North America: From Free Trade to Managed Trade

Interview with Mauricio de Maria y Campos, board member of the Industrial Growth and Economic Development Institute (IDIC).  

By: César Guerrero Arellano / Photo: Ignacio Galar  

North America: From Free Trade to Managed Trade
With the premise that agreements are the result of what is possible, not what is desirable, Mauricio de Maria y Campos dissects the specificities of the North American Trade Agreement renegotiation. He highlights, among others, the structural changes that made NAFTA an uncomfortable instrument and the panorama of the Mexican pharmaceutical industry after the signing of the Modifying Protocol, a valuable and unexpected window of opportunity.  

 

What were the main NAFTA contributions to the Mexican economy?

NAFTA marked a momentous scheme of regional reference when the world was headed towards a greater promotion of trade and investment. It gave investors security and contributed to the modernization of the Mexican economy in industries such as automotive, auto parts, electronics or aerospace. It also promoted the development of the agricultural sector, where the export of fruits and vegetables was very significant. It is often forgotten that the level of a country’s development affects its negotiating capacity. What is possible is signed. The fact that 80% of exports go to the United States today gives us an advantage, but also represents an enormous vulnerability.

 

Are the wage gap and the development of technological capabilities NAFTA debts?

According to the European model, yes. Equality was at the heart of the debates that shaped European integration, which explains the great development of countries and regions such as Spain, Portugal, Ireland and southern Italy. Using a more liberal integration model, wage, income per capita and development gaps between the different regions of North America remained during NAFTA. Mexico’s north and the Bajío region contrast with the south of the country. The per capita income differential between Mexico and the United States increased when real wages did not improve. Mexican exports grew at very high rates, but those of production registered a mediocre average of 2% that barely exceeded population growth, which translated into a marginal increase in our per capita income with an annual average of 0.5%.

 

But I want to highlight that, in a strictly liberal model, something very important that’s missing is an industrial and technological policy. Free trade agreements must be part of a comprehensive approach that allows the development of the production sectors and creates favorable conditions for investment. This not only applies to NAFTA, in which we are in surplus, but also to all agreements, where we buy more than we sell. We have lacked a policy to promote production and to develop local technological capacities. We have lost and continue to lose that opportunity.

 

What were the main reasons behind the renegotiation of NAFTA?

The most important reason is that the economic, commercial and technological rise of China, and of other Asian countries, changed the international economic context. Without neglecting the adjustments NAFTA needed to stay in tune with the advances in services, digital economy and telecommunications, the factor that most affected its renegotiation was the displacement of the axes of trade, production, industrial employment and technological development from the West to China. This concern is not new, since the Obama period was sought to institute a new way of competing with the Trans-Pacific Partnership Agreement (TPP). This ill-fated U.S. initiative, later taken up by the rest of the countries of the bloc, sought to establish a free trade area with countries such as Mexico, Japan or Vietnam. Those are the seeds of the USMCA: it is a fundamental precedent. Since his campaign, Trump proposed a very different paradigm: managing his trade with China and with Mexico to reduce a deficit that was unacceptable to him. However, he rejected that a good part of the trade imbalance was due to the loss of competitiveness of the American industry due to its very high wages compared to the China and Mexico, the structural change in the U.S. labor market associated with robotics. In fact, without the competitiveness it was given by NAFTA and depressed Mexican wages, that deficit would have been higher. At the beginning of his presidency, Trump pressured these countries and their own companies to buy more U.S. products, withdrew from the TPP and began a long process, with several stages. The first stage was to threaten to pull out of NAFTA, a big problem for states like California and Texas, which are big exporters to Mexico, and for many companies in Mexico and Canada that were created based on that agreement. This led to a very tough and complex negotiation, with the Trumpian style of intimidating counterparties.

 

How different is the USMCA from NAFTA? Is it really a new agreement?

With all of its limitations, NAFTA was more positive for Mexico than the USMCA will be. In fact, the USMCA is a managed trade agreement. Among his complaints, Trump raised two fundamental criticisms: that NAFTA widened the wage gap between the countries of the region and that plants in Mexico introduced exogenous components without tariffs to North America. That’s why Mexico’s deficit with China grew, which is approximately 15 to 1. The best example is television sets that are assembled here, with only 1% or 2% of Mexican components. We do not provide manufacturing or technology, only man power. That’s why the USMCA modifies the rules of origin to increase the regional content of what is assembled in Mexico, especially in those products with higher added value. That will eventually reduce our deficit with China.

 

We will see few investments in Mexico to manufacture intermediate goods given the amount of investments required. In principle, the USMCA seeks to recoup investments for the United States. Mexico—which has a comparative advantage in automotive components such as harnesses and seats, but not in others such as engines—had to accept it. These are rules for internal combustion cars that cannot be applied in the same way to electric cars. An export limit of 2.4 million vehicles was also agreed. Close to producing two million, this cap discourages the expansion of automotive investments in our country. Also, 40% of regional content in new cars must be produced in countries with wages of US$16 an hour. Otherwise, there is a tariff that compromises production in Mexico and makes cars in North America more expensive. A series of rules will give companies time when faced with that very strong work pressure that, as a result of the USMCA, will be good in other fields. There are also quotas in the electronics sector and in others that are no longer significant, such as the textile and clothing industry, where there is no Mexican production to meet them. That will compromise many Mexican companies and increase our deficit, just like with Vietnam and Malaysia in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP).

 
MAURICIO DE MARÍA Y CAMPOS

 

Have dispute resolution mechanisms improved with the USMCA?

The terms deteriorated. We would have liked to maintain the provisions of NAFTA, which allow Mexico and Canada to go to trade arbitration in the WTO. With the USMCA, the possibilities were severely limited in order for negotiations to take place in U.S. courts, where we have always lost.

 

How did the country’s pharmaceutical industry evolve during NAFTA?

The pharmaceutical sector is especially complex: it requires the systematic incorporation of cutting-edge technology and the presence of multinationals predominates. The consumer is not sovereign  (although it depends on the doctor’s direction), and piracy is a risk. Thanks to provisions adopted in the 1980s, a Mexican pharmaceutical industry was established with generic products and also with drugs that compete with those of large companies. Through a limited but important policy, the Mexican generic market developed during NAFTA, both for purchases from the public sector and in pharmacies, where many people without social security go. With these products, pharmaceutical companies with Mexican capital captured a portion of the market. Some seriously invested in technology and began exporting, not only to other countries, but to the United States itself.

 

However, a growing problem is that, through a very liberal provision, the Calderón administration abolished the obligation to establish laboratories in Mexico from pharmaceutical companies, where at least the medicines were bottled or packaged. This opened the market for products from many different countries, sometimes with no optimal quality and even dangerous. The importer no longer requires medical responsibility that guarantees quality. Counterfeits and products that do not meet health conditions have spread to markets and small pharmacies in Mexico.

 

The emergence of pharmaceutical companies with a slightly higher level of technological sophistication in Mexico and in countries such as Brazil, China and India, takes us back to the TPP, where large pharmaceutical companies sought to be dominant by increasing the term of patents. No country admitted it, but they managed to duplicate the first period of protection, under easily generalizable conditions of exception, by adding to the drugs elements that “modify” their purposes, such as relieving headaches in addition to the flu.

 

Medicines developed in recent years are also biological and not just chemical. With biological processes it is much easier to create products that can compete once the patent expires. Given this, U.S. pharmaceutical companies managed to extend the exclusivity period in the TPP from three to five years. But after the United States withdrew from that transcontinental agreement, that provision was frozen. In the USMCA, however, the extended period was maintained, against the interest of Mexican pharmaceutical companies, which were already in a position to bring anticancer and antiretroviral drugs to the market. These are areas of progress in the treatment of diseases with more prevalence in Mexico and in other countries, and where drug prices have increased significantly.

 

In the USMCA negotiation, these pharmaceutical companies lobbied for a longer period than in the TPP: eight years, to be exact. Mexican, Canadian and other companies protested, but their efforts were unsuccessful in the face of the importance of automotive issues. In the end, Mexico accepted, despite having very specific interests. A study that I coordinated for the Belisario Domínguez Institute of Mexico’s Senate calculated billions of pesos saved per year—for patients and the public sector—if those terms were not signed. The price of an anticancer drug could be reduced by up to 10% of the original cost. However, the government decided to go ahead and approve this on fast track.

 

What are your thoughts on the elimination of the exclusivity period for biological medicines agreed in the protocol modifying the USMCA?

What we would have never imagined, happened: the United States Democratic Party opposed all the clauses related to the pharmaceutical sector and industrial property of the USMCA, ratified by the Senate in Mexico and signed by the president. Well-known Democratic presidential hopefuls—like Senator Warren, Senator Sanders, and even Biden himself—said no. Since they don’t know what to do with very high drug prices in the United States either, they eliminated the ten-year requirement to manufacture drugs biologically, making it a condition for Trump to ratify the USMCA. It was serendipitous. Without this restriction, the Mexican industry now has a golden opportunity. Many laboratories in Jalisco plan to leverage it, but will require support from development banks, like Nafin and Bancomext. Mexico needs a policy to support national technological development.

 

How is the Mexican pharmaceutical industry ranked worldwide based on its production and technological capacities?

It’s a very uneven sector, with enormous progress in the last twenty years. An important group of companies have conducted research and technological development, especially in biological medicines, with UNAM and IPN laboratories. Some, like Inosan Biopharma, the world’s number one company in the production of viper antidotes, are increasingly exporting, not only to markets like Africa. More companies are making good products. It’s a small group, but if health and industrial authorities focus properly, we can leverage new opportunities and build a good sector. Many recent developments correspond to some form of stimulus, such as strong demands from the health sector in the United States, Europe and China. Although it would be for a minority of Mexican laboratories, it can and should continue to be promoted.

 

Along with the food sector, the health sector is one of the few in which it must have certain capacity to respond to an emergency, such as that of the coronavirus and others that we have gone through. Having research capacity is a matter of national security. Like the United States, we have stopped researching in local vaccine production. Today, European and U.S. medicines are based on Chinese raw material, the main producers in the world. When they are needed, almost always due to a global pandemic that can strike at any time, they’re not something that can be imported overnight. Vaccines must first be developed and, once they exist, they are paid at a steep price.

 

Only one in ten thousand substances that are developed in laboratories reaches the market as medicine. What are the most appropriate mechanisms to protect the profitability of this research?

Ever since patents were born, economists have written books justifying their social value. They were considered very important as a stimulus for investment, which I agree with. Indeed, it is a high-risk research sector. But beyond the social purposes of research there is a gray area that could lend itself to misuse to achieve maximum economic benefit.

 

The frozen CPTPP clauses, which were expanded in the USMCA, lent themselves to abuse. A patent system that allows returns to match research efforts should have the public interest as a limit. It is not right for so many people to die because they cannot pay the very high prices of medicine.

 

That’s where patent and health authorities, like the Federal Commission for the Protection Against Sanitary Risks (Cofepris), must oversee the expensive and complex testing process. In the face of a pandemic there is a principle of compulsory patents, with which health authorities allow the incorporation of a greater number of producers based on public interest. It is contemplated in most industrial property legislations, both international and domestic. Doctors also need to include the generic name of medicines in prescriptions, as is the case in Europe. Another recent and very serious problem is medicine importation authorized with no need to register it in Cofepris’ tenders, this to buy medicines at a lower cost. Low prices destroy the existing industry and then go up. Then there’s the additional danger of the drugs being apocryphal and circulating in informal trade. What’s most important is to have a timely supply of medicines at affordable prices.

 

What were the main NAFTA contributions to the Mexican economy?

NAFTA marked a momentous scheme of regional reference when the world was headed towards a greater promotion of trade and investment. It gave investors security and contributed to the modernization of the Mexican economy in industries such as automotive, auto parts, electronics or aerospace. It also promoted the development of the agricultural sector, where the export of fruits and vegetables was very significant. It is often forgotten that the level of a country’s development affects its negotiating capacity. What is possible is signed. The fact that 80% of exports go to the United States today gives us an advantage, but also represents an enormous vulnerability.

 

Are the wage gap and the development of technological capabilities NAFTA debts?

According to the European model, yes. Equality was at the heart of the debates that shaped European integration, which explains the great development of countries and regions such as Spain, Portugal, Ireland and southern Italy. Using a more liberal integration model, wage, income per capita and development gaps between the different regions of North America remained during NAFTA. Mexico’s north and the Bajío region contrast with the south of the country. The per capita income differential between Mexico and the United States increased when real wages did not improve. Mexican exports grew at very high rates, but those of production registered a mediocre average of 2% that barely exceeded population growth, which translated into a marginal increase in our per capita income with an annual average of 0.5%.

 

But I want to highlight that, in a strictly liberal model, something very important that’s missing is an industrial and technological policy. Free trade agreements must be part of a comprehensive approach that allows the development of the production sectors and creates favorable conditions for investment. This not only applies to NAFTA, in which we are in surplus, but also to all agreements, where we buy more than we sell. We have lacked a policy to promote production and to develop local technological capacities. We have lost and continue to lose that opportunity.

 

What were the main reasons behind the renegotiation of NAFTA?

The most important reason is that the economic, commercial and technological rise of China, and of other Asian countries, changed the international economic context. Without neglecting the adjustments NAFTA needed to stay in tune with the advances in services, digital economy and telecommunications, the factor that most affected its renegotiation was the displacement of the axes of trade, production, industrial employment and technological development from the West to China. This concern is not new, since the Obama period was sought to institute a new way of competing with the Trans-Pacific Partnership Agreement (TPP). This ill-fated U.S. initiative, later taken up by the rest of the countries of the bloc, sought to establish a free trade area with countries such as Mexico, Japan or Vietnam. Those are the seeds of the USMCA: it is a fundamental precedent. Since his campaign, Trump proposed a very different paradigm: managing his trade with China and with Mexico to reduce a deficit that was unacceptable to him. However, he rejected that a good part of the trade imbalance was due to the loss of competitiveness of the American industry due to its very high wages compared to the China and Mexico, the structural change in the U.S. labor market associated with robotics. In fact, without the competitiveness it was given by NAFTA and depressed Mexican wages, that deficit would have been higher. At the beginning of his presidency, Trump pressured these countries and their own companies to buy more U.S. products, withdrew from the TPP and began a long process, with several stages. The first stage was to threaten to pull out of NAFTA, a big problem for states like California and Texas, which are big exporters to Mexico, and for many companies in Mexico and Canada that were created based on that agreement. This led to a very tough and complex negotiation, with the Trumpian style of intimidating counterparties.

 

How different is the USMCA from NAFTA? Is it really a new agreement?

With all of its limitations, NAFTA was more positive for Mexico than the USMCA will be. In reality, the USMCA is a managed trade agreement. Among his complaints, Trump raised two fundamental criticisms: that NAFTA widened the wage gap between the countries of the region and that plants in Mexico introduced exogenous components without tariffs to North America. That’s why Mexico’s deficit with China grew, which is approximately 15 to 1. The best example is television sets that are assembled here, with only 1% or 2% of Mexican components. We do not provide manufacturing or technology, only man power. That’s why the USMCA modifies the rules of origin to increase the regional content of what is assembled in Mexico, especially in those products with higher added value. That will eventually reduce our deficit with China.

 

We will see few investments in Mexico to manufacture intermediate goods given the amount of investments required. In principle, the USMCA seeks to recoup investments for the United States. Mexico—which has a comparative advantage in automotive components such as harnesses and seats, but not in others such as engines—had to accept it. These are rules for internal combustion cars that cannot be applied in the same way to electric cars. An export limit of 2.4 million vehicles was also agreed. Close to producing two million, this cap discourages the expansion of automotive investments in our country. Also, 40% of regional content in new cars must be produced in countries with wages of US$16 an hour. Otherwise, there is a tariff that compromises production in Mexico and makes cars in North America more expensive. A series of rules will give companies time when faced with that very strong work pressure that, as a result of the USMCA, will be good in other fields. There are also quotas in the electronics sector and in others that are no longer significant, such as the textile and clothing industry, where there is no Mexican production to meet them. That will compromise many Mexican companies and increase our deficit, just like with Vietnam and Malaysia in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP).

 

Have dispute resolution mechanisms improved with the USMCA?

The terms deteriorated. We would have liked to maintain the provisions of NAFTA, which allow Mexico and Canada to go to trade arbitration in the WTO. With the USMCA, the possibilities were severely limited in order for negotiations to take place in U.S. courts, where we have always lost.

 

How did the country’s pharmaceutical industry evolve during NAFTA?

The pharmaceutical sector is especially complex: it requires the systematic incorporation of cutting-edge technology and the presence of multinationals predominates. The consumer is not king (although it depends on the doctor’s direction), and piracy is a risk. Thanks to provisions adopted in the 1980s, a Mexican pharmaceutical industry was established with generic products and also with drugs that compete with those of large companies. Through a limited but important policy, the Mexican generic market developed during NAFTA, both for purchases from the public sector and in pharmacies, where many people without social security go. With these products, pharmaceutical companies with Mexican capital captured a portion of the market. Some seriously invested in technology and began exporting, not only to other countries, but to the United States itself.

 

However, a growing problem is that, through a very liberal provision, the Calderón administration abolished the obligation to establish laboratories in Mexico from pharmaceutical companies, where at least the medicines were bottled or packaged. This opened the market for products from many different countries, sometimes with no optimal quality and even dangerous. The importer no longer requires medical responsibility that guarantees quality. Counterfeits and products that do not meet health conditions have spread to markets and small pharmacies in Mexico.

 

The emergence of pharmaceutical companies with a slightly higher level of technological sophistication in Mexico and in countries such as Brazil, China and India, takes us back to the TPP, where large pharmaceutical companies sought to be dominant by increasing the term of patents. No country admitted it, but they managed to duplicate the first period of protection, under easily generalizable conditions of exception, by adding to the drugs elements that “modify” their purposes, such as relieving headaches in addition to the flu.

 

Medicines developed in recent years are also biological and not just chemical. With biological processes it is much easier to create products that can compete once the patent expires. Given this, U.S. pharmaceutical companies managed to extend the exclusivity period in the TPP from three to five years. But after the United States withdrew from that transcontinental agreement, that provision was frozen. In the USMCA, however, the extended period was maintained, against the interest of Mexican pharmaceutical companies, which were already in a position to bring anticancer and antiretroviral drugs to the market. These are areas of progress in the treatment of diseases with more prevalence in Mexico and in other countries, and where drug prices have increased significantly.

 

In the USMCA negotiation, these pharmaceutical companies lobbied for a longer period than in the TPP: eight years, to be exact. Mexican, Canadian and other companies protested, but their efforts were unsuccessful in the face of the importance of automotive issues. In the end, Mexico accepted, despite having very specific interests. A study that I coordinated for the Belisario Domínguez Institute of Mexico’s Senate calculated billions of pesos saved per year—for patients and the public sector—if those terms were not signed. The price of an anticancer drug could be reduced by up to 10% of the original cost. However, the government decided to go ahead and approve this on fast track.

 

What are your thoughts on the elimination of the exclusivity period for biological medicines agreed in the protocol modifying the USMCA?

What we would have never imagined, happened: the United States Democratic Party opposed all the clauses related to the pharmaceutical sector and industrial property of the USMCA, ratified by the Senate in Mexico and signed by the president. Well-known Democratic presidential hopefuls—like Senator Warren, Senator Sanders, and even Biden himself—said no. Since they don’t know what to do with very high drug prices in the United States either, they eliminated the ten-year requirement to manufacture drugs biologically, making it a condition for Trump to ratify the USMCA. It was serendipitous. Without this restriction, the Mexican industry now has a golden opportunity. Many laboratories in Jalisco plan to leverage it, but will require support from development banks, like Nafin and Bancomext. Mexico needs a policy to support national technological development.

 

 

How is the Mexican pharmaceutical industry ranked worldwide based on its production and technological capacities?

It’s a very uneven sector, with enormous progress in the last twenty years. An important group of companies have conducted research and technological development, especially in biological medicines, with UNAM and IPN laboratories. Some, like Inosan Biopharma, the world’s number one company in the production of viper antidotes, are increasingly exporting, not only to markets like Africa. More companies are making good products. It’s a small group, but if health and industrial authorities focus properly, we can leverage new opportunities and build a good sector. Many recent developments come from some form of stimulus, such as strong demands from the health sector in the United States, Europe and China. Although it would be for a minority of Mexican laboratories, it can and should continue to be promoted.

 

Along with the food sector, the health sector is one of the few in which it must have certain capacity to respond to an emergency, such as that of the coronavirus and others that we have gone through. Having research capacity is a matter of national security. Like the United States, we have stopped researching in local vaccine production. Today, European and U.S. medicines are based on Chinese raw material, the main producers in the world. When they are needed, almost always due to a global pandemic that can strike at any time, they’re not something that can be imported overnight. Vaccines must first be developed and, once they exist, they are paid at a steep price.

 

Only one in ten thousand substances that are developed in laboratories reaches the market as medicine. What are the most appropriate mechanisms to protect the profitability of this research?

Ever since patents were born, economists have written books justifying their social value. They were considered very important as a stimulus for investment, which I agree with. Indeed, it is a high-risk research sector. But beyond the social purposes of research there is a gray area that could lend itself to misuse to achieve maximum economic benefit.

 

The frozen CPTPP clauses, which were expanded in the USMCA, lent themselves to abuse. A patent system that allows returns to match research efforts should have the public interest as a limit. It is not right for so many people to die because they cannot pay the very high prices of medicine.

 

That’s where patent and health authorities, like the Federal Commission for the Protection Against Sanitary Risks (Cofepris), must oversee the expensive and complex testing process. In the face of a pandemic there is a principle of compulsory patents, with which health authorities allow the incorporation of a greater number of producers based on public interest. It is contemplated in most industrial property legislations, both international and domestic. Doctors also need to include the generic name of medicines in prescriptions, as is the case in Europe. Another recent and very serious problem is medicine importation authorized with no need to register it in Cofepris’ tenders, in order to buy medicines at a lower cost. Low prices destroy the existing industry and then prices go up. Then there’s the additional danger of the drugs being apocryphal and circulating in informal trade. What’s most important is to have a timely supply of medicines at affordable prices.