'Our Economies Are Completely Tied': Why Trump's Threats Worry Business Leaders

The Mexican peso has weakened in the past several years, hurting some areas of San Diego’s retail industry, and much of it has to do with President Donald Trump. Two days after Trump defeated Hillary Clinton in November, the Mexican peso weakened by 11 percent to the U.S. dollar, according to the Federal Reserve. On Jan. 19, the day before Trump’s inauguration, the peso hit a record low, dipping to 21.89 pesos for $1.

The peso has been declining in value since 2014, when Mexico’s oil prices also began to fall. More recently, the peso has taken several plunges due to Trump’s rhetoric and policy proposals, such as the proposed wall along the U.S.-Mexico border, potential withdrawal from the North American Free Trade Agreement, imposing taxes on cross-border trade and a crackdown on undocumented immigrants.

Economic development leaders believe San Diego’s manufacturing and tourism industries may also feel the impact.

San Diego’s Economy Is Mexican

“Our economies are completely tied,” said Paola Avila, the vice president of international business affairs at the San Diego Regional Chamber of Commerce. “We depend on the Mexican market for the consumer market, tourism, and to buy our exports.”

In 2015, San Diego’s exports to Mexico were worth $5.5 billion, according to the Department of Commerce,

Mark Cafferty, CEO of the San Diego Regional Economic Development Corporation, said that the maquiladora industrial region in northern Baja – which is where many foreign companies set up factories to manufacture their goods– is integral to the binational equation. Samsung, Panasonic and Becton Dickinson, an American medical technology company, have manufacturing plants in the Baja region. Most of the goods manufactured in Baja find their way to San Diego.

Among San Diego’s top imports are TV and computer monitors and medical instruments, most of the products originating in Mexico, according to a recent WorldCity analysis of U.S. Census Bureau data.

“Assembly and advanced manufacturing is still the bread-and-butter part of what the economic picture looks like in San Diego,” Cafferty said.

The close trading partnership between Mexico and the United States, which was strengthened by NAFTA in the 1990s, means that Mexican markets and U.S. markets usually do well alongside each other, said Marc Muendler, associate professor of economics at University of California, San Diego.

The U.S. dollar has recently gotten stronger in relation to most foreign currencies, such as the euro. Muendler said that is largely due to Trump’s proposed tax cuts for U.S. businesses, the promise of infrastructure projects and hopes of proposals in Washington that would help balance the budget. In the past, the peso would have also gotten stronger.
But the value of the peso has dropped, along with other foreign currencies.

The Peso Plummeted

As early as mid-2014, the peso began to weaken when Mexico was forced to adjust to falling international oil prices. Mexico had to sell its oil to countries like the U.S. for a cheaper price. Coupled with domestic issues such as governmental corruption, the peso’s value took a hit. From the end of 2014 to the close of 2015, the peso lost 17 percent of its value against the U.S. dollar.

Beginning with Trump’s aggressive rhetoric toward Mexico during the campaign, his election and his subsequent policy proposals have worsened an already negative trend for the peso.

Avila said that every time Trump made a negative comment about Mexico during the campaign, she saw the peso’s value drop.

“It was directly tied to statements, not even policy, just simply statements,” she said. “That’s how delicate the peso is.”

The peso’s devaluation may also signal the souring economic and political relationship between Mexico and the U.S.

“[The peso devaluation] says the average Mexican, or U.S. investor, thinks that it’s no longer the case that NAFTA binds Mexico to the U.S., but that maybe the integration is actually somewhat tainted or already severed,” Muendler said.

Though the peso’s value remains low relative to previous years, exchange rates in April have returned to where they were in August, before the election, according to the Federal Reserve. Muendler said he sees this as a sign that uncertainty about Trump has resolved.

Still, a weaker peso also means that exports to Mexico become more costly and less attractive, Avila said, noting that San Diego companies may look elsewhere to export their goods.

Since the Trump’s election, and as the rhetoric intensified shortly after his inauguration, Cafferty said some sports equipment manufacturers in San Diego and Baja have either conducted their business quietly or halted any growth or expansion.

“I think there’s a lot of people who are essentially in a wait-and-see mode,” Cafferty said.

If the slowdown in manufacturing worsens, Cafferty worries that a lot more San Diegans will feel the impact.

“It would hurt the U.S. more than anyone realizes, because of how strong the Mexican economy contributes to California, but I think San Diego would get a disproportionate hit,” he said.

Beyond manufacturing and trade, the retail industry has also taken a hit. Mexican consumers are crossing the border less and spending less.

“We’re becoming less attractive to our No. 1 market, because it reduces their purchasing power,” Avila said.

Trump is not the only reason the peso has fallen. It began to falter two years ago.

Jason Wells, chief executive officer of the San Ysidro Chamber of Commerce, represents about 800 businesses — 650 of them have a ZIP code within one mile of the border. Ninety percent of these businesses’ customer base comes from Mexico.

When the peso went down, Wells said they felt the effect immediately.

Businesses’ customer base decreased, as more Mexicans preferred to shop at their local stores. Those who still came bought a lot less, Wells said.

“We have closed about 60 businesses in the last year and a half, due extremely in part to the peso devaluation,” Wells said. Duty-free stores along the border have recently experienced 40 percent in losses.

The Psychological Wall

It’s not just the peso and border traffic congestion keeping Mexicans from visiting San Diego to spend money. Fear is, too.

“The reality is, we’re not worried about a physical wall, we’re already feeling the effects of a psychological wall that [Trump] has put up,” Wells said.

He often hears stories of people worried the government is checking their phones, or targeting workers from Mexico, threatening to take away their visas.

Wells hosted breakfasts in which U.S. Customs and Border Patrol officers sat down with members of the Chamber of Commerce, assuring them their practices have not changed.
But the perception might be enough. Concerns about what may be happening could also be keeping Mexican shoppers from crossing the border and heading further north to places like Fashion Valley Mall.

“After the inauguration, people were afraid to come,” said Landy Castro, a sales associate at 7 For All Mankind. “They called, asking questions like, ‘How is it going over there?’ ‘Is it safe?’” A few told Castro that they would rather stay and shop in Mexico.
Eduardo Herrera, a sales associate at Emporio Armani, said he noticed a shift in the amount of shoppers coming from Mexico.

“We used to get a lot more [shoppers from Mexico], but since the election, we’ve noticed a lot less,” Herrera said.

Sales associates from other high-end retail stores in the mall said they’ve noticed similar drop-offs, citing the peso’s value as a factor, most of them dating the decrease to around the time of the election last November.

Tourism Fears Creep in

In 2015, San Diego saw 4.4 million day visitors from Mexico and another 365,000 overnight visitors, according to numbers provided by the San Diego Tourism Authority.

San Diego’s tourism industry employs 184,000 people, generating $16 billion each year, Avila said. She worries a decrease in visitors from Mexico may hurt those employees, citing a recent Forbes report that predicts the Unitied States will experience $1.6 billion in losses from a decline in Mexican tourism.

But Candice Eley, communications director at the Tourism Authority, does not expect the numbers to change dramatically.

Still, as if bracing for impact, Edna Gutierrez, the public relations manager at the Tourism Authority, has been actively working with members of the Mexican media and publications like National Geographic, Harper’s Magazine, Travel + Leisure and in-flight magazine for Mexican airlines, encouraging travelers to come to San Diego.

Gutierrez has had to angle her pitches to emphasize that San Diego is still the friendly, laid-back city Mexican tourists knew before the election. “This ‘welcoming atmosphere’ is really the big focus,” Gutierrez said.

Eley said it is too early to calculate San Diego’s air travel data since Trump took office. But San Antonio, Texas, another city that relies heavily on tourists from Mexico, received 30 percent fewer Mexican travelers at its international airport in January and February, compared to the same months the previous year, according to the San Antonio Express-News. The report attributed the drop-off to peso devaluation and Trump’s desired policy changes.

Avila pointed out that San Diego already has a border wall, or at least a border fence, that snakes along the San Diego-Tijuana border.

“We already have a wall, and it hasn’t deterred us,” Avila said. “We’ve built bridges over the wall, and we’ll continue to build bridges.”

Trump’s Take

Though the border wall is on Trump’s agenda, the president has recently focused more on revisiting trade agreements such as NAFTA.

Since the campaign, Trump has been outspoken about his criticism of NAFTA, calling the 1994 trade agreement “the single worst trade deal ever approved [in the U.S.].” Earlier this month, Trump reiterated his disdain for NAFTA, promising its removal.

“NAFTA has been very, very bad for our country. It’s been very, very bad for our companies and for our workers, and we’re going to make some very big changes or we are going to get rid of NAFTA for once and for all,” Trump said, drawing applause from the crowd.

Seemingly giving teeth to Trump’s rhetoric, this week Politico reported that the Trump administration was set to unveil an executive order withdrawing the United States from NAFTA. Peter Navarro, the head of Trump’s National Trade Council and a former San Diego politician and economics professor at UCSD, reportedly wrote a draft of the executive order. Navarro is a known protectionist who has been outspoken against outsourcing manufacturing jobs to China, and is a supporter of a border-adjustment tax that would impose taxes on imports, including those coming from Mexico. Navarro has been guiding Trump’s rhetoric regarding trade since the campaign.

Despite Navarro’s views and his role in drafting the anti-NAFTA order, Navarro has expressed his willingness to work with Mexico when it comes to trade.
“We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” Navarro told Bloomberg in March. This desire for negotiation would eventually prevail amid the reports of a probable U.S. pullout from NAFTA.

On the same day reports surfaced about a possible executive order, the White House released a statement saying that Trump “agreed not to terminate NAFTA at this time,” and instead called for negotiations with Mexico and Canada.

“It is my privilege to bring NAFTA up to date through renegotiation. It is an honor to deal with both President (Enrique) Peña Nieto and Prime Minister (Justin) Trudeau, and I believe that the end result will make all three countries stronger and better,” Trump said in a statement.