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USMCA, its Challenges and Opportunities in Mexico

After months of negotiation, leaders from Canada, the United States and Mexico reached an understanding that ought to set the foundations for the implementation of the new United States-Mexico-Canada Agreement (USMCA).

View over Mexico-City

On September 30th, leaders from the United States, Mexico and Canada released the text for a new trade deal that would replace the 24-year-old North American Free Trade Agreement (NAFTA), covering areas such as agriculture, rules of origin, trade remedies, financial services, digital trade, intellectual property, labour and dispute settlement. This new trilateral deal has a 16-year term and a successful review between the parties after six years or at any subsequent time extends the agreement for another 16 years.

New agreement expected to be signed by end of November

During the past months, NAFTA renegotiations were restraining investment plans and generating uncertainty within the whole region. This new agreement is expected to be signed by the end of November, but uncertainty about passage by the US Congress is likely to persist by 2019.

Implications on the Mexican automotive industry

For Mexico, it was of great importance to keep an agreement with two of the largest economies of the world, since NAFTA represented around the 27.8% of the world’s GDP, however, there are still a few doubts about the real benefits of this new agreement, specifically when it comes to the Mexican automotive industry. The UNCTAD, on its Global Investment Trends Monitor, said this new commercial agreement erodes some of Mexico’s competitive advantages, this impact will be felt more in the second half of 2018 and in the coming years. 
For example, in order to avoid tariffs, the agreement calls for 75% of auto content to be produced in the region. Furthermore, out of this 75%, the 40% (light vehicles) and 45% (pickups) must be manufactured only by workers earning at least $16 USD or more per hour, which is much higher than the typical manufacturing wage in Mexico ($3.5 USD per hour). This new measure is highly beneficial for both U.S and Canadian workers, but not for Mexican ones, as it was implemented to keep jobs from going to lower-paying countries and the Mexican government has already said they are not willing to increase the earnings. 

Benefits for the Mexican automotive industry through the new agreement

Even though the USMCA undercuts some of Mexico’s cost advantages in building vehicles, there are a couple opportunities found by the Mexican Automotive Industry Association (AMIA). The biggest one is that the Mexican supplier industry has an opportunity to increase their auto parts production due to the rise of the use of North American-made parts from 62.5% to 75% by 2023 in both light vehicles and trucks (El Economista). 

Another positive contribution goes to the workers, because the Mexican government authorities are required to allow workers to form collective bargaining units, supporting a more union-friendly regulatory environment. This is expected to be an opportunity for Mexican workers to ask for wage rises, although it is still unclear how it will be implemented. 

Remaining uncertainties regarding announced agreement

Since some uncertainties remain around the announced agreement, it is expected for the MXN (Mexican Peso, currency) to be restrained and contingent on the external environment until a formal vote in the US Congress occurs in 2019. HSBC on its Global Research 2018, states that USD-MXN topside will likely be capped between 19.75-20.00 by the central bank’s monetary policy stance and its willingness to intervene if market conditions deteriorate. They believe a year-end USD-MXN 19.50 would be appropriate.

More economical stability in the upcoming years

It seems that the current NAFTA worked better for Mexico compared to the USMCA due to different concessions, such as the ones mentioned above. However, the most important aspect of the USMCA is that it will keep granting a friendly trade framework for companies operating in Mexico and this could help bringing more stability in upcoming years. 

Nonetheless, within a more protectionist Agreement, Mexico remain as an attractive option to invest, since it is the most open from the three countries. Undoubtedly, Mexico must keep working to take advantage of the opportunities the USMCA entails and more importantly keep further diversifying its international trade.

Are you doing business in Mexico and are uncertain, how this agreement will affect your business? Please don’t hesitate to contact our Consultant Latin America, Benjamin Werenfels and get personal assistance regarding the effects of the USMCA.

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