Mexico needs new trade deal despite its shortcomings, Baker Institute report says

For Mexico, the United States-Mexico-Canada Agreement (USMCA) represents the best alternative to the North American Free Trade Agreement (NAFTA) it seeks to replace — far superior to the termination of NAFTA threatened by the U.S. administration, according to a report from the Mexico Center at Rice University’s Baker Institute for Public Policy.

The Mexican flag flies above the Zocalo square in Mexico City. Credit: 123RF.com/Rice University

“The U.S.-Mexico Trade Relationship under AMLO: Challenges and Opportunities” authored by David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute, gives an overview of the USMCA’s implications for Mexico. The report finds that while challenges remain for the U.S.-Mexico relationship, the possibility of the agreement going into effect by 2020 should greatly reduce uncertainties about the future of North American trade.

The USMCA has been signed but not yet ratified by the three countries.

Although the newly negotiated treaty is imperfect, the report concludes the NAFTA termination threatened by the U.S. administration would have led to a longer period of uncertainty that would have jeopardized new investment and job creation in all three countries.

The major objective for both Mexico and Canada “was to preserve relatively unhampered access to the U.S. market, which traditionally receives more than 75% of total exports from Mexico and Canada each,” wrote Gantz, who is also the Samuel M. Fegtly Professor of Law at the University of Arizona’s James E. Rogers College of Law and director emeritus of its international trade and business law program.

“Both Canada and Mexico are likely to be slightly less well-off economically than they were under NAFTA … but this is by no means certain,” Gantz wrote. “Neither country desired the 16-year sunset clause, but it was far better than the five-year sunset initially demanded by the Trump administration, and presumably neither wished to accept a prohibition on bilateral free trade agreements with ‘non-market economies’ (that is, China), a prohibition that if it were imposed on (rather than demanded by) the United States would likely have been denounced as a flagrant violation of U.S. sovereignty.

“Most significantly, and in a radical departure from a so-called free trade agreement, neither country was exempted from the 25% tariffs on U.S. imports of steel and 10% on imports of aluminum (nor was the U.S. exempted from retaliatory tariffs imposed by Mexico and Canada on agricultural and other products) although those tariffs will probably have to be lifted by the administration before the U.S. Congress agrees to approve the USMCA.”

For Mexico, the most significant risks in the USMCA are changes in international trade patterns caused by new rules about where automotobile parts originate, Gantz said. These changes are designed to encourage automakers based in the United States to assemble more vehicles and source more parts in the U.S. rather than in Mexico (and to a lesser extent Canada).

“However, the economic costs for Mexico will probably be relatively minor, due to a variety of other factors,” Gantz wrote.

Mexico also loses the broad protections NAFTA gave U.S. investors in disputes with the Mexican government, which some observers believe encouraged investment, Gantz said. In addition, the increased protection period for biologic drugs to 10 years could raise the cost of those medicines in both Mexico and Canada, most of which are provided to consumers by government health services. Other changes in patent and trademark protection, while different from NAFTA, are within the scope of provisions agreed to by all three parties under the Trans-Pacific Partnership.

Other areas of the USMCA that will have a notable impact on Mexico include energy, agriculture and labor. Gantz’s report explores each of these in detail, addressing related economic and policy challenges.

Immigration and trade

Trade relationships between the U.S. and Mexico could also be disrupted by non-trade disputes, particularly over immigration and asylum, Gantz said. He highlights the “seemingly intractable problem of migrants from the Northern Triangle countries in Central America (Guatemala, El Salvador and Honduras) seeking passage through Mexico so that they can enter and seek asylum in the United States.”

Immigration has never been a significant part of NAFTA, but Gantz said there’s always been a relationship between immigration and trade.

“Many hoped that the enactment of NAFTA would lead to improvements in Mexico’s economy, including wage levels, and to reduce the incentives for undocumented migration to the United States, but in 25 years this has not occurred,” he wrote. “It is obvious that closing the border would be a disaster for both the United States and Mexico (suggesting that despite the threats it will not happen for any length of time), but it seems clear that the immigration problems faced by the United States will continue to threaten the stability of the U.S.-Mexico relationship with or without the ratification and entry into force of the USMCA.”