Donald Trump’s arrival to the White House on January 20th, 2017, jeopardized world trade on the whole and, in particular, Mexico’s, given the close ties between our country and the markets of its neighbor to the north. The campaign slogan of then-candidate Trump, “Make America Great Again”, has translated into an isolationist and populist trade agenda, based on an economic nationalism that proposes to rewrite the rules of international trade in benefit if the United States. The explicit threats condemning the North American Free Trade Agreement (NAFTA), clash with the Mexican economic development model, one of whose main sources of growth are exports, and particularly its exports to the United States.
Mexico’s response to Trump’s trade agenda has not been to create barriers or to mirror a protectionist policy, but rather to deepen and strengthen the integration model by updating the NAFTA, as well as aiming to modernize, broaden and negotiate agreements with Latin America, Europe and Asia, so as to guarantee Mexican presence in these markets.
On August 16th, 2017, Canada, the United States and Mexico began renegotiating the terms of the NAFTA, in an environment charged with challenges and obstacles, given the differences in perspective of the governments on the results of the trilateral agreement. While, from the Mexican and Canadian perspectives, the balance of the NAFTA has been a positive one, and the results have exceeded initial expectations, President Trump has called it “a disaster”, rating it “the worst” trade agreement, and blaming it for the US trade deficit as well as for the
Loss of manufacturing jobs in his country. By contrast, on August 20th, 2017, upon the conclusion of the first round of negotiations, Mexico’s Secretary of Finance, Idelfonso Guajardo, pointed out that “the NAFTA has been a categorical success for all its parts”.
The agreement has made the three countries priority trade partners for one another. Canada destines 76% of all its exports to the United States, which supplies 51.3% of its imports. In the case of Mexico, 81% of its exports go to the United States, from which we obtain 46.5% of our total imports. For both Mexico and Canada, the United States is the main export market, and the most important source of imports. In 2017, the United States sent 18.3% of its exports to Canada, and 15.7% to Mexico, while 12.7% of its imports came from Canada and 13.2% from Mexico. This has been the result of profound integration in regional production chains.
Mexico’s response to Trump’s trade agenda has not been to create barriers or to mirror a protectionist policy, but rather to deepen and strengthen the integration model
The NAFTA Renegotiation: Critical Issues
Within the framework of the NAFTA renegotiation process, the United States has put a series of proposals on the table, some of which are geared toward modernization, and other more controversial ones which Mexico has had to consider regardless of the fact that they sometimes work against the interests of all three countries. For the sake of this analysis, we will divide the United States proposals into three groups.
We will first group the proposals we consider unfeasible or “poisonous pills” that threaten to erode the very essence of the NAFTA. This group of proposals includes those such as the so-called “sunset clause” which would require that the NAFTA be reviewed and ratified every five years, thus putting and end to certainty, one of the essential qualities of the agreement. Then, there are the proposals with which the United States seeks to weaken or eliminate mechanisms such as: (1) those aimed toward investor-State dispute settlements (Chapter 11, Section B); (2) those allowing the review of decisions on the application of trade remedies (Chapter 19), and (3) those designed to settle Sate-to-State differences (Chapter 20). If these proposals were to be implemented, it would mean the end of settlement mechanisms for dispute resolution, which are fundamental pillars of the agreement. Another explosive idea is that which would allow for dumping and agricultural subsidy investigations to begin upon the request of producers of a given region, or with a basis on the seasonal participation of a product, something that would impose a barrier to agricultural trade between Mexico and the United States. In the same tenor, the proposal that a motor vehicle must be composed of 85% regional parts and 50% American supplies in order to qualify as American-made, seems like a measure that seeks to kill all negotiation efforts: these are incredibly high levels, in addition to the fact that, while their alleged aim is to favor national production, they go against all regional production logic.
Days after Donald Trump’s arrival to the White House on January 20th, 2017, Mexican President Enrique Peña Nieto announced a plan to diversify Mexican trade
In a second group of United States proposals, we have placed those that seek to weaken integration, thus diminishing the ambition of 1994 NAFTA regulations. Thus is the case of the issues related to the liberalization of land transport services, the temporary entry of business people, and government purchases.
The third and last group of proposals is comprised of ideas that would in fact lead to a modernization of the NAFTA, such as those related to pymes (small and medium businesses), competition, customs facilitation, e-trade, or labor and environment issues, among others.
Faced with the real possibility that the United States may pull out of the NAFTA, Mexico set into motion an intense international trade negotiation agenda with the aim of strengthening its already broad network of 12 free trade agreements with 46 countries, and 8 trade agreements with 6 Latin American countries. Thus our country seeks to diversify its foreign export, import and investment markets.
Days after Donald Trump’s arrival to the White House on January 20th, 2017, Mexican President Enrique Peña Nieto announced a plan to diversify Mexican trade. In order to improve the access of Mexican exports to Latin America, he underlined his interest in strengthening regional integration with our Pacific Alliance (PA) partners –Chile, Colombia and Peru–, as well as in promoting trade negotiations aimed to broaden its Economic Complementation Agreements with Argentina (ACE 6) and Brazil (ACE 53), within the framework of the Latin American Integration Association (LAIA). Better agreements could mean an increase in Mexican exports to Argentina and Brazil, which in 2016 rose to 1 billion, 408 million USD, and 3 billion, 55 million USD, respectively; together, these countries represent barely 11.9% of our worldwide sales. Mexico could diversify its imports of foods such as soy and wheat, which today come primarily from the United States.
Peña Nieto’s government also aimed to finish updating the Global Agreement, the trade pillar of which is the Free Trade Agreement between Mexico and the European Union (FTA EU-MX), in effect since 2000, as well as the European Free Trade Association (EFTA), implemented in 2001. Although between 2001 and 2016, Mexican exports to the 28 member countries of the European Union, grew nearly 250%, going from 5 billion, 641 million USD to 19 billion, 362 million USD, the bloc’s participation in Mexican exports to the world is still low: in 2016, it represented 5.2%, compared to 3.56% in 2001. The FTA EU-MX’s modernization process began in June, 2016, and it is hoped that it will conclude before the end of the presidential term. In February, 2017, those responsible for the negotiation process on behalf of Mexico as well as of the European Union, pointed out that “together, we have witnessed with concern the ascent of protectionism around the world, [which is why] we have accelerated the speed of the negotiations in order to obtain the most benefits within the shortest possible amount of time”
By not withdrawing from the CPTPP, Mexico sent out a clear political signal underlining its commitment to an innovative and cutting-edge trade agenda
On January 23rd, 2017, when President Trump pulled the United States out of the Trans-Pacific Partnership (TPP), Mexico continued working with the other 10 participating countries. With Japan’s leadership, the TPP was relaunched as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed on March 8th, 2018. By not withdrawing from the partnership, Mexico sent out a clear political signal underlining its commitment to an innovative and cutting-edge trade agenda. It also counters the Trump administration’s protectionist trade proposals. In the absence of the United States, Mexico could become the export platform for US companies based in Mexico.
With the aim of countering –at least in political terms– the Trump administration’s unilateral and protectionist trade policy, in June, 2017, Mexico and its Pacific Alliance (PA) partners agreed to negotiate a Free Trade Agreement with Australia, Canada, New Zealand and Singapore, all of whom would join as partner States. The negotiations began in October 2017, in Colombia, and a second round was held in January, 2018, in Australia. Although in 2016, only 1.7% of Mexican exports were destined to the PA, and barely o.47% (1 billion, 778 million USD) to Australia, New Zealand and Singapore, the broad range of initiatives in which Mexico participates, show an openness that is clearly opposed to the temptation to normalize protectionist policies which could elevate costs for Mexico and for the world.
One of the main challenges for Mexican foreign trade is undoubtedly the lack of a national product that would reduce the degree to which our exports depend on the United Sates
The Trump era has forced Mexico to face its excessive vulnerability and its dependence on the US market. The country has laid out an ambitious agenda of trade negotiations in order to guarantee not only its trade policy, but also its national development model. Although it is true that an institutional framework and trade agreements are essential to the feasibility of the Mexican development model based on exports, it is merely a point of departure. After four decades of openness, one of the main challenges for Mexican foreign trade is undoubtedly the lack of a national product that would reduce the degree to which our exports depend on the United Sates, as well as taking advantage of the market opportunities offered by trade agreements already in effect, and those that may be signed in the near future. A positive effect of the Trump era may be that Mexico finally takes a firm step towards the development of exports to other countries and regions beyond the United States, and that it consolidates its relationships in markets that can in fact grow, and that see eye-to-eye on the benefits of integration.