By: Carolina Pocovi, Project Coordinator, ET2C Mexico

The Trump era is an antechamber full of tension and pressure in which the renegotiation rounds of the NAFTA agreement are taking place, which began last summer. In this context, the growing uncertainty regarding what will happen after the renegotiation of the agreement is on the rise and could drastically affect the growth of the Mexican economy if a good negotiation does not materialize.

This is mainly due to two factors: on the one hand, the great economic dependence on our next-door neighbor, and on the other the high degree of competitiveness and growing demand of international markets, since the internationalization process that began in Mexico more than 25 years ago, has raised the standards of commercial competition at an international level.

 

Mexico’s economic dependence with the United States

In order to understand the complexity of this negotiation process, it is necessary to recognize the great importance of the economic relationship between the United States and Mexico, besides being the first commercial partner for Mexico, this relationship is one of the most important in the world, with a trade in goods and services that exceeds half a billion dollars annually. To better identify this phenomenon there are two circumstances: the number of jobs that this commercial flow produces, and the growth of the automotive manufacturing industry.

Speaking of employment, 80% of Mexican manufacturing exports are sent to the United States according to CNN and 1.5 million dollars in goods cross the borders of these countries daily. This data shows that this commercial activity encourages the continued existence of job opportunities related to everyone that converges in manufacturing, which encompass producers, large industries, marketers, logistic companies, transports, customs and more.

But perhaps the most important entry of this activity is the high percentage of exports in the automotive industry because almost half of what is sold to the United States are automobiles. If the agreement that supports the free trade area with this nation breaks down, this industry could be one of the most affected, since tariffs would increase the cost of cars to export. Another scenario that can be seen at the same time are high production costs, since also some of the inputs or auto parts of various models and brands of cars are imported to Mexico to assemble and finish the car in the national territory. That is why this framework would represent a great disadvantage for our country and could take more than one, out of the market.

 

Scenarios for the renegotiation

Based on the 7 rounds carried out by the three members of the treaty, the Mexican delegation has expressed that it is possible to talk about 3 possible scenarios. The first one would be that in the case that the objective of modernizing and renegotiating key aspects within NAFTA materializes, since it has not had a constant update, the pertinent modifications would come into force at the beginning of 2019.

The consequences or possible positive effects of this scenario that is postulated as the most probable would practically be reflected until next year, taking into account that the electoral period can slow the process. All this will depend equally on other factors such as the new presidency of the Bank of Mexico, the exchange rate of the peso against the dollar, and inflation, so that the “new” preferences and commercial benefits cannot be made immediately.

A second scenario is the possible termination of the treaty, mainly by the United States and led by Donald Trump. In this case, a complaint letter has to be submitted and 6 months later the USA would be out of the agreement. Then trade with Canada and Mexico would be governed by the provisions of the World Trade Organization, applying the clause of the Most Favored Nation.

If this happens, there are many doubts and opinions about what Mexico could do with its 80% of exports. If the US is no longer an option, then where? This is where the great challenge lies, since although for a period of time the economy will contract very hard, diversification and the urgent search for new markets is essential. It is a matter of obliging both the Mexican businessmen and the world in general, to adapt to new circumstances and to depend less and less on certain sectors.

The third possible scenario, then, would be a “non-exhaustive” negotiation, in which minor issues are modified and dealt with; emphasizing rules of origin and keeping aside all the other chapters on the agreement that have been a discussion topic in the 3 political agendas. In the latter case, there would not really be a before and after the negotiation rounds, since it is not the objective of any of the negotiators that this scenario becomes a reality. All parties would remain strong in their own sectors and as for numbers; only the demand for seasonal products such as perishables could increase.

Taking into account all reflections and conclusions of experts and participants of these rounds is where the questions arise from the business associations and members of various committees. It could be said then that this long and uncertain process of renegotiation, attracts great business opportunities, regional products, transport networks (land, sea, and air), a prevailing technological update and physical improvement of the Mexican border’s infrastructure, among others. In the end, the fact is that there is a long way to go and it can all be done by the three North American nations.