September 21, 2018
From Mexico: The U.S. – Mexico Trade Agreement Has Been Finally Reached
The process of renegotiation of the North American Free Trade Agreement (NAFTA) began on August 16, 2017 with an expectation to be concluded in seven rounds by the beginning of 2018. After a year of talks between the three countries involved (U.S., Mexico, and Canada), on August 27th, an agreement between U.S. and Mexico was finally reached (known as the U.S. - Mexico Trade Agreement).
Several chapters of high complexity that did not allow progress were resolved in seek of achieving a bilateral agreement, such as the sunset clause (under which the new agreement would expire after five years, unless all the countries ratify its continuation), agricultural seasonality, steel/aluminum tariffs and the chapter of the automotive industry that took notoriety.
Although it seems a well-achieved agreement, it should be noted the acceptance of the most controversial proposal made by the U.S. related to the automotive industry, under which in order to apply a preferential 0% duty rate, 75% of the components must be manufactured in one of the two countries and between 40% to 45% must be produced by employees earning at least $16 USD per hour. Failing that, imports could have a tariff of 2.5% or, in a worst-case scenario, up to 25%.
It is necessary to emphasize that it is a preliminary agreement and the incorporation of Canada is still expected, so the trilateral trade battle to reach a new NAFTA continues.
At any case, once the rules of the game are established, it will be possible to analyze the imminent restructuring of the supply chain and, therefore, to know the potential economic impact for Mexico and U.S.