NAFTA in a Land of Uncertainty: Is Mexico Still an Alternative for Foreign Investment?

NAFTA countries are starting to show their cards. The U.S. wants a one-sided renegotiation – wherein it receives benefits that were denied to it during the original negotiation, but Mexico does not also improve its position. 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 at a substantial cost to all involved.

Without considering the U.S. threat of imposing a 20 percent “border tax,” which requires its own analysis, terminating NAFTA would most likely send the U.S.-Mexico trade back to WTO´s Most Favored Nation (MFN) rules. Under those rules, U.S. exports to Mexico would be subject to a 6 to 30 percent duty, depending on the product, and Mexican exports to the U.S. would be subject approximately to a 2 to 5 percent duty. In light of these MFN rules, the competitive manufacturing advantages of Mexico (i.e., location, labor, access, etc.) vis a vis those of the U.S. may persuade a number of companies to continue exporting from Mexico into the U.S. market. Even companies that would not remain competitive when exporting to the U.S. could 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 encouraged 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. 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. Thus, even if NAFTA were to terminate, forcing companies on both sides of the border to readjust, Mexico could still be 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.

Gardere’s international trade group will continue to monitor developments in this area and work with our clients to manage the associated risks.