NAFTA in a Land of Uncertainty: A Perspective From Mexico

17 January 2017 Publication
Author(s): Andres Alvarez Marcos Carrasco Menchaca Alejandro N Gomez-Strozzi

Potential reactions to trade measures that may be undertaken by U.S. president-elect

The U.S. president-elect has proposed to renegotiate or withdraw from NAFTA and impose a 35 percent tariff rate on imports to the U.S. from Mexico. The Mexican government has remained largely silent and expectant regarding such claims. While the Mexican government has not disclosed potential retaliatory measures, Mexico is not helpless and has some options in the event such proposals become reality under the new administration.

In a previous alert, we analyzed the possibility of a U.S. withdrawal from NAFTA. Below we address potential responses from Mexico in the event of a NAFTA renegotiation or other restrictions on imports to the U.S. from Mexico.

What can the Mexican government do to counteract measures from the Trump administration?

The Mexican government has measures available to counteract tariff increases and nontariff barriers on imports from Mexico to the U.S., which would have the practical effect of blocking certain U.S. exports to Mexico. These actions range from an increase in import duties on U.S. products coming into Mexico to the establishment of nontariff barriers on imports from the U.S.

Mexico is no stranger to non-tariff barriers. In fact, Mexico has increasingly used them to protect certain sectors of its domestic industry. Some of these measures include:

  • Minimum import reference prices for textile and footwear imports
  • Limiting entry ports for textiles
  • Requiring advance import-notices for steel products
  • Requiring prior permits for steel and iron ore
  • Establishing import quotas for toys and clothing

The use of antidumping duties has also been on the rise, even though antidumping investigations involve a lengthy and adversarial process in which U.S. exporters can, contrary to the previous measures, opine and argue on their behalf.

Some non-tariff measures can be unilaterally imposed by the Mexican Ministry of Economy while others may require coordination with other Mexican agencies. In either case, implementation is relatively swift because it simply requires the approval of a multiagency, non-binding opinion body (the Foreign Trade Commission, or COCEX in Spanish) and publication in the Diario Oficial de la Federación. Such steps could be accomplished in weeks, or even days, if the Ministry of Economy determines the matter to be urgent.

The Mexican government could also enhance the existing relationship with other trading partners, such as the EU or countries in Latin American, or could even foster trade relationships with new trading partners, mainly in Asia.

What can companies do prior to and during a NAFTA renegotiation?

Companies in Canada, Mexico and the United States should be prepared for a renegotiation of NAFTA. As with any negotiation process, they should be able to identify the business interests that may be affected, including any potential impact to their supply chains. After identifying such interests, they should set appropriate scenarios or courses of action that may minimize any possible adverse effects (i.e., alternative sources, alternative markets, etc.). At this point, engaging with industry trade groups could also help create common industry positions.

Simultaneously, businesses should approach their corresponding trade negotiators at the government and/or industry level to provide their views on a potential NAFTA renegotiation. These negotiators should know firsthand, directly from the companies themselves, what the company would expect to occur during any renegotiation process, as there may be some risk in assuming that the industry or sector-wide associations may accurately and actively represent the company´s interests.

In addition, governmental authorities welcome receiving a document outlining a negotiating position and relevant information that they can bring directly to the table without investing significant amounts of time from their end (i.e., relevant tariff lines, trade statistics, legal venues and, better yet, how the company’s counterparts could react).

Ideally, companies should also ensure a permanent presence in “the room next door” to the trade negotiators during the negotiating rounds, which is vital to react to any inquiries from governmental representatives in a timely fashion.

Should you stock up and prepare for a trade war?

It is hard to predict what the Trump administration will actually end up doing. However, it is clear that NAFTA is included on the president-elect’s priorities list.

At the same time, we recognize that the U.S. market cannot internally satisfy all of its needs, that Mexico has more competitive labor costs compared to the U.S., and that a “near shore” advantage is evident and is not going away. Further, Mexico has a history of trade promotion programs such as maquiladora, IMMEX, sectorial programs and duty drawback (to name only the most relevant) that have been very successful in the past.

While the Trump administration may want to discourage U.S. businesses from manufacturing or sourcing in Mexico and instead seek access to the U.S. market, the administration will not want to negatively affect U.S. consumers of Mexican-sourced and/or manufactured goods.

In light of the above, it would be wise to start working through applicable scenarios and develop strategies and courses of action to minimize possible adverse effects to your business, whether in Mexico or the U.S. This includes defining and creating a negotiating position in case NAFTA is renegotiated and maintaining a permanent presence in the “the room next door” to the trade negotiators, as well as identifying business interests that may be affected by increases in tariff duties and/or non-tariff regulatory barriers, including potential supply chain impact. We have the legal and practical expertise to help minimize exposure to the scenarios described above and are available to assist.

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