Over the past months, there has been much speculation from all corners of the country about how policy enacted by the Trump administration will affect the economy of the United States. From immigration policy, to job creation, to foreign trade, many factions have voiced their thoughts both in favor and resistance of potential changes.
Beyond domestic concerns, the impact of American politics can be felt aboard, too, especially in terms of currency values. Take the Mexican peso as an example.
Since the outcome of the election was announced, the value of the peso has been extremely volatile. On the day of the U.S. election – November 8 – the peso was valued at 18.43 per 1 U.S. dollar, but by the very next day, the peso had suffered an 11 percent decrease, hitting a record low. Value decreases continued in the following weeks, as the peso bottomed out at just over 22:1 on January 17, 2017.
Since then, Mexican currency has made small gains, increasing to 20.28:1 by February 13. This rate is still well below the pre-election level, and far from the 16.61:1 rate witnessed just a year prior on November 30, 2015.
Initially, it may seem like all good news for people living and working north of the border. “It will cost less for me to go on vacation to Mexico,” “If I send money to friends and family in Mexico, they will receive more for each dollar I send,” or “If I go shopping in Mexico, I can buy more with less money” may be a few of the thoughts people have.
Unfortunately, a lower Mexican peso will likely also have many negative repercussions for American consumers.
Think about agricultural produce. The U.S. Department of Agriculture estimates that Mexico is the largest exporter of fresh produce to the United States, providing nearly 70 percent of our vegetable imports and almost 40 percent of fruit imports.
Initially, a lower conversion rate means that importers will be able to buy produce from Mexico at a lower price. Later, as the producers need to make purchases to maintain their operations – things like fertilizer, facility improvements, shipping equipment and supplies – which come through dollar-dominated loans, they will face large expenses due to the high exchange rate. In order to balance budgets, the producers will have to increase prices and pass those increases on to their consumers. As such, the U.S. will be back to paying higher costs.
According to the U.S. Census Bureau, Mexico is the United States’ third largest trade partner. Following China and Canada, the import-export exchange with Mexico represents 14.5 percent of all U.S. trade, totaling nearly $500 billion annually.
As is the case with most business dealings, a partnership is only as good as the parties it involves. If the Mexican peso experiences difficulties, Mexico’s trade partners – like the United States – will eventually also experience negative effects. ◆