Mexico's Drug War Adds to Troubled US Relations

| Oct. 7, 2011 |

Published by Minyanville

Always game for a newsworthy quote, Texas governor Rick Perry announced this week that he would consider deploying US troops to Mexico to help fight its war on drugs, which since December 2006 has taken more than 42,000 lives. It was then that President Felipe Calderón came to power and the number of lives lost has increased dramatically ever since. Now, says Perry, “it is very important for us to work with them to keep that country from failing.”

Perry was attacked on both sides of the troubled border region. Mexico’s ambassador to the US said bluntly, “It’s a non-starter.” While the US, according to The Economist, is in an “isolationist mood, perhaps because [Americans] are war-weary or skint.”

The US has already supplied Mexico with military hardware and training. “Few in the U.S. are aware of how entrenched their military machine has already become south of the Rio Grande,” writes Ioan Grillo for NPR. However, this has caused consternation in Mexico, with some suggesting that US involvement violates Mexico’s constitution.

Relations between the two countries are incredibly frayed thanks in part to a bungled US operation which allowed guns to cross south into Mexico with the hope of being able to trace their use. The acting director of the Bureau of Alcohol, Tobacco and Firearms (ATF) Kenneth Melson, as well as Arizona Attorney Dennis Burke, resigned after Operation Fast and Furious saw US agents allow thousands of guns into Mexico, hoping to track them. Hundreds went missing and dozens have turned up at crime scenes.

“We're going to work on rebuilding that trust and we know we have work to do,” acting head of the agency Todd Jones told reporters.

The two nations may be at odds over the drug war, however, their economies are very much intertwined, with Mexico relying heavily on its northern neighbor as 80% of exports head into the United States. This has been demonstrated this week by the peso and Mexico’s IPC index, both of which have risen slightly thanks to positive news from the US.

The peso recovered from recent losses, closing Thursday at 13.3960 to the US dollar, 1.2% stronger than Wednesday when again the peso saw a 1.3% rise against the US dollar. This is thanks to both positive news from Europe and which translated to a US rebound. The peso, however, is nowhere near its July close of 11.7370 to the US dollar.

The weak currency, combined with generally struggling markets, led to shares in cement-manufacturer Cemex (CX) hitting 13-year-lows. They have lost nearly 70% of their value this year alone as investors worry about a $17.3 billion debt, which Reuters points out is equivalent to the annual economic output of Honduras.

Good news on US jobs this week, though, saw Mexico’s IPC close Wednesday at 33,000 points, 0.1% higher on the previous day, on a volume of 315m shares worth $420m.

Trucking Dispute
There was some good news in relations between the two neighbors, as a long-standing trucking dispute finally comes to an end. Mexican vehicles will finally be able to cross over the US border within weeks, after they were banned from US roads for apparently being unsafe.

The move will reduce transportation costs between the two countries by around 15%, according to Mexican Economy Minister Bruno Ferrari. “If you take into consideration that Mexico's manufacturing costs are at least 25 percent lower than in the U.S., this is going to be a very strong competitive advantage,” he told Reuters. Mexico’s traditional dominance in US market share has been hampered by Chinese inroads.

Earlier this year, Mexico imposed retaliatory tariffs, in order to help lobby Washington to change the rules. These caused around $2 billion worth of losses to the United States. Ferrari warned, however: “We reserve our right to retaliate on that if the program stops for a reason in the future.”

Stunted Growth
Analysts are now expecting growth in Mexico to be 3.77% this year, lower than the 3.81% predicted in Reuters’ previous poll. This is the fourth straight month to see the figure drop, thanks primarily to a slowdown in the United States.

Manufacturing also fell in September, compared to the previous month, according to the factory index, compiled by the Mexican Institute of Financial Executives (IMEF). The figure fell 1.6 points to 50—above which indicates growth, below which indicates contraction.