No Need for Panic Over NAFTA RenegotiationWed, 11/01/2017 - 15:07
The North American Free Trade Agreement (NAFTA) was the primary reason for the boom in Mexico’s maquiladora industry. Since the agreement was ratified in January 1994, automotive and aerospace manufacturers have found a home in Mexico’s Bajio region. Incentivized by the country’s proximity to the US, low costs and experienced labor, more and more OEMs including Volkswagen, Audi, Ford, GM, Mazda, Honda, Toyota and Kia have set up manufacturing plants in the key states of Puebla, Nuevo León, Aguascalientes, Guanajuato, Querétaro and San Luis Potosí. The states have been rewarded by double-digit growth.
But with the inauguration of US President Donald Trump in January 2017, doubts began to surface about the future of industrial development. Much of the new president’s rhetoric during the campaign process revolved around Mexico, with pledges that included the construction of a wall to keep out immigrants and the renegotiation of –- or an end to the US’ participation in –- the NAFTA treaty. As a result, in the days immediately preceding the presidential inauguration in January, the Mexican peso reached a record low of almost MX$22 against the dollar.
This, says Juan Francisco Torres Landa, Partner at global law firm Hogan Lovells, is not a fair reflection on how the US-Mexico relationship will unfold. Torres Landa has more than three decades of experience practicing corporate law in Mexico. The majority of his career was spent at 65-year-old local legacy firm Barrera, Siqueiros y Torres Landa (BSTL) until it merged with Hogan Lovells in 2014, meaning he has extensive corporate experience on both sides of the border. Torres Landa’s article The Changing Times: Foreign Investment in Mexico was published in the New York University Journal of International Law and Politics and has since been cited in various publications in relation to NAFTA.
“We are very bullish that hard facts and sound economic policies will outweigh any negative perceptions of the industry,” he says. “In the months following the election we have already witnessed the checks and balances in the US working as they should, which has restored a lot of investor confidence in Mexico.” Both the judiciary and Congress have stepped in to curb some of the US president’s more controversial policies from becoming law, and as of late June 2017, the Mexican peso regained some strength, reaching highs around MX$18 to the dollar.
This is aided by the dissent from Donald Trump’s own party. Republicans are traditionally defenders of free trade and Torres Landa believes there will be a great deal of resistance to any attempt to withdraw from NAFTA. The agreement greatly benefits the agricultural business in the US Midwest as Mexico is the third-largest consumer of US corn, soy, pork, dairy and beef products, an export market worth US$18 billion alone in 2016. “This market cannot be replaced for the US because the US producers are able to export them by land, which is relatively easy,” explains Torres Landa. Mexico is the US’ thirdlargest trading partner, with US exports to Mexico totaling US$262 billion in 2016 and supporting an estimated 1.2 million jobs in 2015, according to the US Trade Representative.
The mounting evidence of the relative unpopularity of the president’s Mexico-related policies within his own party spurs Torres Landa’s confidence in the state of the industrial sector in Mexico, which has largely been buoyed by NAFTA and the country’s proximity to the US. More than this, one condition of the renegotiation of NAFTA is that all three countries must agree on the terms – if there is even one holdout, the agreement will not pass. “It is highly unlikely that US legislators will allow the complete revocation of NAFTA so either the agreement will be favorable to all parties or it will remain as it is currently,” he says.
But the renegotiation of NAFTA can be seen as a positive development, says Torres Landa. “Ultimately, the agreement is 23 years old and there are now a lot of new trends that were not accounted for in the previous agreement, such as e-commerce,” he says. There is a specific need for negotiation, even for Mexico, especially in light of the newly opened energy sector. “The current NAFTA agreement eliminated energy due to the constitutional restrictions in place in Mexico,” he explains. “Now the market is open to private investment, the inclusion of this industry could be extremely beneficial for all parties.”