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Could Mexico's 'high-risk' auto industry derail NAFTA negotiations?

Could Mexico's 'high-risk' auto industry derail NAFTA negotiations? article image

Mexico’s automotive industry plays an important role in its economy.

The sector’s representativeness rose from 1.5% of country’s GDP and 8.5% of its manufacturing output in 1993, to 3% of GDP and 18% of manufacturing output in 2015.

According to Coface, a global leader in risk management and credit insurance, Mexico has 28 vehicle manufacturing plants which generate, directly and indirectly, jobs for 1.7 million people.

The automotive sector is one of the most controversial topics for North American Free Trade Agreement (NAFTA) discussions which resumed last month.

NAFTA, a treaty between Canada, Mexico and the United States, is the world’s largest free trade agreement.

“Since the beginning of his electoral campaign in 2016, President Donald Trump has continually criticised the NAFTA agreement, blaming it for the trade deficit that the United States holds with Mexico and for destroying jobs,” notes Coface.

The NAFTA agreement currently requires that 62.5% of the components of finished vehicles emanate from partner nations, in order to qualify for duty free imports.

Anti-free trade rhetoric

Under the renegotiations, the US wants to raise this ratio to a total of 85%, with 50% guaranteed to American producers. This proposal has been categorically rejected by Canada and Mexico. This outcome would not be favourable for Mexican exports, as 60% of cars produced in Mexico are exported to the United States.

Despite anti-free trade rhetoric from the US and the postponement of NAFTA renegotiations, Coface expects that the most likely scenario to be reached will be a trade deal which conserves most of the cross-border trade links between the three nations.

“The deep extent of the trade relationship between the US and Mexico is one of the factors that increases the likelihood of this scenario,” it says.

“If the US government were to decide to leave the NAFTA agreement, it would experience strong opposition from industries and individual US states.”

Electoral uncertainty

Coface says risks are also intensified by Mexico’s electoral agenda and consumer trends.

Household consumption decisions are likely to be influenced by the uncertainties surrounding Mexico’s presidential elections scheduled for July 1, this year.

The elections are likely to overlap with the NAFTA renegotiations.

And inflation in Mexico grew to 6.8% at the end of last year.

The benchmark interest rate has risen by 450 basis points since December 2015, to reach 7.5% a year, as of February this year.

In 2017, Mexican vehicle registrations shrank by 4.6% year on year.

“A change in government could impact the country’s pro-business economic stance, leading to a marked shift in Mexico´s position on the NAFTA negotiations,” says Coface.

“The dissatisfaction among the country’s population, with rising criminality (2017 was the most violent year in two decades) and corruption have created an environment of anti-establishmentarianism. This has strengthened the chances of a populist candidate winning the presidential race.

Thinking beyond the US trade relationship

Mexico currently has a network of ten foreign trade agreements with 45 countries.

It appears to be seeking further agreements, as well as updating existing ones (such as its trade deal with the European Union).

“In case of the worst outcome for Mexico in the NAFTA negotiations, the country should focus on strengthening its own business climate, as the recent increase in violence and the weak rule of law are hampering investments,” notes Coface. 

According to the 2017-2018 Rule of Law Index of The World Justice Project (WJP), Mexico is ranked in 92nd place among the 113 countries assessed (only ahead of Guatemala, Nicaragua, Honduras, Bolivia, and Venezuela in the 30 Latin America economies analysed).

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