MCALLEN, RGV – Robert S. Kaplan, president and CEO of the Federal Reserve Bank of Dallas, is concerned that some of the rhetoric coming out of the United States may result in Mexico electing an anti-American president next year.

Mexicans go to the polls on July 1, 2018. According to some polls, leftist Andres Manuel Lopez Obrador, who leads the National Regeneration Movement (MORENA) party, is the front-runner ahead of next year’s presidential election.

Kaplan gave his views on anti-Mexican rhetoric, trade with Mexico, immigration and the value of the peso at the Border Economic Development and Entrepreneurship Symposium hosted by the Dallas Fed, UT-Rio Grande Valley’s Robert C. Vackar College of Business & Entrepreneurship, and McAllen Chamber of Commerce. He took questions from Marie T. Mora, associate vice provost for faculty diversity at UTRGV, and from those in the audience. He also held a news conference with reporters.

Asked by Mora and renegotiation of the North American Free Trade Agreement, Kaplan said: “My concern is, I think it is a constructive thing for us to be leveling the playing field and renegotiating trade agreements. I think some of these other issues and the rhetoric associated with them, my fear is, when you go to Mexico, they have an election coming up in July of 2018 and I would not want to see a situation where in order to get elected president of Mexico, you need to be anti-America, anti-American.”

Kaplan said the United States has “benefitted enormously” from having “good, solid, relations” with Mexico and countries on our border.

“History has shown that that is not only economically valuable, it is geo-politically valuable. And the only comment I would make is, being down there (Mexico) a lot I am sensitive and concerned about how this (Mexican presidential) election might go and what the geo-political ramifications might be. Maybe more about the rhetoric than anything else. That would be a caution I would have.”

Kaplan pointed out that Texas is the largest exporting state in the United States and Mexico is its largest trading partner.

“More than that, we have done a lot of work with the Bank of Mexico about the importance of trade to the United States. Our research shows that on average, 70 percent of the imports from Mexico to the United States are what is referred to as intermediate goods. Meaning, they are goods that are going back and forth across the border that are part of complicated logistics and supply chain arrangements.”

Kaplan said this contrasts sharply with U.S. trade with China. He said most of the goods imported from China are final goods.

“Our work and our research shows that this trading relationship with Mexico has likely caused U.S. companies to be more globally competitive, not just in Texas but in the United States, that they have added jobs and our concern is, yes, NAFTA and trade agreements certainly need to be modernized and updated, renegotiated and all that but, we think this trading relationship is essential to the competitiveness of the United States in this hemisphere.”

If the United States did not have this trading relationship, Kaplan said, “it is our judgment that we would likely lose some of the jobs we have in the United States. We would lose them elsewhere in the world, most likely Asia.”

Kaplan added: “We feel strongly that it is not enough to add a job in the United States. It has got to be globally competitive in order to be sustained. We think that our trading relationship with Mexico improves our competitiveness globally. We always emphasize that. We think Mexico is very strategically important to the United States.”

In the Q&A, Kaplan took a question about the importance of NAFTA from Ron Whitlock of Ron Whitlock Reports. Kaplan responded:  “I have said this publicly many times. I think a review of NAFTA and a modernization of NAFTA is wise. It is a good idea. I think those discussions were already taking place as part of the TPP (Trans Pacific Partnership), which is not going to happen. I think both sides knew the agreement would have to be updated. The issue is whether we will be able to successfully renegotiate the agreement.”

Kaplan said he is still hopeful that there will be a successful renegotiation of the agreement.

“To your point,” Kaplan told Whitlock, “I think it is in the strategic interest of the United States, for the reasons I mentioned earlier. It is very important for the U.S. that we maintain that trading relationship. It is critical, I think, to U.S. competitiveness, adding U.S. jobs, competitiveness in the U.S. hemisphere, and so everywhere I go, I try to call it out.”

Kaplan said that when he meets with elected and appointed officials at the federal level and other levels, he goes through this analysis. “You have to segment the type of trade deficit first. Is it final goods or intermediate goods? The trade relationship with Mexico is primarily intermediate goods. And, second, just because you run a trade deficit, it does not necessarily mean that there is unfairness going on. Again, there is the posturing and there is the public comment on the negotiation. I am hopeful, because it is in our strategic interest, that this will be successfully completed.”

He added that he is “careful” not to comment on individual provisions of NAFTA, even though he may have a view on them. “I have heard from both sides. As the Fed president I am being careful not to get into…, other than to say, it is in our strategic interest and it is important that we maintain and build this relationship.”

Later, when interviewed by reporters, Kaplan was asked about the maquiladora industry that exists cross the border from the Rio Grande Valley, in cities such as Reynosa, Rio Bravo and Matamoros. “They are worried about wage levels. They worry about the community. They are going through a transition where labor was initially a reason people located activities there. Increasingly, they may have to move up the value chain in terms of being more technology-oriented and less labor-rate dependent activities. I think they are wrestling with that transition,” Kaplan said of maquila operations. “I lived in Asia. I saw this in Korea, I saw this in Taiwan, many countries have gone through this transition. Initially, the reason people locate jobs there is labor rates but normally you cannot stay there. You need to move up the value chain. I think Mexico and the maquias are wrestling with the implications of that challenge.”

Kaplan was also asked by a reporter about the fluctuating value of the Mexican peso. Kaplan said: “The peso has been highly volatile for different reasons. One of them was energy weakness. The lived through that. Then they lived through the aftermath of the fall (U.S. presidential) election of 2016. Then they saw a strengthening. The Mexican central bank has raised rates, a double-digit number of times to try to deal with what is emerging. They have a real inflation issue they are trying to get to grips with. I am sensitive to the fact that the peso is going to be volatile in response to, not just things they do within the country but some of the external pressures, trade being one of them.”

“A good, constructive, relationship between the United States and Mexico is certainly in the interest of Mexico and, strategically and economically in the interests of the United States,” Kaplan added.

Kaplan was also asked by a reporter about immigration. Whitlock cited the example of Arturo Duran, the former U.S. commissioner of the International Boundary & Water Commission. He said Duran had come to the U.S. from Mexico when young, unable to speak English. In the U.S., he said, Duran gained master’s degrees in economics and engineering. “Had it not been for us being an accepting country, he (Duran) would not have been here to give McAllen the opportunity of a 15,000-employee automobile plant,” Whitlock said.

Kaplan responded: “I have said it numerous, numerous times. One of the distinctive competencies of the United States over the last several decades has been its ability to attract and develop and retain immigrants, make them part of our society, and then they become leaders here and productive citizens in our society. I think for the future of the United States, I have said this, my parents were not born here, I think it is one of the distinctive competencies. I used to teach strategy leadership at Harvard and I am a business person. When you have a strategic distinctive competence, we have others in the United States by the way, but that is one of them. I think you want to make sure to protect and preserve and build your distinctive competencies. And immigration is one of our distinctive competencies.”

Editor’s Note: This is the first in a two-part series on Robert S. Kaplan’s recent visit to McAllen, Texas, with his Federal Reserve Bank of Dallas team. Part Two will focus on workforce development.