After long and sometimes very intense talks that lasted for a little more than a year, Mexico and the United States recently reached an understanding on bilateral trade through the renegotiation of the NAFTA. The representatives for both parties came to mutual agreements on the most difficult of the issues that were under consideration. According to several analysts, Mexico has, however, conceded its positions on one of the most important of US concerns.
Since assuming the US presidency, President Donald Trump has insisted that significant changes be made in the trade regime that governs the North American automotive sector. Trump had often made the assertion that if changes were not made, the US would charge tariffs on vehicles imported from Mexico into the United States.
According to Trump, the low wages paid to Mexican automotive workers encouraged automotive OEM and parts manufacturers to open plants south of the border, thereby causing significant unemployment in the US. For this reason, the US president stated that any renegotiation of the NAFTA should stipulate that 85% of the parts of each vehicle assembled in Mexico should originate in the United States. The pre-renegotiation version of the NAFTA dictated that only 62.5% of the parts be made in the United States. After the recent renegotiation of the NAFTA, both parties agreed to increase the percentage by 12.5% for a total of 75%. It is anticipated that this change would result in more auto parts being manufactured in the United States.
According to professor Arlene Ramirez of the Technological University of Monterrey, the renegotiation of the NAFTA in its final form does not represent a best-case scenario for Mexico. The result of the agreement will be felt negatively in the Mexican automotive manufacturing sector. The country will lose 12.5% of its production. Political scientists on both sides of the border agree that this represents a political victory for Donald Trump before his nation’s mid-term elections.
In addition to a change in the percentage of parts manufactured in the United States under the renegotiation of the NAFTA, Mexico also agreed that 40% to 45% of the value of cars manufactured for the North American market be built in areas that have wage levels of at least $16 per hour. In Mexico, it will be very difficult for manufacturers to meet this requirement, considering the current average salary in the country’s automotive productive sector is just over $2 per hour.
The renegotiation of the NAFTA and the sunset and dispute resolution clauses
Another provision that the US sought to achieve during the recent renegotiation of the NAFTA was that of a “sunset clause.” A sunset clause would enable to termination of the agreement to occur after a period of five years should any party wish to do so. In the final renegotiation of the NAFTA, representatives from the two parties agreed to establish a sunset clause provision after sixteen years. In addition to that mechanism, the teams also agreed to meet and review the new version of the NAFTA after six years in order to determine whether or not to extend the trade accord for another sixteen years.
As regards Article 19, which provides the rules for the resolution of trade disputes, Mexico is in favor of eliminating it or modifying it. This article of the NAFTA has yet to be fully reconsidered and will be looked at when a renegotiation of the NAFTA with Canada has been finished.