Deal or no deal - Positives for Mexico
11 September 2018
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
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
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).
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
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
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
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.