The SAI Report: Mexico & NAFTA (July 2017)

NAFTA

• The NAFTA Parties have shown political commitment by agreeing to begin negotiations on August 16, 2017, and holding negotiation rounds approximately every 20 days till the year ends.
• There are many factors that could contribute to extend in time the NAFTA 2.0 negotiation, signature and approval by the legislatures of each country; as there are also other positive elements that give support to a more optimistic approach.
• In compliance with the TPA, the U.S. administration published thirty days before initiating negotiations the “Summary of Objectives for the NAFTA Renegotiation”.
• Responses to the USTR Summary of objectives were mixed. The governments of Mexico and Canada remained mainly neutral as a part of their negotiation strategy, while other groups in the three countries reacted strongly to the document.
• Pursuant to article 8 of the Law regarding Approval of International Treaties on Economic Matters, the Ministry of Economy submitted to the Senate the document titled “Mexico’s priorities in the negotiations to modernize NAFTA”.
• According to the website of the Ministry of Economy, 613 comments were received during the online open consultation process it conducted during June and July of 2017. Citizens were the largest group to participate (57.7%), considerably higher than the private sector (8.5%). This is probably explained because companies have generally opted to submit their proposals through diverse business associations. Market access (10%) and trade facilitation (7%) were the two most common issues addressed in the comments. Only 2% of the submissions came from abroad (Germany, U.S., Canada and Japan).
• Although Trump and Lighthizer have not abandoned their harsh rhetoric regarding their position on NAFTA, members of the U.S. Administration and Legislative Power have expressed their interest on a successful negotiation.
• Governors Meeting- Further trilateral efforts took place as Canada and Mexico participated in the National Governors Association (NGA) Summer Meeting in Rhode Island on July 13-15.
• Tensions continue to accumulate in the region regarding controversies in traditionally long-disputed sectors; pertaining cases that remain unsolved (e.g., tuna, softwood lumber) and potential ones that are on the horizon (e.g., steel, aluminum, fructose).
• G20- Although Trump’s trade policy influenced the summit’s final statement, U.S. leadership continues to lose ground in the international arena.
• Peña Nieto and Trump met for the first time since the U.S. election during the G20 meeting. Unfortunately, Trump’s assurance that Mexico will “absolutely” pay for the border wall was the highlight of the event. Later the same day in his weekly address he once again threatened that if he does not get a “total renegotiation” he will “end NAFTA forever”.
• The Senate’s failure to repeal and replace Obamacare, the latest scandals regarding Russian involvement in the elections, turmoil in the Presidential Cabinet, as well as other policies and controversies, have Trump as the most unpopular president on the 6-month mark.
• Failure by Congress to pass legislation, even with a Republican majority, might become a serious problem for NAFTA reform. A renegotiated NAFTA has to be voted by both Chambers, according to the TPA. Depending on how long negotiations take, the Agreement will have to be voted by this Congress, which has failed so far to have a significant legislative victory, or by the Congress elected on Midterm elections (November of 2018), which will probably have a Democratic majority. Furthermore, if negotiations extend through April 2018, Trump would have to renew its TPA, something Congress could reject.
• Distrust to Trump’s Administration and criticisms of past negotiations (notably, the Trans-Pacific Partnership or TPP) have led U.S. lawmakers to introduce to the House the Promoting Transparency in Trade Act. The approval of such bill could further complicate the negotiation process since the USTR would have to publish “the proposed United States text, prior to the start of such negotiating round; and the considered text at the conclusion of such negotiating round”.
• On a positive note, House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady announced on July 24 they would drop their proposal of adding a Border Adjustment Tax (BAT) on imported goods “in order to advance tax reform”.
• Mexico’s diversification efforts- Mexico-EU FTA negotiations continue to progress; United Kingdom expresses its interest in negotiating a bilateral FTA with Mexico and the U.S.; and China and Mexico’s diplomatic and economic relationship go through a positive moment.

Mexico- Macroeconomic conditions

• Specialists’ expectations reflect optimism about the Mexican economy.
• During the second quarter of 2017, the growth of the economy surpassed all expectations in response to the strong performance of services.
• Domestic demand is still resilient in spite of the decrease in consumers’ purchasing power. The consumer sentiment is more optimistic than in previous months, suggesting that private consumption will increase even more in upcoming months.
• Formal employment generation and unemployment reached a historical best during the first semester of 2017. However, so far this year, real wages have decreased considerably and, in consequence, underemployment is starting to go up.
• The exchange rate has been quite receptive to changes in the political and economic environment during the year. In consequence, the peso has strengthened in response to a more optimistic scenario for the renegotiation of NAFTA.
• After ten fortnights on the rise, annual inflation finally began to slow down. Nevertheless, the increase in inflation during the last fortnight was higher than expected.
• Financial measures undertaken by the public sector indicate more stability for the rest of 2017. In consequence, both S&P Global Ratings and Fitch Ratings upgraded the outlook on Mexico's sovereign ratings to stable from negative.
• Remittances from the United States to Mexico reached in May their maximum level since October 2008.
• The USTR Objectives might lead to companies making less use of NAFTA when they export to the U.S., especially if the rules of origin become more restrictive. If this occurs, transportation products would be the most vulnerable since the U.S. trade deficit with Mexico in such sector is large, when compared to other groups of products, and since most of the exports of such sector apply to NAFTA’s preferences.

Otras publicaciones

The SAI Report:
Mexico and NAFTA
June 2017

The SAI Report:
Mexico and NAFTA
May 2017

The SAI Report:
Mexico and NAFTA
April 2017

The SAI Report:
Mexico and NAFTA
March 2017