Why The NAFTA Reboot Is A Raw Deal For Mexico
Proposed changes to the trilateral trade accord could scare off investors, hurt Mexican automakers, and sour relations with Canada, analyst Luis Rubio argues.
MEXICO CITY — As lawyers sometimes say: "Better a bad settlement than a good fight!" I imagine that's what Mexican negotiators were thinking while haggling with their U.S. counterparts over a trade deal — the revised North American Free-Trade Agreement (NAFTA) — that negates the reasons Mexico signed on to the accord in the first place. The best we can hope for now is that U.S. lawmakers reject the deal so that the status quo will prevail.
From what we know of the new pact, it contains two major concessions on our part. First, it puts a cap on vehicle exports, and therefore threatens to limit growth possibilities for Mexico's most dynamic industry. Technically speaking, we can still export cars outside the new FTA (Free Trade Accord) and just pay the tariffs. But there is undoubtedly a risk that when this treaty is up for review, six years from now, the Americans will interpret the export quota as an absolute limit, not one within the bounds of the accord. And so in that sense, we're risking this entire pillar of Mexican industry.
Second, what for us is the heart of NAFTA — Chapter 11 — has been weakened almost to the point of nullification. Chapter 11 spells out rules for resolving differences and is the foundation NAFTA's success for a simple reason: It protects investors from arbitrary government decisions or unjustified expropriations. The mechanism creates proceedings to resolve disputes in an environment free of political influence. It was Chapter 11 that motivated Mexico to first negotiate the trade deal with the United States, back in the 1990s.
We're risking this entire pillar of Mexican industry.
Originally and essentially, NAFTA was conceived with political, not strictly economic, objectives. A reliable instrument was needed that was immune to political pressures and constant changes, and able to raise investment conditions in Mexico to international standards. Within this framework alone, and with the security it provided, the country managed to attract the investments that contributed so much to its modernization in recent decades. Through Chapter 11, NAFTA takes politics out of investment decisions — hence its importance and popularity.
The revised rules on resolving disputes protect services but leave industry in the lurch. Our negotiators from the Secretariat of Economy know as much. They also understand how vital Chapter 11 is to NAFTA. It would seem, therefore, that the decision to accept the changes was not theirs, but rather the product of political calculations that transcend any desire to maintain the country's stability and economic viability.
Trade big and small at the Mexico-U.S. border — Photo: Roberto E. Rosales/Albuquerque Journal/ZUMA
In addition — and this does not necessarily reflect the Mexican government's preference — the way this phase was handled has alienated the other bloc member, Canada, and presented it with an ultimatum: Either accept the deal as it is or be left out.
Just as Chapter 11 is crucial to Mexico, for Canada it is Chapter 19, which regulates dumping. Mexico agreed to eliminate this chapter, threatening Canada's interests and with it the trilateral relationship as a whole. The move puts Canada at a difficult juncture, and its ruling coalition may even collapse, should it accept the terms imposed by negotiations with Mexico.
There are circumstances, clearly, that forced Mexico into these negotiations. The mechanism (namely the Trans-Pacific Partnership) that was supposed to update the treaty without provoking the negative passions associated with the acronym "NAFTA" collapsed the day Donald Trump entered the White House. Revisions, in other words, were due to happen one way or the other. The hope, though, was to upgrade NAFTA, to improve it. Instead, we've backtracked.
The move puts Canada at a difficult juncture.
The revisions raise a number of unanswered questions, starting with the Canada conundrum and whether it will even be possible to present the U.S. Congress with a bilateral deal, given that NAFTA was originally authorized as a trilateral accord. Are there enough votes in Congress for one, or two, bilateral accords, considering the divergent interests of America's southern and northern neighbors? Also, how badly will this accord hurt Mexico"s relations with Canada. And finally, how many changes might the U.S. Congress — under pressure, no doubt, from car makers and service-sector corporations — insert into the draft U.S.-Mexico accord?
All of that begs the question of why Mexico would accept such a scenario. Two possible explanations come to mind: The first is that the negotiators are confident that third parties working through the U.S. Congress will defend our interests and preserve NAFTA's essential core. They chose, in other words, to take a "calculated" leap into the unknown. The second is that they simply wanted to spare the outgoing administration one last defeat. Either way, what they have done is strip NAFTA of its greatest virtue — its apolitical character — and replace it with something that smacks of politics.