if the sharp selloff of the mexican peso after the nov. 8 election of donald trump were set to music it might sound like a funeral dirge, the dearly departed being the north american free trade agreement (nafta). the peso has fallen to an all-time low of more than 20 to the dollar, and on thursday the bank of mexico raised its benchmark interest rate to stem the bleeding. mexico investors are worried that mr. trump might actually believe<u+2014>as he argued in his campaign<u+2014>that u.s. productivity growth and job creation depend on renegotiating nafta to discourage u.s. investments south of the border. but mexico won<u+2019>t easily yield to a new deal that limits its access to u.s. markets in order to make it less attractive as a destination for capital. if mr. trump counters with tariff hikes in violation of nafta, mexico is likely to respond with its own duty increases. it did this with $2.4 billion in retaliatory tariffs on important u.s. export products in 2009 when the u.s. failed to live up to its nafta obligation in trucking. there is even the possibility that mr. trump will carry out his threat to tear up the agreement. there are no winners in any of these narratives. in the 23 years since nafta was launched, mexico has cultivated a middle-class, a more-vibrant democracy and a diversified economy far less dependent than it once was on oil. the country now sends 80% of its exports to the u.s. a trade war would be an economic disaster and open the door to political instability. thus it won<u+2019>t be so easy for mr. trump to bully the neighbors. national pride will play a role in stiffening the mexican spine, and president enrique pe<u+00f1>a nieto <u+2019>s government is signaling that it intends to face any crisis by deepening structural reforms, getting its fiscal house in order and looking more aggressively for new trading partners. the unspoken message to mr. trump is that if he plays the protectionist game, mexico is ready to raise the stakes. nafta<u+2019>s demise would be bad for the u.s. too, although the u.s. stock market rally suggests that the fear of a trade war is overblown. protectionist steel and textile tycoon wilbur ross is rumored to be in line for a job in the new administration. but vice president-elect mike pence is a free trader from indiana, which in 2015 exported $4.8 billion in goods to mexico, its second-largest export market. from time to time mr. trump has had flashes of sanity on trade. in a joint press conference with mr. pe<u+00f1>a nieto in mexico in august, then-candidate trump spoke of the need to <u+201c>keep manufacturing wealth in our hemisphere.<u+201d> some expect the trump administration to find a way to largely leave nafta alone while it works on legitimate trade issues like china<u+2019>s practice of intellectual-property theft. mexico seems to want to help in this face-saving endeavor and has wisely decided not to escalate the rhetoric. it doesn<u+2019>t need to: americans have plenty to lose if nafta is destroyed. many u.s. corporations are now heavily invested in supply chains that crisscross the continent to create globally competitive products. these support millions of u.s. manufacturing jobs. saying goodbye to duty-free access to mexico under nafta also would hit u.s. agricultural exports hard. mexican economy minister ildefonso guajardo told reuters on nov. 10 that his government is <u+201c>ready to talk so we can explain the strategic importance of nafta for the region. here we<u+2019>re not talking about . . . renegotiating it, we<u+2019>re simply talking about dialogue.<u+201d> he also said mexico will look for new markets, adding to more than 40 existing free-trade agreements. it had hoped for expanded opportunities via the proposed trans-pacific partnership, a 12-nation accord that includes the u.s. and much of asia. but president obama wasn<u+2019>t able to get tpp through congress and mr. trump has promised to kill it. mr. guajardo said that mexico will pursue the possibility of completing a smaller tpp with the countries that are expected to have ratified it by the end of 2016. he named japan, new zealand, australia, singapore, vietnam and malaysia. australia would probably be eager to replace the u.s. as mexico<u+2019>s chief food supplier. none of this would make up for the loss of u.s. market access under nafta, which means that increasing mexican competitiveness is urgent. mr. pe<u+00f1>a nieto got historic constitutional reforms in energy and telecommunications through his congress in 2013. opening these markets to competition will attract capital and improve the infrastructure for producers but implementation takes time. unfortunately the government<u+2019>s debt burden has increased sharply in recent years and taxes have gone up, adding to disappointing economic performance. these are mistakes that mexican policy makers cannot afford if mr. trump plays chicken with nafta. write to o<u+2019>grady@wsj.com.
mexico<u+2019>s options in a trump trade war  - wsj
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