News Article

New Trade Environment Demands Further National Development

Thu, 12/06/2018 - 11:04

After over a year of negotiations, the new USMCA treaty was signed by Former President Enrique Peña Nieto, US President Donald Trump and Canadian Prime Minister Justin Trudeau. Despite uncertainty in the automotive sector due to changes in rules of origin, the aerospace sector was mostly unaffected, according to Luis Lizcano, Director General of FEMIA.

“Even though we expected slower growth in the industry’s production and export results due to the NAFTA renegotiation, we experienced quite the opposite,” said Lizcano during the first panel of Mexico Aerospace Forum 2019 held at the Sheraton María Isabel hotel in Mexico City. As moderator, Lizcano opened the discussion highlighting the growth in aerospace exports of US$1 billion for a total of US$8.6 billion in 2018.

Luis Aguirre, President of the National Council for the Maquila Industry and Export-oriented Manufacturing (INDEX), said no big changes were made to regulations focused on the aerospace industry moving from NAFTA to USMCA. “There are more advantages because the new treaty gives more certainty to trade, strengthening customs and information exchange,” he said. “Paperwork on certifications of origin was also simplified to expedite operations.”

This, however, does not mean the industry is free of turbulence. “USMCA will reconfigure the supply chain,” said Antonio Velázquez, Director General of Aeroclúster of Querétaro. Approximately 80 percent of Mexico’s exports go to the US, so Velázquez said companies will have to be very smart in keeping their competitiveness and operations. “Traceability will also be very important under the new treaty. Compliance with rules of origin will be stricter, demanding companies increase the technological content in Mexican production.”

Aguirre also mentioned that the only dark cloud remaining after the signing of USMCA was the lingering tariffs on steel and aluminum imports implemented by the US. Even though these were used as a negotiation tactic by the Trump administration to force Mexico and Canada to adopt US terms, the tariffs have not been lifted. Both Peña Nieto and Trudeau urged the US government to address the issue during the signing ceremony but Trump said this issue will be resolved separately with each of its partners.

Nevertheless, René Espinoza, President of the Chihuahua Aerocluster does not see this as such a grave problem for the industry. “Mexico imports raw materials that are later transformed and exported once again to the US, which minimizes the impact of steel tariffs,” he said. “There has been a slight impact in sourcing costs but most of the certified mills for aerospace production are in the US anyway.”

Regardless of the outcome, USMCA negotiations did shine a light on Mexico’s dependence on the US and Canada regarding exports, which raised the question of whether the country could diversify its operations and participate in more global markets. “There has always been an opportunity for diversification and the CPTPP has opened even more doors for the country,” said Aguirre.

According to Espinoza, the country is already starting to diversify its operations and even though Mexico’s aerospace industry is still young, global markets like Europe are already paying attention to Mexico as an important manufacturing hub. “The USMCA negotiation was a perfect launching pad to generate more interest from other international regions,” he said.

Panelists agree, however, that more is still to be done to boost the country’s position and the government has a major role to play in this process. “Participation of the federal government is the best way for the industry to grow,” said Espinoza. “Unlike the automotive or electronics industry, if the government does not participate, there will be no development.” He highlights the cases of Brazil and Quebec, where government participation was key to creating two of the largest OEMs in the industry: Embraer and Bombardier. “Once the private sector and the government decide to create a company, that is when the industry can truly take off,” said Velázquez. “That is what we need right now in Mexico.”

Before reaching that point, the country must strengthen its supply chain and keep betting on talent to support manufacturing and technology development processes. Just like in other industries, the country has been very successful in attracting transnational companies. Now, it needs to trust the national industry. “There should be more fiscal incentives for national players and support for SME growth,” said Velázquez. “Participation in defense programs is also critical for the industry, because it will open the door to a whole new world of projects and technology.”

Aguirre stressed the importance of specific government involvement in key axes. “The new Minister of Economy, Graciela Márquez, has vowed to increase local content in Mexican exports,” said Aguirre. “That can only be achieved through supporting programs in education, financing and training for national players.”