Monthly interview – July 2017

NAFTA Modernization vs. Renegotiation

Introduction:

The influence of USA to Latin American Economy, especially Mexico, has been strongly present during the first 100 days of Trump’s presidency. One of the most discussed topics may be the renegotiation of the NAFTA (North American Free Trade Agreement). What should we understand under this term “renegotiation”?  What would be the implications for the countries involved?

We would like to talk with an expert in the area, who also after the recently WEF that took place in Latin America can further explain to us what can be expected?  What does MX should be aware of? And how long these kind of renegotiations can take?

Latest facts:

  • January 2017, President Trump announced US exit of The Trans-Pacific Partnership (TPP) trade deal which also included both Mexico and Canada eliminating options to modernize the trade between these three countries.
  • Uncertainty looms over NAFTA. Mr. Trump called the agreement “the worst trade deal in history” and promised either to renegotiate it or abrogate it. He has talked of slapping a tariff of 35% on Mexican exports to the United States.
  • Renegotiating the 23-year-old pact is by itself a positive action.  The original agreement came into force in 1994 and the economy and specially the technology has changed since then, for example was essentially no electronic commerce when NAFTA launched.
  • Last May 18, 2017; U.S. Trade Rep. Robert Lighthizer sent a letter to congressional leaders, starting 90 days of consultations with lawmakers over how to revamp the pact. The two-page letter offered few details about what changes the administration would seek. Mr. Lighthizer told reporters that any new deal should do a better job of protecting U.S. factory workers and should be updated to reflect new technologies.
  • Only after the 90 days of consultation the talks with Canada and Mexico can start. Source: FoxNews 
  • Trade wars and rising tariffs could severely disrupt American supply chains for example the American car industry relies heavily on component suppliers in Mexico.
  • For Mexico, a tariff increase on exports to the United States would create a loss of about 63,800 jobs and 0.4% of GDP for every 10-percentage-point increase in tariffs. The domino effect would be dramatic – a likely increase in exchange rates, leading to higher prices, higher inflation and a greater distortion in wealth distribution. source: WEForum
  • On the flip side, MFN tariffs would have an especial effect in states like Texas (0.17 percent drop in GDP), Iowa (-0.15 percent), and Nebraska (-0.14 percent): source: WEForum

I am talking today with Antonio Human, He is Community Lead for Latin America, and  Global Leadership Fellow at the World Economic Forum.

Q1. Which industries / topics do you consider that will be first priorities during the renegotiation?  

“Renegotiation” sounds a bit harsh, I think that a “modernization” of the NAFTA agreement is more appropriate and certainly, more positive.

In my opinion, NAFTA needs to be modernized in the three following areas of priority:

Energy: Since 1938, when President Lázaro Cárdenas expropriated foreign oil companies in Mexico, PEMEX held a monopoly over the Mexican oil industry. Only as of 2013, when the energy reform transformed the oil and gas sector into an open market, firms were allowed to compete in downstream activities, such as refining, petrochemicals, pipelines and transport. The original NAFTA Agreement, which was put into effect in 1994, did not encompass the opening of the energy market in Mexico as of 2013. Hence, this new development within the Mexican energy sector should be a crucial point of discussion as it represents an opportunity for both US and Canadian oil companies. The same is true in the renewable energy space. Furthermore, a greater integration of the North American oil axis could help reduce the US’ dependence of Middle Eastern oil.

Intellectual Property: Within the scope of a modernization of the NAFTA agreement and intellectual property rights, Mexico still has a long way to go. Not so much with regards to putting intellectual property laws into place, but in implementing and executing these laws. If Mexico wishes to attract new businesses, it is key that a safe and orderly environment of intellectual property rights is firmly in place.

E-commerce:  Today NAFTA represents a unique opportunity to put into place the world’s most advanced and all-encompassing e-commerce framework.

Q2. How feasible is that the renegotiations of the NAFTA will keep a balance benefit for all the implicated countries?  Which will be the main consequences if renegotiation goes towards a protectionist agreement?

This question gives way to ample discussion, which goes beyond trade implications, reaching matter of the global balance of power across nations.

NAFTA has been a win-win-win situation for all countries involved. However, it is not perfect, there is a clear opportunity for improvement and I believe that the pressure from the Trump administration to modernize could be something positive. In the absence of a re-modernization, sooner or later, NAFTA would become obsolete. Nevertheless, Mexican negotiators should be ready to step away from the negotiation table if quotas or tariffs (or even the “wall”) are brought to the discussion.

A failure of NAFTA negotiations would have enormous consequences, as the supply and value chains across the three nations are so inter-linked (electronics, pharmacy, automotive, etc.). American and Mexican industries are efficient (particularly when compared to Asian competitors) partially thanks to these inter-linkages. Asian competitors will be the first to benefit if the modernization process of NAFTA fails, as American companies look into finding suppliers elsewhere, ironically (from a Trump administration point of view) increasing the US trade deficit with China. A loss of Mexican competitiveness would inevitably ensue (at least in the short run).

A second consequence would be Mexico truly integrating with Latin America, as it looks south, and invests in the strengthening of the Pacific Alliance (Chile, Peru, Mexico and Colombia and more recently, New Zealand, Australia, Canada and Singapore as associate members). The repercussions of such are not necessarily all negative, as this might lead to an approximation of the Pacific Alliance and MERCOSUR (Brazil, Argentina, Uruguay and Paraguay). As a first step, however, what we might see is an incentive to accelerate bilateral trade agreements between Mexico and Argentina, and Mexico and Brazil.

Q3.? In your opinion, which areas should the modernized in the agreement be modernized/ improve?

In addition to energy, IP and ecommerce, which I have mentioned earlier, I believe there are other areas which could also benefit from the modernization of the NAFTA agreement. In 2014, Mexico passed and implemented a telecom reform to increase competition in the sector. I believe the NAFTA modernization could include the expansion of the Telecomm provisions and to remove some of the barriers that remain, as to allow American and Canadian companies to increase their participation in this market, while ultimately benefitting the end consumer.

Another opportunity lies in further strengthening labor laws and environmental standards in Mexico, as the US and Canada raise the bar for Mexican producers in this respect and create a pressure to adhere.  

Personally, I would also like to see a serious discussion around creating a framework for the disruption resulting from the Fourth Industrial Revolution. This moment in time, when NAFTA is being rethought, provides a unique opportunity to address the concerns of job loss and other risks resulting in the rapid implementation of technologies such as artificial intelligence, robotics, Automatization, self-driving vehicles, blockchain, etc.  We must not only think of fixing what is not working, but also creating a new platform for generations to come.

Q4. How long do you believe this renegotiation can take? Which obstacles may delay the process?

I do believe we find ourselves in a “it’s now, or never” type of situation. My hope is that the upcoming negotiations are expedited so that as of the 16th of August 2017, when all parties will have concluded their internal consultation periods, discussions can begin. As difficult as it may seem, Mexico should do whatever it takes to finish by December 2017, otherwise we risk a long bump due Congressional elections in the US and to Mexican presidential elections in July 2018. Depending on the outcome of Mexican presidential elections, a potential new party in power could also freeze the process, extending it beyond 2019.