Deal or no deal - Positives for Mexico

11 September 2018

Mexican trade

NAFTA is no longer the only game in town for Mexico.

The end of the standoff?

Only a few months ago, NAFTA (the North American Free Trade Agreement) looked dead in the water. The US seemed hell-bent on walking away from the 24-year-old deal, while Canada and Mexico were unwilling to concede any ground.

Now, the US and Mexico appear to have come to an agreement, giving some respite – at least temporarily – to investor nervousness over an all-out trade war.

It remains to be seen whether Canada will sign up, which could be make or break for the deal’s success. Even if this new pact fails, there’s reason to believe the future is still bright for Mexican-based companies.

NAFTA’s replacement – lacking bite?

The NAFTA agreement has effectively synchronised the business cycles of the three countries, boosting revenues and earnings (via enhanced productivity and lowering of tariffs) of corporates in all three countries. It has also led to close cooperation in the arenas of security, policing and foreign affairs.

The new deal centres around harsher ‘rules of origin’ for autos (75% of a car’s value has to be manufactured in North America to avoid tariffs and nearly half the components will need to be made by workers making at least US$16 an hour – Mexico’s average manufacturing worker earns US$2.30).

NAFTA

In reality, it is fairly lightweight and ‘rules of origin’ will only affect a handful of models and sales in the US.

A sting in the tail

Canada has yet to sign up and, crucially, without its support the deal cannot go ahead. NAFTA will have to be dismantled first, which implies a process involving the legislative chambers of all three countries.

And, much like the Brexit saga in the UK, the harsh reality is it is virtually impossible to negotiate a new agreement at the same time as extricating from an existing, complex and long-standing one.

Mexico’s more global focus

Thus far, because of NAFTA, Mexico has not been forced to diversify – the US currently makes up 81% of its export market.

However, in the long term, there are positives for Mexican companies, regardless of what the NAFTA deal looks like – and even if it disappears completely.

As long as protracted negotiations continue over the future of a deal, it is business as usual, but Mexican companies are already exploring ‘Plan B’ and where else their products can be marketed – this could be avocados to Japan, or car parts to China.

NAFTA has helped bolster Mexico’s economy but, with membership of the Trans-Pacific Partnership, a trade agreement with the European Union and its involvement in the China-backed regional Comprehensive Economic Partnership, it is no longer the only game in town.