In the midst of a trade boom, Mexico is seeking to pass reforms that have the potential to violate the free trade agreement with the United States and Canada. Analysts warn that some of the 20 bills expected to be approved in September violate the principles of the agreement, the USMCA, but the electoral period could ease the confrontations between the two governments.
Last year, trade between Mexico and the U.S. totaled $798 billion, allowing the Latin American country to dethrone China as the U.S.’s largest trading partner. This is because the U.S. government has escalated a plan to decouple economically from China, which opens a window of opportunity that Mexico has identified to attract greater investment.
This is where USMCA becomes more relevant than ever, as the agreement is, in a nutshell, a set of business rules that the three countries swore to follow. The fruits are undeniable: trade between the three countries increased 50% since 2020 (when the agreement went into effect) and last year accounted for a third of global gross domestic product (GDP), according to an analysis by the non-profit organization Wilson Center. In North America, $3.6 billion worth of goods and services are exchanged every minute.
It has not been without its clashes. All three countries have used dispute-resolution mechanisms in markets as varied as dairy in Canada to automobiles in Mexico. In most cases, and despite some strong rulings, the conflicts continue, with no one exerting much effort to get the other to do what it should. But the score of reforms that López Obrador is seeking to pass in September, when his party and allies take the majorities they won in last month’s elections, could raise trade tensions to a new level.
Specifically, there are five initiatives that could violate six chapters of the USMCA, explains Jesús Carrillo, a specialist at the Mexican Institute for Competitiveness, an independent research center that worked with the Wilson Center on the report published this month.
“The initiative for administrative simplification is one of the most important,” says Carrillo, “and much will depend on how it turns out in the end.” The initiative seeks to eliminate autonomous bodies such as the Federal Economic Competition Commission (Cofece) but also regulators in sectors such as energy and telecommunications. “It is possible that, within the same reform, it is decided to have another figure of national competition authority and one of telecommunications authority, for example… but, as it is now, the approach is only to remove these authorities and that does not comply with the USMCA,” says the researcher.
However, none of the five initiatives identified by Carrillo and his colleagues is the one that has generated the most controversy. The so-called Plan C is a reform to the judicial power that seeks to have the majority of judges elected by popular vote, which has generated much uncertainty and even caused the exchange rate to plummet by 8% in the days following the election.
“This proposal raises serious concerns that judicial security and independence could be substantially weakened, undermining the rule of law in the country,” wrote Diego Marroquín Bítar and Earl Anthony Wayne of the Wilson Center. “While the results remain uncertain at the time of writing, these developments could pose serious new challenges to the USMCA and the long-term competitiveness of the region, if approved,” they added in the report published earlier this month.
Mexico has clashed with the US on two of the issues included in the reforms, without much success. On the energy issue, the White House opened a consultation process, arguing that it violates the USMCA for Mexican state companies to receive an advantage in the market. On the issue of genetically modified corn, whose ban would cost hundreds of millions of dollars to American farmers who export their product to Mexico, the US is awaiting a ruling from a panel.
But the US government has been “too pragmatic” in its trade confrontations with Mexico, says Juan Carlos Baker, who negotiated the USMCA as an official of the Secretary of Economy under the previous Administration. “The United States clearly realizes that some of these things have a strong implication on business and on the matter of certainty, and it is very far from being what they would like to see,” he says, but electoral times could lessen the pressure.
“The United States needs Mexico for the migration problem, for the security issue, for the fentanyl issue… the Government will be very careful about anything that could influence American public opinion and, therefore, the election,” says Baker, “I don’t see Biden making a fuss about these reforms before the November elections.”
Carrillo also believes that a “political reading” of the USMCA should be made. Unlike businessmen in the US energy sector, farmers are better organized and have put more effective pressure on the White House, which is why the dispute was escalated to the level of a panel and did not remain in limbo like the energy dispute. “It is very evident, in my opinion, that these very powerful territories have a say in this, because they represent votes that can be moved in an important year for their party,” explains Carrillo.
A broader reading of these reforms, and therefore changes in the Mexican economic landscape, points to the entry of a new paradigm, according to Baker. “This predicts that a different regime will be consolidated in Mexico than those that existed at the time of NAFTA and even during the first years of the USMCA. Mexico is going to go in another direction. I don’t think that everything that is being proposed is necessarily bad, but there are things that, in their spirit, are difficult to reconcile with the context that the USMCA is supposed to have proposed five years ago,” concluded the specialist.
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