NAFTA countries are starting to show their cards. The U.S. wants a renegotiation that is nothing short of putting America first. Mexico’s suggested hypothetical win-win outcome is no less than what it already has, though the country admits that withdrawing from the agreement remains an undesirable option. Meanwhile, Canada remains neutral to the discussion.
Mexico has relied heavily on the U.S. market for more than 20 years. Eighty percent of Mexican exports are bound for this market. In turn, Mexico has become the second largest purchaser of U.S. goods, just short of Canada. The Mexican and U.S. economies are currently integrated to such an extent that changing the trade rules will have a significant impact on both economies. The North American sourcing and manufacturing region would have to readjust to these new rules.
Without considering the U.S. threat of imposing a 20 percent “border tax,” which requires its own set of analysis, terminating NAFTA would most likely send the U.S.-Mexico trade back to WTO´s Most Favored Nation (MFN) rules. This agreement would require a 6 to 30 percent tariff duty on U.S. exports to Mexico, depending on the good, and Mexican exports to the U.S. would require roughly a 2 to 5 percent tariff duty.
Therefore, the competitive manufacturing advantages of Mexico (i.e., location, labor, access, etc.) vis a vis those of the U.S. may still result in a number of companies remaining attracted to exporting from Mexico into the U.S. market under WTO’s MFN rules. Even companies that would not remain competitive when exporting to the U.S. can still look into Mexico as a viable option for their international trade transactions and supply chains.
Mexico has a history of welcoming foreign investment and has consistently used exports as a public policy for growth. This has resulted in the implementation of trade promotion programs such as maquiladora, IMMEX, sectorial programs and duty drawback that have been successful in the past.
Mexico has also negotiated free trade agreements with 44 countries other than the U.S. and Canada, including the European Union and the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), Japan, Israel, Chile, Colombia, Peru, Uruguay and most countries in Central America, as well as preferential trade agreements with Mercosur and with the Latin-American Integration Association (ALADI). In addition, Mexico is currently exploring preferential trade agreements with South Korea, Brazil, Singapore, Argentina, Jordan, Turkey and Ecuador.
To provide certainty to foreign investment, Mexico has also agreed to bilateral treaties for reciprocal protection of investments with 32 countries, including China, India and Singapore.
In addition, Mexico has recently developed a new generation of Foreign Trade Zones, which will aggressively promote foreign investment in underdeveloped areas.
Even if NAFTA were to terminate, forcing companies on both sides of the border to readjust, Mexico could still be considered as a viable option when identifying and assessing supply chains and access to markets other than the U.S., or even the U.S. market under WTO´s MFN rules.