US-Mexico-Canada Agreement (USMCA) launched- What is in it for Mexico?

July 03, 2020 11:24 AM

The impact of pandemic on the economies of the three is going to be severe and will test the resolve of USMCA partners; not just among them but also with other trading partners.

President Trump signed US-Mexico-Canada Agreement (USMCA) in January 2020.President Trump signed US-Mexico-Canada Agreement (USMCA) in January 2020.

By Ravi Bangar

“¡Pobre México! ¡Tan lejos de Dios y tan cerca de los Estados Unidos!” (Poor Mexico, so far from God and so close to the United States!

This phrase is attributed to Porfrio Diaz, a Mexican President of the 19th century. It is often used to illustrate how complicated Mexico’s relationship with its powerful neighbour to the north is. He was a controversial figure in the Mexican history and dominated political scene for 35 years (1876 until a political revolution unseated him in 1911).

When he came to power, the government was in debt and had very little cash reserves. Therefore, he enthusiastically encouraged investment by foreigners. Conditions were made so advantageous to the investors that Mexican industries and workers alike suffered. He was responsible for the influx of foreigners to build railroads and bridges, to dig mines, and to irrigate fields. Mexico’s new wealth, however, was not distributed throughout the country; most of the profits went abroad or stayed in the hands of a very few wealthy Mexicans.

He died in exile in France and is buried in Paris. There have been several unsuccessful attempts to return his remains to Mexico since the 1920s.

Partly due to his lengthy tenure, the Mexican constitution limits a president to a single six-year term with no possibility of re-election, even if it is non-consecutive.

No borders between countries are usually easy: old territorial disputes [The Mexican-American War from April 1846 to February 1848) stemmed from the annexation of the Republic of Texas by the U.S. in 1845 and from a dispute over whether Texas ended at the Nueces River (the Mexican claim) or the Rio Grande (the U.S. claim)], national security problems, trade and other variables often create difficult relationships in many cases. But if the neighbour is a sole superpower also used to impose the dance moves, it is even more complicated to do the Tango with.

In the 21st century, Trump called Mexicans murderers, rapists, criminals. He said will build a “beautiful wall” and they will have to pay for it. At the same time called for renegotiations of the North American Free Trade Agreement (NAFTA) with the threat that if the United States did not get what it wanted, it will abandon.

Though Mexico is a trading partner to more than main 50 trading countries, with several FTAs with Europe, North and South America as well as Africa despite this, more than 75 per cent of Mexico’s exports are to the US, focusing on industries such as automotive, electronics, clothing.

Mexico has a large diverse economy, the second-largest economy in Latin America. It has a current GDP of US$2.7 trillion and has been growing at an annual average of 2.6 per cent for the past 20 years. Mexico is an upper-middle-income G-20 and OECD member with a per capita GDP of US$10,405.

Mexico joined GATT (founded in 1947) only in 1986. It was the largest Western nation outside the GATT. Membership in the GATT had been a controversial issue in Mexico for many years. Mexican manufacturers and labour unions opposed entry into the GATT on grounds that the nation’s economy was too weak to survive an influx of foreign-made goods. In 1979, the government negotiated terms to join the GATT, but President Jose Lopez Portillo decided against entry at the last minute in 1980.

In 2018, Mexico was the third-largest trading partner of the US after Canada and China. Mexico is the first or second-largest export destination for 27 US states. That is the expanse of Mexican trade relations deep inside the US. Top US destined product exports include electronics, vehicles, fuels, minerals, plastics, clothing and machinery. In addition, Mexico is the second-largest agricultural export market for the US and imported US$19.5 billion worth US agricultural products in 2018.

In 2018, Mexico ranked 12 both in merchandise exports and imports. Mexico is also a net exporter of services. Mexico’s main destinations of merchandise exports are the US (76.5%), EU (4.7%) Canada (3.1%). As for imports, the main origin is the US (46.6%), China (18%), EU (11.4%), Japan (3.9%). The large number FTAs Mexico has entered into led its market being one of the most competitive and open in the world. Mexico’s applied MFN tariffs for agricultures are 13.9% and for non-agriculture(manufactured goods) are 5.8%.

In my experience at Geneva as India’s DPR to the WTO(2006-11), found that Mexico took a keen interest in participating actively in all multilateral and plurilateral agreements as well as the working of the Secretariat. Firmly believing that to derive maximum advantage of the system it is essential to be part of the rulemaking and standard-setting and not just be a passive, reactive voice.

Bit curiously for Indian negotiators of trade in services, Mexico showed keen interest in the Services Council, its Committees and other subsidiary bodies. Well, this was given the fact that Mexico’s information technology (IT) sector is well established. Due to Mexico’s proximity to the US, it has made manufacturers shore operations to the country to cater to US demand. Conglomerates such as GE, IBM, Oracle, and Intel have several offices, HR functions, and innovation centres in Mexico. The industry is reported to be pulling more than US$12 billion a year with around 4,000 companies across the country contributing to the industry. Major IT industrial clusters are located in the capital Mexico City as well as Guadalajara and Monterrey. Jalisco state is home to 40 per cent of Mexico’s IT industry and a well-educated workforce.

The Mexican trade negotiators are engaging, suave, well-trained professionals. This could perhaps be rooted in the fact that they come from Latin America and the country has the significant web of FTAs (14 with 50 countries at the last count). With this, Mexico has access to 60% of world’s GDP. The benefit of this has been the proactive approach to FTAs including at Doha at the launch of the Round in 2001.

In those days on trade liberalisation India was still considered to be the tentative, reluctant, argumentative partner. It was often cited that on Doha Development Agenda India was the last one to sign on and at the very fag end.

The hindsight may now justify to some extent India’s less than enthusiastic approach to the DDA, rooted as it was in lack of sincerity of those pushing it was not without any basis.

It may be recalled that the Round was launched in the aftermath of 9/11 attacks, out pouring of tremendous sympathy for the US, new commitments to a “better and equitable world”, solidarity with developing and least developed countries, promises of a “Golden Era of Trade for Development” which for the most proved a mirage after marathon negotiations and somewhere down the line became an instrument for seeking market access in developing countries. No wonder it collapsed at the WTO Ministerial Conference in Nairobi in 2015. Financial Times of the day headlined,“The Doha round finally dies a merciful death” and went on, “After a death scene so drawn-out it would have done credit to a Victorian melodrama, the curtain has finally come down on one of the longest-running farces in global policymaking. The so-called Doha round, the programme of multilateral trade talks that started in 2001, was last week declared dead by World Trade Organisation members after nearly a decade spent comatose.”Late Murasoli Maran, India’s then Commerce Minister who agreed in Doha must be smiling in the heaven! Saying, “I told you so.”

While Mexico continued participation in the DDA negotiations, its trade negotiators also kept themselves busy by continuing negotiations and sewing upseveral important bilateral and regional trade agreements including with Central America, European Free Trade Association, Panama, Uruguay, Japan, Israel, Peru, Bolivia(replacing an old one), joined the Pacific Alliance.

In 1994, NAFTA created one of the world’s largest free trade zones. The purpose of NAFTA was to remove barriers to the trade in goods and services cross-border, and to increase the competitiveness of all three signatory countries in the global marketplace. It began a phase-out of most tariffs on trade between Mexico, Canada and the United States. NAFTA set rules that allowed for tariff-free trade of goods in which 60 per cent of the manufacturing content originated in North America. It also streamlined border processing and reduced other barriers to conducting business across the border, and established regulations around environmental issues, labour concerns, and intellectual property rights. The trade agreement oversaw an increase in trade in agriculture, manufactured goods, oil and gas and other commodities from approximately $290 billion in 1993 to over $2.56 trillion by 2018. NAFTA significantly boosted the GDP of all three of them.

Enter presidential candidate Trump in 2017 for him this was one of the “worst trade deal ever made”. He promised his cheering followers to renegotiate it.

In October 2018, NAFTA members renegotiated their agreement under a new United States-Mexico-Canada Comprehensive Agreement (USMCA). It was signed on the margins of the G20 Leaders’ Summit in Buenos Aires. It is touted as bringing NAFTA into the 21st century. It also has disciplines on currency manipulation, new IPR protections and chapters on Digital Trade, Anticorruption, and Good Regulatory Practices.

President Trump signed US-Mexico-Canada Agreement (USMCA) in January 2020 and promoted it as a wholesale overhaul that replaced the “NAFTA nightmare.” Canada ratified it in March 2020 and Mexico in June 2019.

The (USMCA) will ensure continuity for manufacturers and agriculture. It will bring many changes. Among them, increases the amount of content for automobiles that must originate in the US to 75 percent. 40 per cent of the local content of automobiles must be manufactured by workers earning on average US$ 16 per hour after 2023. Thirdly, Canada would increase the tariff quotas on the dairy market, allowing the United States to access 3.6 per cent of it. It also lays out new labour regulations and sets rules for digital trade. It will ensure Mexico remains a key trade partner of the US. The deal will also help industries such as automobiles, garment and textiles, energy, mining and agriculture, streamline customs clearances. This will be done by reducing costs and implementing a single-window system.

While the USMCA has come into force at a time the coronavirus has all three countries mired in a deep recession even at such an early stage of the agreement, the threat of disputes is exposing cracks in the agreement. The areas which could throw up challenges to the new agreement could surface including on account of national security tariffs on imported steel and aluminium by the US, energy sector due to Mexico’s recent actions to protect PEMEX, the state owned petroleum company and Mexico’s failure to approve U.S. biotech products.

President Andrés Manuel López Obrador’s (AMLO) 2018 landslide victory was a surprise to many but was hailed as Mexicans’ response to political sleaze, soaring violence and poverty. That they had voted for change and to reject the only two parties to hold the presidency since the end of one-party rule in 2000. However, AMLO’s actions like the cancellation of the Mexico City airport, the biggest infrastructure project in Latin America, dampened the investor interest. His handling of COVID 19 has also invited criticism as Mexico reported 28,510 fatalities, second highest in Latin America after Brazil. The IMF projects a 10.5% contraction this year, while the UN says 17 million Mexicans could be living in extreme poverty by year’s end, up from 11 million now. Amidst all this, the Mexican government allowed more businesses to reopen in parts of the country despite continued high infection and death rates.

In 2019, the United States, Mexico’s largest trading partner, grew 2.3 percent rate, for the first time in a decade, the Mexican economy contracted by 1.6 percent. As of February 2020, private investment had fallen for 13 consecutive months.Remittances are one of Mexico’s major economic drivers, totalling more than US$36 billionlast year, an all-time high. Indeed, remittances sent south across the border account for roughly 3% of Mexico’s Gross Domestic Product.

The predicted economic contraction in Mexico due to the Covid-19 pandemic is expected to be greater and longer than any previous economic crises. Unlike in the past crises, the “escape valve” for Mexicans to cross the border will not be available as the northern neighbour itself fights record joblessness.

The impact of pandemic on the economies of the three is going to be severe and will test the resolve of USMCA partners; not just among them but also with other trading partners.

Following AMLO’s victory Argentina’s former president and present Vice President, Cristina Kirchner had tweeted: “Andrés Manuel López Obrador represents hope, not just for Mexico but for the entire region.” Well, Mexico, Latin America and the world is watching.

(The author is Former Ambassador to Colombia and Ecuador, High Commissioner to Cyprus, Deputy Permanent Representative to the WTO and Deputy High Commissioner to Singapore. At the Ministry, he headed Multilateral Economic Relations, West Africa and East &Southern Africa Divisions. The views expressed are personal.)

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