has already started and will remain a focal point in Mexico during the first half of the year. The domestic issues and candidates’ proposed solutions will be indicative of Mexico’s limitations in its relationship with the US and possible strategies for dealing with the US despite them.

Three topics stand out among the election issues: the price of food staples, the price of fuel, and security. The US-Mexico relationship plays a critical role in all three, and addressing them necessarily means working with the United States at least to some degree.

When it comes to Mexican food staples, the corn tortilla is not just iconic—it’s critical to the daily food consumption of average Mexicans. In 2016, about 8.3% of all spending on food in Mexico went toward tortilla purchases, and Mexicans consumed about 125 pounds of corn tortillas per person, according to the Mexican statistics agency INEGI. So when tortilla prices fluctuate, people notice. A spike in prices in 2007 set off protests, with chants of “Without corn, there is no country!” (It sounds better in Spanish: “¡Sin maíz, no hay país!”)

Now tortilla prices are on the rise again. The Ministry of Economy said they jumped 8.4% in 2017, while inflation for the year was only roughly 6.7%. In 2018, vendors planned to increase the price—currently averaging 14.02 pesos ($0.73) per kilogram nationwide—by between 11 and 21% per kilogram. These plans have been shelved, at least temporarily, while producers and government officials meet to come up with an acceptable solution.

Mexico’s corn production is enough to satisfy only two-thirds of domestic demand, so the country relies on corn imports—almost exclusively (97%) from the United States—to fill the gap. And the gap is widening: Mexico’s corn consumption increased by 3.75%, from 37.3 million to 38.7 million tons, in the 2016-17 season. The price Mexico pays for US corn depends primarily on three factors: prices in the world market, the exchange rate, and the price of fuel. The US produces enough corn to influence global prices; commodities are traded in US dollars; and as we shall see, the US plays a critical role in Mexico’s fuel supply.

The Mexican government cannot ignore these factors when addressing the problem of tortilla prices, especially since the current government budget will not readily allow for drastic increases in subsidies to offset any nationwide price increases. Alternative providers like Brazil and Argentina do exist, but transport costs would be higher. Between production and proximity, the US is the natural source for Mexico to get its corn.

But as important as the prices of food staples are, it’s the cost of fuel that is the most important. Parties and candidates are already trading blame for higher prices. Mexico embarked on major energy reforms in 2013 that, among other things, address national production and refinery capabilities. In November, the government liberalized gasoline prices so that they respond to market regulation. Now, the Mexican Association of Gasoline Businesses says people can expect a 22–26% increase in fuel prices in 2018.

The government could try to counteract this volatility, but doing so would in some ways negate the move to liberalize prices and would affect exchange rates for the entire economy. The fuel supply is not entirely under the government’s control: Mexico imports 80% of its gasoline and 73% of its diesel. Recent estimates by the Energy Ministry indicate Mexico will increase its refining capacity over the next 14 years but will remain dependent on imports until 2026. The US is by far the largest supplier of fuel to Mexico. Over half of all gasoline and diesel consumed in Mexico comes from the US, and imports continue their steady rise.

The final campaign issue is security. Since 2015, the number of annual homicides in Mexico has been rising—along with armed robberies, extortion, disappeared persons and kidnappings, and sexual assaults. 2017 has been confirmed as the deadliest year in Mexico since the government started tracking homicides in 1997. (The record-high number (23,101) of murder investigations opened last year will likely grow by about another 2,000 once December figures are included.)

Mexico does not track deaths specifically related to organized crime, but such crime (which includes drug trafficking) is still believed to be the main contributor to the rise in the number of homicides. Gun-related deaths are generally tied to organized crime, and such deaths made up 66% of homicides in Mexico in 2017. In addition, the states with the most homicides per month are those with the strongest presence of drug trafficking. Finally, there’s been an increase in killings of journalists and politicians, who often speak out against organized crime and thus make attractive targets for criminal groups.

Since most of Mexico’s organized crime is related to drug production and trafficking, and most of the drugs are sent north to the United States, the US is inextricably linked to Mexico’s security problems. The two countries cooperate closely on border security, immigration, and combating drug trafficking. Washington assists in anti-narcotic efforts by providing training, funding, weapons, and intelligence, while Mexico assumes responsibility for on-the-ground counternarcotic operations.

The partnership is mutually beneficial. Domestic security in Mexico is a costly endeavor, and US support is helpful. And in addition to wanting to protect its citizens, Mexico has an interest in reducing violence, which can hurt foreign business operations, investment, and tourism. As for the US, Washington pursues a supply-side solution for dealing with US drug consumption and doesn’t want to see cartels getting stronger on US soil. The US also wants to reduce the amount of drug money that could be used by overseas groups—including those labeled as terrorists—that threaten US interests.

Regardless of who wins the presidential election—even if it’s nationalist candidate Andres Manuel Lopez Obrador—there are limits to how much Mexico can change its relationship with the United States. Mexico depends on the US, and both sides benefit from the relationship. But the next Mexican president will still have a few options going forward. We will be watching over the next six months to gather insights on what the next leader will do to fix Mexico’s economic and security problems and mitigate the vulnerability that comes with dependence.

George Friedman
Editor, This Week in Geopolitics

Share Your Thoughts on This Article

Not a subscriber?
Click here to receive free weekly emails from This Week in Geopolitics.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact [email protected].

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

© Copyright 2018 Mauldin Economics