NAFTA and Mexico’s Trade Policy.

Interview with Ildefonso Guajardo

Gabriela Gándara

Mexico is a benchmark in terms of commercial openness, as evidenced by its extensive network of free trade agreements that allows it to enter markets in 46 countries with preferential conditions. The agreement signed with the United States and Canada is undoubtedly the most relevant due to the magnitude of trade and investment flows involved, and the productive dynamics prevailing in the region. Its renegotiation has been an arduous task, as revealed to Comercio Exterior by one of its main actors, Secretary of Economy Ildefonso Guajardo, who also shares in this interview the most relevant results of the preliminary agreement between Mexico and the United States, announced last August.

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FROM THE RESULTS OF NEGOTIATIONS WITH THE COUNTRY’S MAIN TRADE PARTNERS, DO YOU THINK THAT 2018 IS A MILESTONE FOR THE FUTURE OF MEXICO’S FOREIGN TRADE?

More so than what happened in 2018, the balance has to do with the foreign trade strategy undertaken in the last six years of President Enrique Peña Nieto’s administration.

At the beginning of his term in office, I was instructed to diversify Mexico’s trade policy, strengthening it around the globe. To the west, we reinforced our relations with Asia through the negotiation of the Trans-Pacific Partnership (TPP), today CPTPP, which will allow Mexicans to have access to six new export markets namely, Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. To the east, we modernized the Global Agreement between Mexico and the European Union, in order to expand and update the framework that regulates our commercial relationship with Europe. To the south, together with Chile, Colombia and Peru, we continued with the commercial component of the Pacific Alliance, guaranteeing free access to people, products and services in the region, as well as with negotiations with partner nations candidates. Moreover, we began negotiations to deepen our commercial agreements with Brazil (ACE 54) and Argentina (ACEG 6), strategic partners in Latin America.

Finally, in the last part of the administration, we began negotiations to modernize the North American Foreign Trade Agreement (NAFTA), to adapt it to the needs of the economic reality of the 21st century and strengthen competitiveness in the regions vis-à-vis the world.

 

YOU RECENTLY IDENTIFIED DISRUPTION AS A DECISIVE ELEMENT TO UNDERSTAND INTERNATIONAL DYNAMICS AND ESPECIALLY THAT OF NORTH AMERICA.

I talked about it at a lunch organized by the magazine Los 300 líderes más influyentes de México.

The sign of the times, at a global level, is undoubtedly disruption. It responds to the fact that large sectors of the population in developed economies are not satisfied with the results of the openness. They have become the new dissatisfied with globalization.

In this sense, we would be mistaken to believe that the challenges we face today with respect to Washington, respond to situational aspects. The presidential elections of November 2016 in the United States are a reflection of a deeper and more disruptive problem. It is a structural challenge, not a transitory one that those of us who intervene in the design of public policy must face and manage properly, since the circumstances will not exactly be the same as in the last 20 years.

 

WHAT DOES THE PRELIMINARY AGREEMENT WITH THE UNITED STATES ANNOUNCED LAST AUGUST 27 MEAN AND HOW IMPORTANT IS IT?

The understanding reached between Mexico and the United States sets a foundation for a fundamental framework in trade relations with North America because above all, it provides certainty, but also because it strengthens competitiveness and productive integration in Mexico; it guarantees free trade in the region, without quotas or other restrictions, and safeguards dispute settlement mechanisms to protect existing and future investments.

 

WILL THE INITIAL UNITED STATES PROPOSAL OF RENEGOTIATING THE AGREEMENT EVERY FIVE YEARS STILL STAND? WHAT HAS BEEN AGREED ON THIS TOPIC?

We eliminated the threat of including a sudden death clause in the Agreement as proposed by the United States government. Instead, Mexico managed to incorporate a mechanism to review the Agreement every six years.

In an open society, public policies and trade agreements must be reviewed periodically in order to align them to the economic reality of the moment. This will prevent us from finding ourselves in a situation like the current one, where the original NAFTA was not reviewed until 24 years later. As part of the new mechanism, once the revision is agreed, the term of the agreement is reset to 16 years.

 

WHAT STANDS OUT IN THE AGREEMENT REACHED REGARDING THE RULE OF ORIGIN OF THE AUTOMOTIVE INDUSTRY?

In the automotive sector, we agreed on a stricter rule of origin that will strengthen the integration of value chains in North America.

The United States’ position for this automotive sector followed an array of disruptive pretensions. The proposal was to raise the regional content value of the sector to 85% and that 50% of that proportion were to be exclusively from the United States.

Mexico managed to change it to an intermediate point of regional integration, which is good news for national auto parts manufacturers. The minimum to pay zero tariffs will no longer be 62.5% of regional content, but rather, 75%.

 

 

WHAT IMPACT WILL THE WAGES ASPECT HAVE IN THE EVOLUTION OF THE COMMERCIAL FLOW OF THE AUTOMOTIVE INDUSTRY?

At the beginning—informally—the intention was to close the wages gap by decree and require at least 50% of US content. Instead, the agreement states that of the 75% of the automobile manufactured in North America, 40% must be manufactured in an area with a minimum wage above $16 per hour.

The latter means that 60% of the value of the vehicle will not be conditioned; while the remaining 40%—given the prevailing salary circumstances—may now be manufactured in Canada and the United States. That is how we went from 50% US content down to 40% between Canada and the United States; and gave Mexico the opportunity to exercise a fully liberalized trade for 60% of vehicles manufactured in the region.

 

WHAT DO YOU THINK ARE THE MOST SIGNIFICANT CHANGES IN TERMS OF DISPUTE SETTLEMENT?

Although the United States’ original position was to eliminate all dispute settlement mechanisms, the negotiation resulted in keeping them. These include:

  • Chapter 20 remains unchanged. This pertains State-State disputes and makes the Agreement congruent and consistent.
  • Chapter 21 will allow the defending of more important investments in investor-State disputes.
  • Chapter 29 is divided into two parts: disciplines and disputes. In the former, Mexico focused on continuing to protect North American members from global safeguards, in addition to maintaining trade solution disciplines in line with provisions of the World Trade Organization. Meanwhile, regarding disputes, it is currently being discussed in the United States and Canada negotiations.

 

REGARDING THE AGROINDUSTRY SECTOR, WHAT CHANGES WILL WE SEE IN THE NEW AGREEMENT?

The agroindustry sector is one of the sectors that has most grown and with most benefits regarding the relationship between Mexico and the United States.

In the negotiation, Mexico eliminated the harmful proposal for this sector, which was one of seasonality, designed to block Mexican exports during fresh produce season. The latter was part of the Chapter 29 negotiation, where Mexico got protection against global safeguards. Similarly, negotiating for an improved Chapter on Sanitary and Phytosanitary Measures will give better access to the region’s agricultural products. In addition, through cooperation between health agencies, it is sought that the sanitary and phytosanitary requirements requested by both countries do not unnecessarily obstruct bilateral trade.

 

WHAT ARE THE NEXT STEPS TO FINALIZE THE NAFTA RENEGOTIATION?

The negotiation between the United States and Canada is still under way. We are waiting for the discussions between both countries to come to fruition in the following days, and thus finalize a trilateral understanding, which is the NAFTA spirit after all.

On August 31, the President of the United States informed Congress about his intention to sign an agreement with Mexico and—eventually—Canada. As of that date, we have one month to make all texts on the understanding between Mexico and the United States public. In fact, the Mexican team is currently working with its US and Canadian counterparts on cleaning up the legal aspects and have them ready in a timely manner. The agreement will be signed at the end of November and after that, there will be a legislative process in each country to approve it, probably by spring of 2019.

 

IS TRADE A ZERO-SUM GAME? WHAT SHOULD BE DONE SO THAT EVERYONE—COUNTRIES AND THEIR CITIZENS—RECEIVE THE BENEFITS OF TRILATERAL TRADE EXCHANGE?

Global trade exchanges are increasingly complex, and therefore cannot be evaluated from the perspective where what one part wins, the other loses.

In the last 25 years, the NAFTA balance has been positive for all three countries. However, there is an important window of opportunity to extend the benefits of free trade to more sectors in our economies.

This is why, as part of the understanding, we include chapters of the so-called “progressive agenda,” which include the protection of labor and environmental rights, as well as the development of small and medium-sized enterprises.

 

IS MEXICO’S FOREIGN TRADE POLICY A STATE POLICY?

Once the open economy policy is defined and accepted, all development instruments available must be at hand; accompanying the international integration process with the industrial development policy, considering market competition, the business atmosphere and functionality.

There is currently no way of establishing an industrial and sector development policy if there are no foreign policy or foreign trade instruments to rely on.

There are two models in the world to understand foreign trade negotiations. One that depends on Chancelleries, like Brazil and Chile, and another that does not depend on them, but rather, on agencies responsible for economic or industrial development, as is the case with Canada, the United States and Mexico.

 

WHY DOES IT MAKE SENSE TO HAVE A FOREIGN TRADE POLICY IN THE SAME PLACE WHERE INDUSTRIAL POLICY IS DETERMINED?

In reality, they are two sides of the same coin. An economic development policy cannot be designed in the absence of a global integration trade policy. When defining the direction of the industrial development, you have to consider access to markets and instruments you have within the country in order to look after and accompany companies.

In the 21st century, we talk about industrial policy in a broad sense, in which services, domestic trade, the agroindustry and manufacturing sectors are considered, and at the same time, we have the instruments to develop the business environment and improve the quality of your markets, eliminating competition barriers and promoting competitiveness.

When an economy opens, it must have the mechanisms to achieve deregulation in a fair competition framework in which competitor standards are comparable.

If on the one hand there is an openness policy, but on the other there are no public policy instruments that needed to improve the business environment, the participation of small and medium-sized enterprises and the creation of value chains, ultimately, the impact on industrial development is lost. The fact that in Mexico foreign trade support areas are part of the economic development policy is fundamental, because important themes that are closely linked stem from that.