Mexico Pushes for a Successful Trilateral NAFTA
Mexico Pushes for a Successful Trilateral NAFTA
Since the end of the twentieth century, when the trade of goods and services quickly expanded worldwide, Mexico has secured several trade agreements with over 45 countries, the North American Free Trade Agreement (“NAFTA”) being the most important one. As part of President Trump’s agenda, the U.S. government initiated in May 2017 the renegotiation of NAFTA with the objective of increasing economic growth for the U.S.1
While it is true that NAFTA is a 23-year old agreement among Canada, the U.S. and Mexico that needs some modernization in several chapters, the agreement has vastly benefited all three parties. Companies from these countries have enjoyed lower overall supply chain costs thanks to NAFTA, which is why it is imperative that the agreement is not terminated but improved. Failure to do so will dramatically increase overall costs, resulting in a less competitive North America region facing its efficient counterparts in Europe and Asia2.
The U.S. is known for isolating its industries throughout modern history3; hence, given the current renegotiation opportunity, it is looking to protect its automotive and agricultural industries from a lower cost Mexican competition. This is particularly important for Mexico’s Ministry of Economy (“MME”), key player in this negotiation, given that approximately 80% of the country’s exports are destined for the U.S. (Mexico is the fourth largest automobile exporter in the world).
Additional to the pure trade effect on all three countries due to potential tariffs, the termination of NAFTA would further cause the depreciation of the Mexican Peso against the U.S. and Canada’s currencies, positively affecting the supply chain of cross-border companies in the short term, before the inflation normalizes the temporary effect4.
Finally, several U.S. economists have predicted that if NAFTA is ended, the U.S. economy would sow its growth so much that it could even enter a recession given the immense benefits from the agreement5. Should this happen, Mexico’s top customer would reduce its purchases, resulting in a direct impact on the country.
The negotiations have concluded four rounds which have mainly served as the introduction of proposals from the three countries. The next stage will be held from November 17th to November 21st in Mexico City with MME’s Chief Negotiator for NAFTA, Kenneth Smith.
Up to the end of the fourth round, Mr. Smith has focused on learning the positions of his counterparts, as well as presenting his own proposals with the goal of modernizing the agreement to better reflect the current economic environment of the North American region2.
In parallel, MME is working closely with the private sector in Mexico to better understand exactly how and the magnitude of the negative effect resulting from an unbalanced outcome from negotiation of NAFTA or from the termination of the agreement. Mr. Smith is particularly interested in having all the details given that modernizing NAFTA and making more inclusive (e.g. include SMEs, allow more competition, enforce gender equality) is critical for the long-term economic prosperity of North America2. By making the agreement more inclusive, not only will the overall supply chain costs be reduced given economies of scale, but also the products and services of the region will increase in value and differentiation versus Europe and Asia.
The coming negotiation rounds will be central since the most relevant items will be discussed multiple times. Given the somewhat aggressive initial postures of the U.S. government in some of these items, probably due to orders from the “Chairman of the Board”, MME’s staff should focus on countering each one of them with data and analysis-backed proposals. Mr. Smith must strengthen Mexico’s and Canada’s positive attitudes towards maintaining and improving NAFTA, so that they can jointly persuade the U.S. Administration with economically and financially logical arguments.
Additionally, MME should focus on emphasizing the importance of long-term viability of the agreement by allowing enough flexibility to NAFTA for continuous revision and improvement from time to time without putting in peril the elimination of the agreement6.
It is imperative that Mr. Smith and his team demonstrate that NAFTA has greatly benefited the U.S. regarding regional trade, and that the deficit of the balance of trade is not uniquely dependent on its regional trade with Mexico and Canada, but mainly on its domestic consumer trade deficit.
A few questions remain regarding the future impact of NAFTA negotiations on supply chain management of companies in Mexico, Canada and the U.S. Would the U.S. jeopardize long-term viability and economic growth for a short-term political success? How will other industries (e.g. aerospace, technology) be affected as the countries further develop?
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In addition to all the actions you recommend for the MME I think there are a couple others that could be undertaken:
1-It is key that the ministry focuses in developing a plan B in case the negotiations don’t go as expected. Mexico should start approaching other countries that could be potentially interested in the excess of supply generated by a negative Nafta. By doing this, the MME would have a better picture of which industries will be less and more undermined. This at the same time can help the MME define its priorities at the moment of their negotiation with the US. (e.g. Car manufacturing exports can be shifted to other countries, but some raw material production may not).
2-The MME should launch a comprehensive plan for Mexican companies to integrate their supply chain within Mexico (e.g a company that sources from US products but produces in Mexico). The plan should have tax incentives and subsidies to encourage adoption. This way, more Mexican and non U.S companies could be incentivized to develop new ventures and more investment in the country could partially replace the revenue Gap generated by the Nafta.
Certainly an interesting topic to discuss especially given the increasingly isolationist environment that we see globally. I would add that albeit NAFTA is fundamentally an economic agreement and it would make sense to focus on the economics and finances of the deal, with the current political climate in the US – other signatories on the deal need to really flex their negotiation muscles and craft a story that is compelling for the current administration. Unfortunately, in my view, the biggest reason why US is wanting to pull out of NAFTA is not for sound economic reasons but rather primarily for political gains. The problem of immigration is intricately ingrained into the debate and decision surrounding this matter. As such, being able to really highlight (as you’ve done here) the real, tangible economic disadvantages to US businesses and employment and presenting that perhaps not directly to the US government but to US companies (who will incur major and direct loss). From there, if positioned well, one would hope that the US companies will be the major mouthpiece and deliver the message to the political leaders. Hopefully with enough leverage and pressure, they will rethink the decision especially since losses will be incurred by all parties – US very much included.
Very relevant article which focuses on one of the many unfortunate outcomes of the shifting political climate over the past few years. Whereas I fully agree that counter-proposals should be presented in a logical manner backed with deep and accurate data analysis, I am at the same time skeptical as to whether or not this will have the desired tangible result. We have witnessed several times how the Trump administration emphasises “alternative facts” and appeals to a sense of patriotism, which I believe cannot easily be overcome by logical reasoning. Additionally, this US president has been elected on a certain mandate to enact protectionist policies in favour of American companies and as such it will be politically hard for the US to digest a solution which falls short of this promise. In addition to your suggestions, I would emphasise the role of Canada and the bargaining power this duo could develop vis-a-vis the US. I am not suggesting Mexico and Canada always have converging interests, but in the current political climate I believe a rational compromise can be achieved more easily through aligning Mexico’s position with that of Canada.
Really interesting article, thanks for writing this! As European citizen, i definitely see and know all the benefits related to a free-trade area. On the other side, i have seen so many industries shifting production from my home country to exploit reduced cost-of-labor prices and favourable taxation schemes. Moreover, we have seen nowadays how the threat of NAFTA forced many companies in the automotive industries to enlarge or to plan new investments in the USA, giving profound and long-lasting benefits to the communities involved. Due to these different side of the same coins, I’m wondering if a new NAFTA agreement is truly necessary or if we should leave the market decide how to allocate capital, resources and profits. I’m truly convinced that overall, the benefit of a free-trade areas more than compensate for the potential losses, but i would love to hear your opinion on this topic.
Great article! I agree that the U.S. will definitely suffer in the longterm without NAFTA. To @Juan A’s point, Mexico is already strengthening its relationship with other countries. Many large corporations are re-structuring and building more globally focused divisions to fast-track partnerships with other countries. President Enrique Pena Nieto recently visited China in order to discuss trade and the Trans-Pacific Partnership accord. With the infrastructure of the Trans-Pacific Partnership already in place, I think Mexico should focus more on China than Canada to capitalize on the growth in China. But, risks for Mexico remain as last year Mexican exports amounted to $374 billion, and more than 80% of that amount went to the United States. For Mexico, the threat of NAFTA’s end will provide the motivation the country needs to diversify [1].
[1] https://www.nytimes.com/2017/10/16/world/americas/mexico-nafta.html
Love the article! As a Canadian, I definitely resonate with Simon’s point about the aligned incentives of Mexico and Canada. A key point; however, is that both countries rely on the massive population of the USA to fuel their respective economies. I am not convinced that the synergies of a Mexican-Canadian only partnership are strong, or overlapping when so much of both countries’ economic longevity is focused on supplying to the US consumer base.
I also agree with the points raised about Mexico’s need to explore alternative trade agreements and strategies outside of the USA. The WSJ just announced today that Canada is exploring expanded trade agreements with China, as a presumed pivot away from reliance on NAFTA. https://www.wsj.com/articles/as-nafta-tensions-simmer-canada-pursues-asia-trade-1512133200
While it is encouraging that many countries still have the political appetite for multi-national trade agreements, I am concerned about the signaling effect of this decision on the probability of a successful NAFTA re-negotiation.