Day of the Dead for Mexico and Nafta?

November 6, 2017

The only real decision to come out of the fourth round of talks was to delay any eventual decision until 2018. For businesses and investors that means the uncertainty continues. Moreover with Mexico going to the polls to elect a new president in 2018, there will be little time to hammer out a deal next year.

Big differences

What’s clear so far is that Trump’s election campaign rhetoric wasn’t just a ploy to win votes but has now become the USA’s official negotiating stance. Details of the talks are confidential but all sides admitted to “significant conceptual gaps”. Meanwhile, insiders speaking anonymously to Reuters gave more details on the US proposals. One of the most strident was that any car sold inside Nafta must have 50% of its value from US-manufactured content. That would be a clear blow for Mexico, which has established a massive automotive trade surplus with the US. Another controversial proposal is the ‘sunset clause’, which would call for renegotiations of Nafta, every five years. That would add to uncertainty as many businesses invest heavily in factories on the basis that they will be able to earn their return over a 20 or 30-year timeframe.

Mexico clearly has the most to lose from the end of Nafta…

Trade between the US, Mexico and Canada has tripled since Nafta was signed in 1993. Yet US Trade Representative, Robert Lighthizer, has made it clear that the US feels that Nafta is unfairly biased towards Mexico and Canada. In short, the US will be looking to extract concessions from its partners over the remaining three rounds of talks. If it can’t then it may leave. Analysts currently put the odds of the US withdrawing from Nafta at 50%.

Limited impact

Mexico clearly has the most to lose from the end of Nafta. Since 1994 the stock of US investment in Mexico almost quadrupled to $75billion, while Mexico turned a $3.2billion trade deficit with the US into a $120billion surplus. However, even if the US does decide to withdraw the impact on Mexico will not be as bad as many fear. For starters, the benefits of Nafta trade and investment have been concentrated on specific sectors, such as autos and electronic appliances, in a few parts of Mexico – namely the northern states. So most of country would be unaffected directly by the collapse of Nafta. Secondly, many international companies will stay in Mexico regardless of whether Nafta is scrapped. If that happened, commerce between the two countries would then be subject to tariffs under the World Trade Organisation. But these are not too onerous – about 7% for importing to Mexico and 3.5% for importing to the US or Canada. Mexico has such a strong advantage as a low-cost manufacturer that is already integrated into US supply chains that it will still be competitive.