EUROPE: A STRATEGIC ALLY IN THE DIVERSIFICATION OF MEXICAN TRADE.

Stéphan Sberro Picard

EUROPE: A STRATEGIC ALLY IN THE DIVERSIFICATION OF MEXICAN TRADE.
Drawing closer to Europe is one of the most concrete manifestations of Mexico’s obligation to rethink and diversify its political and trade policies. It is not a coincidence that the Economic Partnership, Political Coordination and Cooperation Agreement between the European Community and Mexico came into effect only five years after the NAFTA. By signing the Agreement, the parties upheld their disposition to coordinate their efforts in political, economic and cooperation arenas.

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The Economic Partnership, Political Coordination and Cooperation Agreement between the European Community and Mexico (commonly referred to as the “Global Agreement” or GA), was the first and most audacious instrument to be negotiated between the European Union and a Latin American country. However, since it came in to effect 17 years ago, the world has changed; it overcame the 2007 financial crisis, the greatest since 1929; the content of trade and, with it, the aims of trade agreements, also changed. Current renegotiation of these agreements coincides with Donald Trump’s term as President of the United States, and with his interest in reviewing his country’s trade agreements, among them, the North American Free Trade Agreement (NAFTA).

Within this context, Mexico faces the double challenge of modernizing the trade agreement with its powerful and complicated neighbor to the north, while at the same time addressing the need to reorient its trade and investment flows toward other regions of the planet. In light of this double challenge, renegotiation of the GA with the European Community is strategic.

The review of the GA is of a different nature than that of other agreements that Mexico holds with Asian or Latin American countries. Evidently, the main aim is to promote trade and, as a result, increase competitiveness, improve consumer prices and, ultimately, stimulate economic growth. However, Europeans also seek to identify potential allies in international negotiations as well as to promote its values in issues such as sustainable growth and human rights.

In the first part of this article, we will describe the most outstanding aspects of the renegotiation process and the new agreement between the European Community and Mexico. We

will then go on to broaden and contextualize the meaning of the Agreement beyond the immediate economic benefits it may bring to each of its parts. We will conclude by seeking to frame the Agreement within the economic changes of recent years, and within the scope of multilateralism.

 

Why the Existing Agreement Should Be Modernize 

In light of the attacks on international trade on behalf of the United States, renegotiation with Europe could not be more opportune. Although in 2013, during the European Union-Community of Latin American and Caribbean States (EU-LAC) Summit, Mexico and the European Union committed to modernizing the GA, the subsequent months went by without any substantial progress in this area. The reasons are varied and many: among the more negative ones, there were the economic difficulties that surfaced for all parties from 2009 onwards; other more optimistic reasons, however, included the positive performance of the Agreement and the satisfactory fulfillment of its general objectives.

 

Mexico faces the double challenge of modernizing its agreement with its powerful and complicated neighbor to the north, while at the same time addressing the need to reorient its trade and investment flows toward other regions

 

Although Mexico’s participation in the European market is still not significant, it has achieved a slight improvement in its position, and remains the European Union’s fifteenth most important trade partner. For Mexico, the greatest success of the Agreement has been in the area of investment. Today, the European Union is the second strongest source of foreign investment in Mexico (see Chart).

Despite this progress, since its inception, the GA was considered incomplete and evolutionary. A number of important sectors were not entirely covered by the Agreement, as is the case of agriculture and services. Furthermore, customs procedures and rules of origin, two fundamental points of the Agreement, had become obsolete, and thus there was an evident need to improve them and align them with new WTO regulations.

The renovated Agreement could contain a revolutionary dispute settlement instrument

A broad range of research efforts showed that it was convenient to refine the provisions related to non-tariff barriers. Studies made by or paid for by the European Commission estimated that bilateral trade between the European Union and Mexico could increase fourfold if the parts were able to reach an agreement to reduce tariffs, as well to eliminate non-tariff barriers and other measures with the same effect on trade.

The service sector had been nearly left out of the original GA, except for a few provisions in matters of financial services and maritime transport. Its relevant weight on the GNP of the European Union –a total of 70 percent–, was a powerful reason to review the scope of the Agreement. The protection of intellectual property and the respect for country of origin norms in the area of agriculture had also become an urgent matter for Europeans. Beyond the limitations inherent to the GA itself, there were important reasons to modernize and strengthen the normative framework related to investment.

 

For Mexico, the greatest success of the Agreement has been in the area of investment. Today, the European Union is the second strongest source of direct foreign investment in Mexico

 

Among the most compelling, was the fact of the 13 –mainly central and east European– countries that had joined the European Union, countries with which Mexico had never before signed agreements on these issues. There was also the transference of competencies in matters of foreign investment, from the scope of the member States themselves, to that of community institutions, as per that established by the Treaty of Lisbon.

From the Mexican standpoint, there were also important reasons to modernize the Global Agreement, among them, the need to adjust it to the transformations stemming from the trade agreements signed in recent years, as well as to ambitious economic reform and Mexico’s growing participation in global value chains.

It was also sought to improve access to public purchase markets with norms designed to guarantee non-discriminatory dealings at both the federal level and, more importantly, at the sub-federal level. The incorporation of special clauses to facilitate access and participation for small and medium-sized companies was also foreseen.

 

 

The renovated Agreement could contain a revolutionary dispute settlement instrument 

 

Lastly, the break in the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the United States and the European Union, as well as important obstacles in the review of the NAFTA, created a favorable atmosphere for the start of negotiations.

Beyond its need to stimulate its bilateral agreement with the European Union, Mexico seeks to intensify its trade flow and investment diversification efforts, as well as to send the rest of the world a clear message of support for economic multilateralism.

 

A New International Economic Relations Model

NAFTA and GA renegotiations illustrate the difference in approach between Mexico’s two most important trade partners. In the case of negotiations with the United States government, a politically and economically solid commitment capable of withstanding changes in leadership and short-term crises has yet to be secured.

In the case of Europe, there is a noteworthy willingness to tackle unfair business practices, and to create an ambitious dispute settlement mechanism. In these areas, the current Agreement is rather limited, while, in others, the only mediation recourse is the WTO. Hence, Europe’s interest in exploring alternative mediation procedures.

The renovated Agreement could contain a revolutionary dispute settlement instrument, if Europeans manage to persuade Mexico to include a normative framework for investment, similar to that which it negotiated with Canada as part of the Comprehensive Economic and Trade Agreement (CETA).

 

Renegotiation has long-term objectives. In addition to intensifying trade flow, it aims to improve the quality of the environmental and social relationship between regions

 

Both the CETA and the NAFTA contain investment dispute settlement mechanisms: one for State-to-State disputes, and another for disputes between the State and privately owned companies. For the latter type of disputes the NAFTA implemented an ad hoc instrument designed for investor-state dispute settlement (ISDS). Although the ISDS was useful for the protection of investments in developing countries, and is currently in effect in over 3 thousand investment treatises, it has been the object of strong criticism because of the power granted to companies in order to call into question a given State’s environmental, public health and other relevant decisions.

 

 

The CETA discards the ISDS mechanism as it exists in the NAFTA and in thousands of other agreements, and in its place, establishes a permanent Investment Court System (ICS). In the ISDS,

judges are chosen by the parts, without independence or competence requirements, and they always belong to the same small group, often alternating as arbitrators and attorneys for one of the parts. The CETA, however, requires the appointment of a panel of 15 permanent judges serving for periods of 5 to 10 years, half of whom should be Canadian and the other European, to be appointed by a mixed council of national judges and jurists known to be competent in investment affairs. The appointed members of the court cannot act as attorneys in other cases.

It is also the first time that these types of trials foresee the possibility of appeal in cases involving interpretation of the law, in order to avoid different interpretations of the agreements on behalf of judges. For the sake of transparency, documents are public, as are the proceedings.

The sentences issued by the panel are limited to the payment of rights and the restitution of property, and the court may not recommend a change in laws or policies. Prior to the arbitration process, there must be an attempt to solve the conflict by means of consultation, and the required information must be submitted in order for an accusation to proceed. An investor participating in a dispute settlement case renounces his right to make use of local courts in order to resolve the conflict.

The mechanism represents substantial progress in respect for citizen rights and State sovereignty. It is in alignment with the European idea that free trade, in itself, is not the sole priority. Currently, the European Union is negotiating the same type of mechanism with Mexico, Japan and Vietnam.

 

 

Mexico was one of the first countries to establish an official relationship with the institutions of the European Community, nearly 50 years ago, and it was the first Latin American country to sign a global agreement

 

Negotiations Beyond Trade

The modernization of the GA with the European Union differs from that of other negotiations that are taking place simultaneously with the aim of updating the network of Mexico’s trade agreements. It doesn’t respond to an urgency to reduce unexpected tensions; quite to the contrary, it reflects a favorable political atmosphere. Trade relations with the European Union are anchored in a solid legal and institutional framework, in suit with European tradition.

Renegotiation has long-term objectives. In addition to intensifying trade flow, it aims to improve the quality of the environmental and social relationship between regions. Europeans seek to modify the rules of the game so as to foster free competition, and while this may be the main objective, it is not the sole aim of international economic relations. There is also an attempt to establish a new set of rules in areas such as agriculture, country of origin, and dispute resolution. Within the framework of this strategy, negotiation with Mexico would represent a milestone. The culmination of trade relations between Mexico and the European Union would be particularly important for Mexico’s insertion in the international scenario.

Despite the clichés surrounding the fatality of a nearly exclusive relationship with the United States, or of the emergence of China as the most viable alternative in our diversification efforts, the reality is that Mexico has always pioneered the forming of close ties with Europe. It was one of the first countries to establish an official relationship with the institutions of the European Community, nearly 50 years ago, and it was the first Latin American country to sign a global agreement. The European Union continues to be the most solid pillar on which to build a stable and diversified insertion in the global arena for Mexico, not only in terms of trade, but also of investment. Additionally, it is a foundation for the achievement of greater clarity and fairness in international trade regulations, as well as a means to put an end to Mexico’s tendency to be at the mercy of multinational corporations or of powerful countries; today, this country may be the United States, and, tomorrow, China.