USMCA: Chance for Mexico to Integrate Metals Value Chain

Q: Will USMCA have an impact on the Mexican mining industry?

A: The USMCA does not include mining explicitly as commodities are free of tariffs. It must be noted that the treaty, except for some digital commerce aspects, is not a liberalizing agreement. In fact, there are certain aspects of USMCA, like those referring to the automotive industry, that are rather restrictive. These aspects force value chains to become integrated regionally. Inputs have to be procured within the USMCA region as the treaty favors the trilateral market. Even if mining is not overtly included, the industry is at the base of the economy and anything that promotes regional trade will result in a boost for mining. The infrastructure sector is mineral intensive and even digital commerce is tied to mining.

An important difference between NAFTA and USMCA are the provisions for protecting investments against the state. USMCA Chapter 14 replaced NAFTA Chapter 11. The latter protected investors for the most part, while the former only protects five sectors: oil, gas, electricity, infrastructure and communications. There is a three-year transition period in which NAFTA Chapter 11 can still be used but after that, a Canadian miner in Mexico will not be able to use USMCA to protect its investment. The company will have to go to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to protect its investment.

Q: Can the Mexican mining industry use USMCA to climb up the minerals value chain?

A: It would be beneficial to the Mexican economy if the mining sector were to accomplish a situation where it participates directly in all sectors of the economy. A mining company that only exports copper concentrates has less of an impact than one that is integrated downstream, selling its product to another company in the same locality that produces copper wire. USMCA can push Mexico’s industry in that direction. For example, in the case of Bombardier, the aircraft manufacturer, miners can integrate their business in such a way that they supply other companies in Bombardier’s supply chain. Ideally, the company that produces the fuselage for the airplanes will manufacture locally and will also acquire its raw materials locally. Today, value chains have expanded and the fuselage manufacturer may be located in Germany, from where it sends its products to Bombardier’s factory in Queretaro. Mining has the challenge to contribute to the industrialization of the regions where it operates. Mining clusters are a good way to achieve this and they can use USMCA as a leverage tool to this end.

Q: What major changes in labor relations will USMCA bring to the Mexican mining industry?

A: One has to look at the developments in Mexico during the last eight years. They are a preamble to the changes USMCA will usher in. The 2012 Labor Reform was significant and the Outsourcing Reform was also key. Right now, outsourcing is the center of potential prohibition in Mexico. Finally, the reform that consolidates freedom of association implied a revision of more than 500,000 collective bargaining contracts that exist in Mexico. They have to undergo a legitimation process and be homogenized with the labor reforms, which also include a new system of labor justice in which arbitration bodies will be replaced with labor courts.

In the final stage of USMCA’s negotiations, Mexico committed to a rapid mechanism for labor conflict resolution. This allows a complaint made in the US or Canada regarding alleged violations of labor rights to result in in situ verification of operations. For instance, a mining company that has several sites can get just one complaint regarding one specific site and that can trigger the mechanism and result in consequences such as customs stopping the company from exporting its concentrates. There is a real consequence linking foreign trade and labor conditions.

Q: What are the main risks Canadian junior and exploration companies evaluate when deciding whether to invest in Mexico?

A: Security is the main risk. Juniors operate in far-flung regions. Security is a transversal issue in Mexico and it affects the exploration sector in mining markedly. Also, since their activities are capital intensive, having a protracted ROI, Mexico’s fiscal framework is something they consider carefully. On the one hand, authorities do not let Juniors deduct pre-operative expenses immediately and that has hindered exploration in Mexico greatly. On the other hand, VAT return is extremely challenging in Mexico. Juniors work with service providers that may or may not be in good standing with tax authorities. Fiscal symmetry laws stipulate that if you pay VAT from an agent that did not pay it, then the Mexican authorities will not refund it. The final link in the VAT chain needs to police the integrity of the whole process and this is almost impossible for most companies to do. But even if the VAT chain is clear, the refund process is very challenging and ends up disincentivizing investment.

Canadian Chamber of Commerce (CANCHAM) is the voice of Canadian business in Mexico. It was founded in 1982 to represent Canadian business interests in Mexico and to promote trade and investment between Canada and Mexico.