World-System (1960-2100) Geopolitical Linkages: Canada, Mexico and the US

 

A recent article in the New York Times (here) suggests that Trump II Administration bullying (Trade Threats to both Canada and Mexico) might bring the two countries (CA and MX) closer together. It's hard to imagine Geopolitical Linkages between Canada and Mexico without the US. Mexico has strong cultural and economic relations with the Southwestern US and Canada has solid culture and economic relationships with the entire Northern US. There are strong inertial forces that will keep the Free Trade Agreements between the three countries moving forward well beyond the limited and inconsistent influence of the Trump II Administration.

The results presented below also suggest (not unexpectedly) that President Trump is tinkering with a system that he does not understand.

In this post, I will put the Growth Components (CA1, MX1, and US1, presented in the Notes below) of the three countries (CA, MX, US) together in a systems model and see what shape the future dynamics might take.** The first question would be which model would be best (from an AIC perspective), the two country model (CA1, MX1) or the three country model (CA1, MX1, US1)? The AICs  for the models are presented in the Notes below. From the AIC perspective, the three-country World-System linkage model is best.

But, let me clarify these results. I assume that politicians follow a BAU strategy: "our country is able to make it's own decisions without regard for other countries or the World System". The reality is, however, that each country is part of the World-System, whether they like it or not and whether they do or do not take into account World-System forces. The BAU results in the Notes suggest that CA and MX might reasonably consider going it alone together. The history of US, Canada and Mexico Free Trade Agreements also suggests that the countries understand the importance of the US as Hegemonic Leader of the World-System. Strong inertial forces will keep the three countries trading with each other long past the Trump II Administration. Inertia does not mean that there are not tensions and contradictions in the system!

The problem with forecasts from the WS-linkage model (above) is that each country will face a possible growth-and-collapse, Limits-to-Growth future. The US will peak a little later (2050) than CA or MX (2025). So, right out of the gate, World System linkage will seem like a bad idea to growth-obsessed politicians. From the standpoint of Environmental Damage from growth, Degrowth would be a positive outcome. So my assumption is that growth-obsessed politicians will turn away from a Limits-to-Growth future and focus on a BAU strategy such as NAFTA or the USMCA (the Trump I version of  NAFTA).

If each country (MX, CA, US) focuses on business-as-usual and their existing linkages (which  is very likely after the Trump II Administration), each country could experience unlimited exponential growth well after 2150 driven by the US, which is the unstable part of the system (you can experiment with the MX_CA_US model using the code provided here). At least unstable, unlimited growth was the vision prior to the Trump II Administration. 

I have suggested here that the Trump II Administration  is essentially taking the US on a Random Walk. If Trump is successful, the result (graphic above) could be a steady state (well after 2150) for all three countries if the US Random Walk persists (you can experiment with setting the US to an RW here; try to determine when the steady state will occur--it's way off in the future). 

In the short-run (year-to-year), the Mexican Economy is also a Random Walk (here). Additionally, setting the Mexican Economy to a Random Walk (graphic above) destabilizes the system and pushes the US into collapse mode. President Trump has to be careful with his RW-policy-approach because it can also destabilize the system.

All of the above is a round-about but necessary way of getting to the question of what effect will Trump Shocks have on the USMCA system? The graphic above shows how a negative shock to the US will affect each country, to include the US. Both MX and CA will be affected negatively to about the same extent and take over twenty years to reach equilibrium again. The US will respond positively in the first years (a prediction of the Shock Doctrine) but will eventually have to deal with the negative consequences for about the same twenty years. In other words, 

the Trade War works in the short run but in the long run helps none of the parties.

You can experiment with the MX_CA_US Model here and the MX_CA_US_W Input Model here. You can experiment with the MXL20 model here, the USL20 model here, the CA_LM model here and the WL20 model here.

In a future post, I will explore finding a steady state for the World System and what it's effect on the MX_CA_US_W Model could be.

 Notes

** More information about how the dynamic component state space models can be found in the Boiler Plate.

AICs

The AICs are: (CA1, MX1 = [104 > AIC=121.6, 137.5]) and (CA1, MX1, US1 = [112.5 > AIC=138.5 > 163]) for the Business-as-Usual Models (BAU) and (CA1, MX1 = [58.03  > AIC=101.6 > 134.2]) and (CA1, MX1, US1 = [ 51.14 < AIC=94.59 < 132.4]) for the World System (WS) input model (smaller is better for the AIC).

MX Components

CA Components

US Components

World Components

World-System (1970-2100) Eight Futures for Mexico

 

The Trump II administration has threatened a Trade War with Mexico and the imposition of tariffs has been delayed while negotiations proceed (here). Canada, Mexico, China and the EU are the US's largest trading partners. Trump has threatened tariffs on all four if his demands on immigration and drug trafficking are not met. The common assumption is that the US "Gorilla" will impose it's will on other nations in the world and will get what it wants. But a World Economic Order where the US imposes it's hegemony on the rest of the World-System is not the only option and it may not be the best for any particular country.

In this post, I will create future paths for the development of Mexico based on different assumptions about possible Geopolitical Alignments. First, there is some history here between Mexico and the two Trump Administrations. In 1994, the US signed the North American Free Trade Agreement (NAFTA), but the impetus for free trade started in the Reagan Administration and is a central assumption of Neoliberalism. In 2017, with the start of the Trump I Administration, NAFTA was renegotiated into the United States-Mexico-Canada Agreement (Trump thought NAFTA was a "bad deal"). Now, in the Trump II Administration, the United States-Mexico-Canada Agreement (that Trump negotiated in 2017) is itself a "bad deal" and Trump thinks that the US is being treated very "unfairly". In the future, trading partners might no longer want to deal with the US and a US Republican party that can't decide whether Neoliberal free trade is a good or bad thing.

Currently, Mexico has an important role to play in the Globalization of its trading partners (CN, CA and US) but does not exert much control over the system (here). Future Geopolitical alignments, to include giving up on the World-System, might be one of the the following (presented visually in the time plot at the beginning of this post):  

• BAU [119.6 < AIC = 124 < 128] The Business as Usual (BAU) model is not a bad option (you can experiment with it here--see the bootstrap confidences intervals for coefficients below). It would essentially involve Isolationism and would insulate Mexico from US bullying tactics.
  
  
• LAC [73.36 < AIC = 131.5 < 170.1] The Latin American Regional (LAC) Alignment would direct Mexico to trade with it's Latin American Neighbors. It would not mean isolation from the World-System but rather Latin American Integration or a confederation of Latin American countries that would interface with the World-System (an unrealized idea that goes back to the 19th Century). In the MXL20 model, it would result in a steady-state after 2040.
  
  
• RW [38.14 < AIC = 48.06 < 57.18] The Random Walk (RW) model would open Mexico up to all types of shocks from the World-System, with Mexico becoming a Small Country, possibly dominated by some other World hegemonic leader. In the short-run (year-to-year) it is not a bad description of 20th Century Mexican history as one damned thing after another.
  
  
• W [69.96 < AIC = 91.55 < 104.3] Hierarchy Theory would argue that linking Mexico to the World System would be the best way to control growth, environmental problems and unemployment (see the Measurement Matrix below for the MX1, MX2 and MX3 state variable components). For Mexico, such a linkage would mean Degrowth after 2040.
  
  
• US [104.7 < AIC = 112.8 < 119.5] Hegemony Theory would suggest that linking to the Hegemonic World Leader (the US, in this case) would be the best strategy for a Semi-peripheral country such as Mexico. The US and Mexico have been strengthening ties (off and on) over the last three decades, but the Trump Administrations seem intent on severing the relationship. For Mexico, Hegemonic linkage would also mean Degrowth after 2040.
  
  
• CN [103.2 < AIC = 116.5 < 129.1] Mexico has also had a history of strengthening relations with China. If the US cuts Mexico free, China may well move into the Geopolitical vacuum. Of the choices uncovered by the MXL20 model, linking with China would be the worst and would lead to almost immediate collapse. The reason is the predicted collapse of the CN21 Model (to be covered in a future post).
  
  
• TECH1 Productivity [63.11 < AIC = 102.8 < 135.3] Mexico could also choose to improve the technological advancement of their economy. One aspect of Technological change is productivity (output per worker, output per energy input, etc.). Although an attractive alternative suggested by Economic Growth Theory, it would be equivalent to a steady-state in Mexico (see LAC above). 
  
  
• TECH2 Efficiency [81.42 < AIC = 130.8 < 160.6] Another aspect of Technological change is efficiency, for example, decreasing energy use per unit of GDP. In Mexico, increases in Economic Efficiency would not be much better than a Random Walk (RW).

As with the IPCC Emission Scenarios the Geopolitical options for Mexico are not forecasts. The future is unknowable. Using different inputs to the MXL20 model, alternate futures can be extrapolated. We will have to wait to see what direction Mexico actually choses, but shocks from the Trump II administration may push the country into making choices.

Notes

MX1 is the dominant state variable of the MXL20 system with data taken from the World Development Indicators (WDI). The methodology used to create forecasts is similar to the one used by the Atlanta Federal Reserves GDPNow app but produces growth scenarios similar to the IPCC Emission Scenarios. Prediction intervals are generated using a Bootstrap algorithm in the R programming language. The AIC can be used to evaluate the quality of models but does not determine which model provides the best forecast. An explanation of Dynamic Component Models (DCMs) can be found here.

The MX1 state variable was created from the following weighted indicators (the first row of the Measurement Matrix) and explain 98% of the variation. 

The first six indicators in standard scores are taken from the World Development Indicators (WDI). KOF = KOF Index of Globalization, EF = Ecological Footprint, HDI = Human Development Index. The second two components: MX2=(0.892 EF- 0.34 LU - 0.22 HDI) and MX3 = (0.847 LU - 0.305 GDP) describe Environmental and Unemployment Error Correction Controllers (ECCs).

You can run the MXL20-BAU model here. The bootstrap confidence intervals for coefficients are:

You can change parameters in the System Matrix (F) in the MXL20 BAU model to any number you want, but the ranges presented above would not be too extreme and would have reasonable probability values.

IPCC Emission Scenarios

Most of the IPCC Scenarios seem to produce a steady state around 2100 (after controlled growth or Degrowth) but there are some outlier scenarios that seem to grow forever. Te MXL20 BAU model is stable and would eventually also reach a steady state (well after 2100).