WHAT ARE YOUR EXPECTATIONS FOR THE NAFTA TALKS?Fri, 12/01/2017 - 14:18
Mexico can pride itself on having the largest number of trade relationships in the world, with a total of 46. Yet, one of the country’s most important FTAs in terms of trade volume now hangs in the balance due to the protectionist policies pursued by the US administration. Since the largest export destination for Mexican goods is the US, changes in trade conditions brought about by a renegotiation NAFTA could have a deep impact in the Mexican economy.
NAFTA allowed maquilas in Mexico to supply to each other and to be supplied to by Mexican companies, generating a synergy in the manufacturing sector and convenient conditions for the introduction of more foreign manufacturers. In my opinion, it is impossible for companies operating in Mexico to move their manufacturing back to the US due to prohibitive costs. I asked some of our main lessees whether they would move their operations back to the US in the case of a negative outcome for NAFTA and everyone answered “no,” even if border adjustment taxes were implemented. While NAFTA is not a minor problem, it will not impact the sector as badly as some fear because the US government wants to increase its exports. A shaky relationship with the US, on the other hand, did impact the generation of new deals but even that impact was limited
NAFTA allowed maquilas in Mexico to supply to each other and to be supplied to by Mexican companies, generating a synergy in the manufacturing sector and convenient conditions for the introduction of more foreign manufacturers. In my opinion, it is impossible for companies operating in Mexico to move their manufacturing back to the US due to prohibitive costs. I asked some of our main lessees whether they would move their operations back to the US in the case of a negative outcome for NAFTA and everyone answered “no,” even if border adjustment taxes were implemented. While NAFTA is not a minor problem, it will not impact the sector as badly as some fear because the US government wants to increase its exports. A shaky relationship with the US, on the other hand, did impact the generation of new deals but even that impact was limited.
The uncertainty generated during this period has scared US companies in many sectors. Our US market, which represented over 80 percent of our business, is now closed. Companies that are already working in Mexico are safe and growing, albeit slowly. New businesses, on the other hand, are reluctant to enter the state. I expect the NAFTA renegotiation to result in a win-win for all parties. It would also be beneficial to NAFTA’s three members to extend the agreement to the rest of Central America. At this point it is necessary to improve the quality of life in all regions instead of building walls among countries. Mexico is in a good position to lead Central America and increase trade across the region. This is the time to open borders.
Our industrial centers in Ensenada, Tijuana, Tecate and Mexicali allow us to be close to the hubs in Los Angeles and San Diego. This whole region gets much attention from aerospace companies and they trust in the economic development potential of Baja California. There is currently a lot of uncertainty generated by all these conversations around the renegotiation of NAFTA, but as of today there is nothing tangible to address. As an aerospace industry, we have to be vigilant of any political or commercial changes but we need to take care of other issues that are more related to our daily operations. We need to focus on our performance and let our Federal and State authorities handle political and economic issues. We just need to make sure that the government takes into account our concerns specifically when it relates to NAFTA.
ÁNGEL DE LOPE
The renegotiation of NAFTA can bring many benefits to manufacturers in Mexico. In a worst-case scenario, trade will continue as it is. The reason is that the US lacks the manufacturing infrastructure to replace whatever they are manufacturing or importing from Mexico in the short term. Acquiring this infrastructure will take the US many years during which demand for these products will not diminish in any way. Furthermore, once they acquire the facilities and warehouses they will need workers to man them, which in the US come at higher costs. The best outcome for NAFTA’s renegotiation will be for all three members to share best practices because some practices in Mexico can improve manufacturing conditions north of the border and vice versa.
A worst-case scenario imagines a cancellation of NAFTA but even under these circumstances the results will not be as bad as many expect them to be. If NAFTA were to be canceled, Mexican exports to the US would be levied a 4 percent tax with the exception of pickups, which would be taxed at 25 percent. However, we now know that NAFTA will not be canceled but renegotiated which might be a beneficial for Mexico. It is often said that there is a trade deficit between Mexico and the US. We expect that the renegotiation of NAFTA will allow the US government to fully understand the relationship between both countries’ manufacturing sectors and how they complement each other.
NAFTA and other trade agreements helped Mexico position itself as a commercial powerhouse by significantly opening borders and simplifying commerce. This made the country an attractive destination for parts manufacturing. But the ease with which these can be exported limits any interest in completing the supply chain. Brazil, on the other hand, has limited trade policies and thus had to invest more heavily in the development of an entire internal supply chain for the construction of Embraer. As part of NAFTA, Mexico entered the global supply chain, allowing it to become a top aerospace parts supplier for the US but there is still room for growth.
While the agreement needs to be reviewed as it is over 20 years old, in my opinion it is here to stay. During this long period, the market changed considerably and new technologies have entered the picture. It is time to adapt the treaty to the current state of the industry and world commerce. I expect the renegotiation to lead to a stronger and more beneficial agreement for the three countries and continue promoting the opportunities the free trade agreement provides. What we can expect is an efficient negotiation between the three countries.
The manufacturing sector will benefit from a revision of NAFTA and an improvement of its security provisions. Any revision must ensure and enforce cargo inspections across the entire Mexico-US border to prevent the introduction of contraband. In Nogales, which has a modern customs office, cargo is inspected by US Customs and Border Protection much more quickly than at other border crossings thanks to modern technology. This allows companies in Nogales to increase their output and even save up to US$1 million a year. Other areas that need to be addressed are information and technology sharing across borders.