How will the new trade agreement affect Mexico?

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Trade negotiations have been tough. Mexico and the United States had opposing positions regarding NAFTA. However, a new trade agreement has finally been reached: the USMCA. And it is that, Mexico, along with China, Canada and Japan is one of the main exporters to the United States. At Economipedia we analyze how the USMCA affects the Mexican economy.

The automobile industry: the main protagonist of the negotiations

In both the United States and Mexico it is questioned whether the USMCA is better or worse than NAFTA. Be that as it may, what seems to be clear is that not all industries will be equally unemployed. A living example of this will be the automobile industry. Which has been one of the central points of the treaty.

Thus, it seems that in this sense, Mexico will be harmed. The new agreement requires that at least 40% to 45% of cars be manufactured by workers earning a wage of at least $ 16 an hour. Here, it could be argued that Mexico loses out. Since the Mexican industry could produce cars at a lower cost, due in part to the lower wages received by its workers. If everything runs its course, this will end up affecting 32% of the automobile plants in Mexico.

Although it is true that this USMCA requirement will seek to reduce the wage differences between Mexican and American workers, trying to achieve a competitive balance in terms of labor costs.

The tariff limit in the automobile industry

Another highlight regarding automobile exports to the United States is the quota of 2.6 million vehicles. It should be remembered that from this figure, the US government will be able to impose tariffs. However, it seems that most of the Mexican industry will be able to adapt to this limit.

Like automobile companies in Canada and the United States, Mexican manufacturers will have to adapt to the new demands. The new rules of the treaty establish that 75% of a car must be made with parts from the United States, Canada or Mexico. Among which, of course, is Mexico. Thus, this will end up affecting the imports of the three signatory countries.

Given the above, Mexican manufacturers will be forced to reduce imports of iron, aluminum and glass that come from areas such as South America, Europe and Asia.

The textile sector and advances in electronic commerce

In the same way, in the textile sector, obligations have been imposed to work with products manufactured in the North American area. For this reason, the Mexican petrochemical company ALPEK can benefit. Since some of its products are necessary for the textile industry. For example, polyester fibers.

One of the weak points of the old NAFTA was electronic commerce. Thanks to the new agreement, new horizons will be opened for Mexican consumers, who, thanks to electronic commerce, will be able to purchase a higher maximum limit of duty-free products.

Before the signing of the treaty, Mexicans who acquired products via electronic commerce paid tariffs for amounts greater than 50 dollars, however, now that barrier will be increased to 100 dollars.

Cross-border purchases: tax-free up to $ 117

Also purchases at the borders will benefit. A clear example is that Mexicans who make cross-border purchases for an amount of 117 dollars or less will be free of taxes.This measure will promote trade between small and medium-sized companies. Which are especially involved in the so-called cross-border trade.

Therefore, through the proposed initiatives in cross-border trade and electronic commerce, it is expected to stimulate the activity of small and medium-sized companies, which will be able to make their way not only in the Mexican market, but also in the Canadian one.

Better access to external financing

Markets and risk indicators are always very sensitive to political and economic events. He planned the risk of the outbreak of a new trade war. However, the USMCA agreement has helped reduce the fears expressed by the main risk indicators.

A clear example is the JPMorgan EMBI + Mexico Index indicator. Indicator, incidentally, that measures country risk. In mid-June, at the height of trade tensions, it stood at 231 points. While, after the agreement was reached (October 3, 2018), it has decreased considerably, standing at 177 points.

This is explained because experience has proven that when protectionism is imposed, economies contract. Hence, in June the risk indicators were high. But now, with the USMCA agreement, fears seem to have dissipated and the economic outlook for Mexico looks more hopeful. Something that undoubtedly explains the drop in its risk indicators.

Another positive effect of the USMCA on the economy is the fall in the rate differential between Mexico and the United States. In this way, Mexico will be able to better refinance its external debt and will have better conditions to obtain external financing. All this will contribute significantly to the financing of Mexico, which is immersed in the preparation of the 2019 budgets.

In conclusion, although it remains to be seen how events develop, it appears that free trade will win the battle. Not all are advantages, but the Mexican economy will benefit from the agreement.

Tags:  finance present Commerce 

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