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Analysis

Treaty Talks Expected to Bolster Mexico's Competitiveness

Fri, 09/01/2017 - 09:46

Mexico is the quintessential manufacturing hub and companies have leveraged its advantages to minimize production costs and optimize profitability. A natural location, however, would be nothing without the proper business connections. Investors are confident NAFTA negotiations will result in better conditions for Mexico

Mexico has, according to the Ministry of Economy, 12 freetrade agreements (FTAs) with 46 countries, 32 investment promotion and protection agreements with 33 countries and nine partial-scope economic complementation agreements. Its commercial network connects the country with players such as the US, Canada, the EU, Latin America and Japan, representing over 1 billion potential customers and 64.9 percent of the global GDP, according to ProMéxico. Mexico is also a member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation and the Organization for Economic Cooperation and Development.

All these commercial agreements bring many benefits to potential investors in terms of low export and import tariffs. However, they also entail certain obligations. Companies must have a fixed percentage of local content in their production, a regulation that is commonly known as rule of origin. In the automotive industry, depending on the export destination and the applicable FTA in the region, corporations must have between 22 and 65 percent of local content in their products. NAFTA regulations require regional content of 62.5 percent for vehicles for 15 passengers or less and 60 percent for vehicles for 16 passengers or more.

Without a doubt, out of all its FTAs, NAFTA has been the most beneficial to Mexico. According to data from AMIA, between January and July 2017, 76.4 percent of all light-vehicle exports were destined to the US. However, NAFTA has also allowed North America to become a strong automotive hub, capable of competing against the European market and the growing Asian forces. Óscar Albin, Executive President of INA, says “(Canada and the US) need Mexico’s low-cost manufacturing because it is the only way for North America to remain competitive internationally. Europe has low-cost partners such as Turkey and Tunisia, while Japan and South Korea are supported by Thailand, Malaysia and the Philippines.”

President Donald Trump’s threats about the US pulling out from NAFTA might not come to fruition but the agreement is nonetheless being renegotiated. The first round of talks started in August in Washington, D.C. Representatives expect seven rounds of negotiations, scheduled every three weeks to be finalized before the end of 2017. According to El Financiero, one of the Mexican negotiators stated this was planned to avoid an overlap with Mexico’s presidential elections in 2018. Among Trump’s promises regarding NAFTA was the implementation of a 35 percent tariff on automotive exports entering the US, which was later transformed into a border adjustment tax that would favor US exporters while charging companies importing products to the US. Both of these initiatives have found resistance from investors and members of the Democratic and Republican parties but Automotive News reported in July 2017 that the border tax adjustment proposal might still be pursued, impacting production costs and final prices for the end consumer.

Rules of origin might also be revised during NAFTA negotiations but AMIA and its counterparts in Canada and the US are already lobbying to keep regulations unchanged. “NAFTA represents a success story and we should not be messing around with important topics such as rules of origin,” says Eduardo Solís, Executive President of AMIA in an interview with El Financiero in May 2017. “Our members feel very strongly that rules of origin are not the tools to use to re-shore jobs into the US,” said Ann Wilson, Senior Vice President of Government Affairs for the Motor and Equipment Manufacturers Association in an interview with Reuters in July 2017.

One of US Trade Representative Robert Lighthizer’s objectives is to ensure rules of origin favor material sourcing from the US. The goal is to decrease the US$74 billion trade deficit the US has with Mexico and limit the entrance of Chinese auto parts to the region. However, a more stringent limit than the 62.5-percent local content regulation already in place would force automakers to go straight to paying the added tariff, according to a statement from Charles Uthus, Vice President for International Policy of the American Automotive Policy Council issued in July 2017.Although negotiations are barely under way, investors are confident that the outcome will suit all three nations. Many of MAR 2017’s interviewees are optimistic about the talks and 42.9 percent of them say Trump’s positions will have a moderate impact on Mexico’s development. In fact, there could even be a unforeseen benefit for Mexico. “Changes to Mexico’s commercial relationship with the US will push the country out of its comfort zone and bring new opportunities to local industry,” said Adonai García, Managing Director of KWH Mirka Mexicana.