The document discusses the complexities of U.S.-Mexico relations, focusing on the impact of NAFTA on trade, banking, and financial regulations. It highlights concerns over remittances, economic volatility, and the possible effects of Trump's trade policies, including potential changes to NAFTA. The text also emphasizes U.S. banking influence in Mexico and the balance of trade between the two nations, along with the historical context of financial crises and regulatory changes.

1. NAFTA, Financial Regulations
and U.S-Mexican Relations
Nomi Prins
May 11, 2017

2. Factors Impacting US-Mexico Relations
 A relationship beyond geography
 Trump promising "very big changes" to NAFTA.
 Fluctuating Oil prices and demands: US imported 200 million barrels in the first 11
months of 2016 ($7 billion).
 Price of crude around 46.5. (as of May 8, 2017)
 Near middle of 2015 av. of 48.67, 2016 av. of 43.33.
 Parallel US and Mexican Central bank policy
 As the Fed cut rates to zero, Banco de Mexico cut rates to a 3% low by 2014.
 When the Fed did QE, Mexico again reacted with similar policy.
 When the Fed raised rates for the first time in seven years in Dec. 2015 by 25
basis points, so did Banco de Mexico (the next day).
 US Bank Activity in Mexico intertwined with US Bank Activity in the US.
 Financial Speculation and Foreign Investment.

3. Trade and
Economic
Indicators
• NAFTA generated one of the
world’s largest free trade
areas.
• Nearly 1/3 of the world’s
total GDP passes between
the three member states.
• Mexico ranks second in US
export markets and third in
US trade.

4. US-Mexico Relations & Banking
History
 By the early 1990s, big US banks like BankAmerica, Chase Manhattan,
Chemical Banking, Citicorp, Goldman Sachs, and JP Morgan accounted for
74% of US-Latin American exposure.
 Amounted to $40.4 billion, of which a big chunk was with Mexico.
 When the Clinton administration signed NAFTA on December 8, 1993, the Los
Angeles Times said, “Banking will be among the first industries opened to
foreign competition under NAFTA.” Chapter 14.
 According to the US State Department, “The implementation of NAFTA
opened the Mexican financial services market to US and Canadian firms.
Foreign institutions hold more than 70 percent of banking assets and banking
institutions from the US and Canada have a strong market presence.”
 Glass-Steagall Repealed under President Bill Clinton in 1999, allowing US
banks to become “too big to fail” and paving way to 2008 financial crisis.

5. Bank Concentration
and Citigroup
Total assets of foreign-controlled banks in Mexico
rose from 24% in 1998 to 70% after Citigroup bought
Banamex in 2001. From 1982-1989 Citibank was the
only foreign bank allowed to operate in Mexico.
Citibanamex* has more branch offices in Mexico
than in any other country (1,500). Citigroup has 700
branches in the US.
Citigroup-US-Mexico Connections:
Former US Treas. Sec. Robert Rubin, Glass-
Steagall Repeal, current Board President
Ernesto Zedillo, former US Treasury Secretary
Larry Summers, Former US Treas. Sec. Jack Lew
was COO of Citigroup Wealth Management
*Renamed from Banamex in October 2016.

6. The Financial Crisis and Dodd-Frank
• Established under Democrats: Wall
Street Reform and Consumer
Protection Act 2010.
• “Living Wills” for big banks.
• Volcker Rule banned some trading
activities.
• May 4, 2017 Republican leadership
in House Financial Services
Committee voted to gut many Dodd-
Frank regulations. Bill would repeal
an estimated 40 provisions, but still
requires 60 votes in the U.S Senate.
• Glass-Steagall Reinstatement?

7. Banking Concentration in Mexico
 Seven largest banks (G7) account
for 80% of total bank assets.
 Five of the G-7 are foreign
subsidiaries and account for 65%
of commercial bank assets.
 Concentration of bank assets has
not changed significantly since the
global financial crisis.
 Tightening concentration limits
and capital charges for
concentration of risks need to be
implemented
 Big Six U.S banks hold:
 42% deposits in U.S
 96% of U.S derivatives
 JPM Chase holds 9% of global derivatives
 Citigroup holds 8% of global derivatives
 IMF 2016 Assessment Report on Mexico: “Key
risks ..include a United States growth
slowdown… and volatility in global financial
markets. Related shocks could adversely
impact the financial system through the
deterioration of corporate and public
balance sheets and reversal of capital flows
leading to tightening financial conditions.”

8. Central Bank
Collusion
Big banks, stock and bond markets
buoyed by government and central
bank intervention since 2008.
US Federal Reserve balance sheet
has $4.5 trillion securities.
ECB has E2.5 trillion securities.
BOJ has $4.1 trillion securities.
US and European banks have paid more
than $130 billon in settlements since
the crisis.
Rate hikes can hurt emerging market
dollar-denominated debt significantly.

9. Federal Reserve Bailout
• The Fed set aside $16
trillion in loans for the
big banks.
• The Fed provided $2.5
trillion in loans (at a
near zero interest rate)
to Citigroup alone.
• Citigroup fired 52,000 US
based employees after
the global financial
crisis.

10. Mexico: Remittances and Risk
 Remittances in March 2017 up 15.1%, due to increased concerns over Trump.
However, remittance flows outside of Latin America and the Caribbean have slowed.
 Total remittances at record $26.97 billion in 2016, rising steadily since 2009.
 But remittances in Mexico hit historic lows after financial crisis in 2008.
 De-risking could hamper this flow of funds.
 Not all cash is “criminal” but all of it is still effected.
 Foreign banks re charging more, closing branches, or diverting funds elsewhere.
 This hurts national economies and revenue streams.
 Risk of Trump Reactionary Policy to remittances and the Mexican economy.

11. In Mexico: outstanding gross government rose from 29% in 2012 to
42.4% of GDP in 2017.
Gross public debt up from 43% (2008) to 58% of GDP (2016)

12. In the US: Outstanding gross government debt has risen from 64.7%
of GDP in 2007 to 105.6% in 2015.
Gross public debt hit103% of GDP in 2015.

13. GDP:
Mexico & US
Trends
"Poor Mexico.
So far from God
and so close to
the United
States."
— Porfirio Díaz

14. Mexico / US Foreign Exchange Rate
Source: Board of Governors of the Federal Reserve
System (US) – St. Louis Fed.

15. Trump, NAFTA and
the Wall
July 2015: “I will build a great, great wall on our
southern border, and I will make Mexico pay for
that wall.” Trump campaign.
September 2016: "NAFTA is the worst trade deal
maybe ever signed anywhere, but certainly ever
signed in this country.”
March 8, 2017 "We're now in the early stages of
the TPA process, the Trade Promotion Authority,
the so-called fast track," U.S Commerce
Secretary Ross told Bloomberg .
April 11, 2017: “It’s been a disaster from the day
it was devised and we’ll have some very pleasant
surprises for you on that one, I can tell you,”
Trump said to business CEO’s regarding NAFTA
April 27, 2017: "I decided rather than
terminating NAFTA, which would be a pretty big,
you know, shock to the system, we will
renegotiate,” Trump said after passing the
Continuing Resolution.
April 28, 2017: "I’m not looking to hurt Canada
and I’m not looking to hurt Mexico. They’re two
countries I really like," Trump said to Reuters.
Worth Consideration: U.S Congress Passed a
Bipartisan Continuing Resolution budget that
included no funding for any proposed border wall
between US and Mexico.

16. NAFTA: US and Mexico Past and Future
 Mexico, Canada and US signed NAFTA December 1992, introduced in January 1994.
 In 2017 US trade deficits in goods with Mexico reached the levels this March that
were the highest since the global financial crisis (November 2007).
 US trade gap with Mexico in goods up 22% to $7 billion in March, 2017.
 About 70% of Mexican export goods require further inputs via US production.
 Mexico remains a strong catalyst for allowing the US to maintain an edge over
Chinese economic competition globally. Yet, there is a West to East shift continuing.
 Mexico and NAFTA negotiations face December 2017 deadline, with important
general elections being held in July, 2018.
 Mexican economic minister, Ildefonso Guajardo told the Financial Times that parts of
the TPP assist in renegotiating NAFTA.
 Mexico considering TPP without the U.S and potential new trade partners like China.

17. US and Mexico: The Trend
 US and Mexico trade more than a half-trillion dollars in goods and services
yearly.
 Mexico looking at other options like TPP without the US and other trade
agreements.
 One of every 29 US workers is supported by US and Mexico trade relations.
 NAFTA tripled the level of the Mexican economy since introduction in 1994.
 US exports to Mexico rose from $41.6 billion in 1993 to $240.3 billion in 2014,
 Oil price declines caused drop in exports to $236.4 billion in 2015 and $231.0 in
2016.
 Many US banks and branches have left Mexico since the crisis and due to de-
risking. European banks have reduced presence due to EU post-crisis capital
requirements.
 Rising corporate defaults could hurt global banks and EM in 2017 and beyond.
 Healthy spirit of nationalism = Opportunity for Mexico.