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Mexico Politics October 2018

Mexico: Exporters breathe sigh of relief as NAFTA 2.0 green-lighted

After months of long, tense and threat-filled negotiations, Canada, the United States and Mexico finally struck an agreement to replace NAFTA on 30 September, quashing fears that North America’s tariff-free trading landscape could come to a sudden halt. The deal’s core was largely left unchanged with a few notable tweaks and a facelift, rebranded the United States-Mexico-Canada Agreement (USMCA). The agreement still needs to be ratified by all three parliaments, so trade risks have not yet been completely extinguished; however, so far political risks appear minimal. The deal is on track to be signed by incumbent Mexican President Enrique Peña Nieto before Andrés Manuel López Obrador takes over the reins in December and support for USMCA is sound in all countries. The successful rewriting of NAFTA bodes well for Mexico’s economic prospects as the deal will banish uncertainty overhanging exporters and should boost confidence, even though the country was forced to accede to certain concessions from the original agreement.

Highlighted changes for Mexico’s economy include tougher rules of origin for the automobile sector, increasing the regional content for light vehicle exports to 75% by 2023 if the vehicle is to qualify for zero tariffs. This is a notable jump from the current 62.5% and will likely result in more expensive cars in the region. Moreover, 40% of automobile content must be made by workers earning at least USD 16 per hour, a move designed to bring Mexican wages closer to U.S. and Canadian standards and could reduce Mexico’s competitive edge as a manufacturing base. Mexico also had to agree to updating several labor laws, including permitting unions, which could drive wages up in the country going forward. While the agreement maintains the United States’ ability to impose tariffs on national security grounds—a move President Donald Trump has threatened regarding automobiles—it limits the potential damage to Mexican and Canadian industries with lenient quotas.

Other changes to the deal include increased access to the Canadian dairy market, new chapters to deal with the internet and ecommerce businesses, a requirement that countries must notify each other if they pursue a free-trade agreement with a “non-market” economy and the introduction of a sunset clause. The sunset clause states that USMCA will expire in 16 years unless all three countries decide to renew it and the deal will be formally reviewed in six years. This generates a considerable amount of uncertainty compared to the old agreement which was indefinite. Nevertheless, the agreement guarantees continued trade in North America for the foreseeable future and prevents a worst-case scenario of no-NAFTA.

Commenting on the deal’s effect on the Mexican economy, analysts from JPMorgan elaborate:

“With a new trade deal extremely likely, this key pocket of uncertainty has deflated, which should allow for recovery in business sentiment and spending. That was already assumed in our base-case scenario and thus today’s agreement merely boosts our confidence that growth is likely to accelerate about 0.5%-pts next year to a trend-like 2.4%oya pace.”

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