The Cutting Room Files, Part 2: The Future of Mexico

by Peter Zeihan and Michael N. Nayebi-Oskoui

This piece is part of the Cutting Room Files, portions of the upcoming Disunited Nations text that were cut for length. Disunited Nations is available for pre-Order now on  Amazon.comHarper Collins, and IndieBound.

American-Mexican relations have been…colorful of late. American President Donald Trump has threatened Mexico with a rising tariff system that would constitute the greatest tariff effort in dollar terms by Americans in their history. Mexican President Andres Manuel Lopez Obrador (AMLO) is pushing a change to tax law that would more or less treat businesspeople like money launderers which would throw trade relations into the freezer. Threats and counterthreats on migration and trade and law enforcement and energy and water rights have ratcheted up to near-crisis levels.
 
This is actually… really good. Ever since Mexican independence in the early 19th century, American-Mexican relations have oscillated between cold-shoulders and American invasions. Today, really for the first time in both countries’ histories, the Americans and Mexicans are not talking past one another, but instead speaking with each other. The process is loud and messy, yes, but it is actually a conversation. The United States and Mexico are working out deals, making functional compromises, and finding common ground. What’s been happening the past two years are the sorts of interactions one would expect between two countries who find themselves increasingly intermingled both economically and demographically. We all fight most vociferously with our families.
 
That hardly means it is all well thought out. One of the most frustrating things about working in the geopolitical forecasting space is that sometimes luck plays a role, and that has most certainly been the case of late.
 
Consider the individuals helming both countries.
 
In the United States, Donald Trump rose to power on a wave unapologetic nativism, which expressly included a harsh campaign against Mexico on economic, political, security and racist grounds. On the other side of the border is AMLO, a guy who combined Trump’s disdain of foreigners, Elizabeth Warren’s enthusiasm for dressing down corporate interests, Ted Cruz’s penchant for blind obedience to ideological dogma, a Clinton-esque love-affair with political corruption, and Bernie Sanders’ pathological refusal to engage in basic mathematics. It’s difficult to imagine a set-up that would be less constructive to functional bilateral relations.
 
And yet, here we are, with the Americans and Mexicans enjoying the most positive bilateral relationship ever.
 
The unexpected outcome largely has to do with an olive branch from AMLO. After his election in mid-2018, but before his inauguration in late-2018, AMLO apparently had an epiphany. He realized that if he and Trump engaged in a binational pissing contest over who was more populist, the bad blood would consume his entire presidency. As he had put together a laundry list of tasks to remake Mexico in his own image, that simply would not do. So he reached out to both his predecessor and Trump, and indicated that if they could complete the renegotiation of NAFTA2 before he took office, he would not seek to reopen talks and would ensure the new deal would be ratified in a timely manner.
 
AMLO has since proven to be a man of his word. Mexican ratification occurred on June 19 of this year.
 
While there are obviously portions of NAFTA2 the Mexicans are less than enthused about and the new deal will disrupt a great many industrial patterns across the length and breadth of Mexico, for the most part the new deal is as much a win for Mexico as it is for the United States.
 
Among the Trump administration’s biggest goals in the NAFTA renegotiations was to make sure goods that benefitted from the low tariffs of the NAFTA system were mostly produced inside of it. These “rules of origin” quotas were increased and ensure that a certain percentage of the product’s value was produced within Mexico, Canada, and the United States rather than outside of it. As Mexican manufacturing capacity is both less expensive and more efficient than most manufacturing in both China and Canada, Mexico will certainly pick up a disproportionate share of whatever relocates to the North American market. Add in the general breakdown of the global Order, and Mexico’s now-even-more-privileged access to the American market, and Mexico’s economic future looks brighter and brighter.
 
Merchandise trade is only one of several aspects of a tightening, more constructive, relationship between the two North American powers.
 

  • One of the many aspects of America’s shale revolution is an accidental, incidental oversupply of natural gas prices in the U.S. market. American natural gas prices are now the lowest (unsubsidized) in the world, and a dozen major pipeline networks have been laid down to connect that supply to Mexican demand. All the pipes are now completed and soon about half of the electricity consumed in Mexico will be sourced from American natural gas.
  • One of AMLO’s less-functional plans is an overhaul of Mexico’s state energy monopoly Pemex, a company so badly run and a process so ill-conceived that it would probably be better for Mexico to burn the entire company to the ground, shoot everyone involved, and start over from scratch. The more dysfunctional Pemex is, the less able Pemex will be able to meet Mexico’s growing energy needs… and so the more reliable a customer Mexico is for American energy product exports.
  • Mexico has rapidly developed since the implementation of the first NAFTA accords back in the early 1990s. That has shifted millions of Mexicans off subsistence farms and into urban environments, even as the standard of living of the average Mexican has surged. Less agricultural production plus more disposable income makes Mexico a premier destination for American agricultural products. In particular, when Mexicans get a bit of extra scratch, the first food product they reach for is beef – American beef.
  • Higher living standards within Mexico have gutted immigration from Mexico to the United States – it has been negative for ten straight years. That gives both countries a vested political interest in regulating Central American migration through Mexico to the United States. One of the dirty secrets of the immigration debate in North America is that Mexicans are even more opposed to Central American migration than Americans. Trump has provided the Mexicans with the perfect excuse to crack down on the through-migration, while enabling the Mexican government to rack up a public relations win.
  • While Mexican migration to the United States peaked years ago, past migration has made Americans of Mexican extraction the second-largest minority in the United States. Even if the economic mingling were not occurring – and it has already surpassed that of any other American co-mingling in history – the demographic co-mingling easily puts Mexican cultural influences in third place behind German and British culture.

 
Taken together, Mexico is now America’s second-largest partner in energy, trade, agriculture and security, and is on the cusp of taking the top spot in all categories.
 
So… that’s the good news.
 
Understanding the bad news requires a bit of a step back.
 
Roughly a decade ago Mexican and American authorities were tracking hundreds of small groups involved in moving cocaine and marijuana through Mexico to America’s southern border. Just as mountainous regions help fracture regions among several competing countries, Mexico’s mountainous geography meant no single drug trafficking organization (DTO) could command all that much territory. A small DTO might control a single stretch of highway, or a single city or a local shake-down racket. Violence between these groups and Mexican law enforcement was horrific, but that carnage was nothing compared the violence among the various drug trafficking groups as they battled to expand their role in the drug trade or defend their patches from one another. In that environment, Mexico’s murder rate soared.

But even then, not all DTOs were created equal because not all DTO leaders were created equal. Today’s story involves a 5’ 6” dude by the name of Joaquín Guzmán, aka El Chapo (which roughly translates as “shorty”), who ran his drug group less like the Sopranos or a street gang, and more like a Korean chaebol.
 
Under his hand, the Sinaloa alliance focused on three general themes:
 

  • First, the bread and butter of drug smuggling to the United States. Violence within the alliance was snuffed out, while the sort of petty violence – assaults, rapes and robberies – that characterized other DTOs was frowned upon. Regular Mexican citizens living in Sinaloa territory were not terrorized by the cartel, so they tended to not resist its efforts.
  • Second, experimentation with new business lines that would enable the Sinaloa to deepen and expand its business. Cocaine never went out of fashion, but the cartel also commercialized heroin and methamphetamines. Selling counterfeit pills to profit from Americans’ opiate addition was an easy add. Cash-heavy businesses found favor as a means of assisting in the drug-money-laundering effort: limes, beef, avocados, real estate, tourism. More business lines mean more and more stable profits.
  • Third, oblique cooperation with the Mexican government to help weaken the competition. Officially, the Sinaloa would provide the Mexican government with scads of intel on their competitors’ operations. Unofficially, the Mexican government would turn a blind eye to the Sinaloa’s operations because Mexico City could only prosecute raids on so many targets at a time. The Gulf and Zeta cartels tended to suffer the most from this de facto alliance.

 
El Chapo’s strategies were so successful the Sinaloa grew to become the most powerful organized crime group not simply in Mexico, but the world. As the Sinaloa alliance expanded and deepened, violence among its constituent components plummeted. After all, they were all on the same side, and El Chapo did not tolerate infighting. Mexico’s murder rate fell.

But nothing happens in a vacuum. Sinaloa’s success meant it also became the most powerful organized crime group in the United States, which earned El Chapo a spot at the top of the Obama administration’s most-wanted list. A joint American-Mexican effort resulted in his arrest in 2014. El Chapo promptly escaped… and was re-arrested in 2015. Mexico extradited him to the United States in 2017, where following his conviction on… lots of charges he is now serving multiple life sentences in an American prison.

Without the business-minded El Chapo to ride herd on the Sinaloa alliance, the relative peace of the Sinaloa era quickly collapsed as the DTO’s various factions fought for control. The biggest and baddest of those factions is known as the Jalisco Cartel Nuevo Generacion, a group run by the Sinaloa’s former enforcers. Whereas the Sinaloa expanded by collaboration and diversification, the Jalisco expands by brute violence.

Four things come from this.

First, the Jalisco is not the Sinaloa v2.0. The Jalisco’s leader – Nemesio Oseguera Cervantes aka El Mencho – first instinct is to kill everyone in every room he enters. He absolutely lacks El Chapo’s charisma and management skills. The Jalisco is expanding, particularly in challenging its former patron, the Sinaloa, but it is most certainly not on course to dominate the drug trade.

Second, between the Sinaloa’s fall and the Jalisco’s rise, Mexico’s murder rate is once against setting record after record. El Mencho has also – repeatedly – broken the cartels’ unwritten rule that one does not engage in open violence in tourist areas.

Third, the Sinaloa is not dead and still supplies the majority of drugs that enter the United States. After a year of chaos and breakdown, elements of El Chapo’s family – most notably his sons – have seized control over what was left of the alliance and thrown up substantial roadblocks to El Mencho’s bloody expansion. Los Chapitos may not be the leaders their father was, but they have proven far from incompetent.

To give an idea of just how potent the Sinaloa remains, consider the events of last week. A government raid October 17 on a suspected sniper in the city of Culiacán accidentally captured one of los Chapitos. Shocked by their unexpected haul, the government stammered a bit. Shocked by the loss of one of their own, the entire Sinaloa alliance descended upon the city in a tsunami of carnage, forcing the unprepared government to release El Chapo’s son. In northwest Mexico, the Sinaloa remains the de facto government. The old man would undoubtedly be proud.

Which brings us to the fourth and arguably most important outcome. El Chapo’s business diversification efforts combined with the breakdown in the “peaceful” nature of the Sinaloa’s management strategy combined with the rapidly deepening economic integration between the American and Mexican markets means that the cartels are now becoming part of the North American economic picture and they are bringing their violence levels with them.

At present this expansion has not penetrated manufacturing – that’s an industry that’s simply too high value-add and too finance-heavy for easy links with DTOs. But nearly everything else is game: transport, trucking, energy, agriculture, construction, tourism, real estate. All these sectors and more now have DTO threads woven throughout, particularly in the Sinaloa heartland of northwest Mexico. And it doesn’t take a big leap to link these Mexican sectors with their American peers. First landfall of Mexican DTOs in these veins will be U.S. regions just across the border from Sinaloa strongholds: Tucson, Phoenix, El Paso, San Diego, Los Angeles and the California Central Valley.

It is worth remembering that while the collapse of the global Order has consequences for everyone, and in many cases those consequences will be the determining factor in a country’s future, regional and local factors don’t simple fade away. Countries’ local geographies and local economic trends and local histories remain relevant. Global shifts are likely to favor Mexico more than any other country, but it can still get tripped up on issues closer to home.

And the same goes for the third NAFTA partner…

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