Mexico's trade with its T-MEC partners fell 4% in the first 6 months of its term

20/02/2021

The COVID-19 pandemic caused the Treaty between Mexico, the United States, and Canada (T-MEC) to register divergent results six months after its entry into force. According to data from the Bank of Mexico, Mexico's trade exchange (exports plus imports) with its two North American trading partners amounted to 291 billion 446 million dollars during the second half of 2020, which meant a 4 percent annual drop compared to the same period in 2019.

T-MEC ready to go into effect in Mexico
T-MEC ready to go into effect in Mexico

The negative variation was largely due to the weakness of Mexico's domestic market. On the one hand, the value of exports with its T-MEC partners amounted to US$196.98 billion, which represented an increase of 0.7 percent compared to the second half of 2019. However, imports could not tell the same story, as the value of Mexican purchases was 94 billion 466 million dollars, which meant a 12.6 percent contraction compared to the same period last year.

Despite having a free trade agreement with both countries, the preference for the U.S. market continues to be overwhelming, since 96.8 percent of Mexican exports and 95.2 percent of Mexican imports were destined for the United States, while the rest corresponded to the country of the maple leaf.

During 2020, the United States remained Mexico's main trading partner, while Canada dropped from fourth to fifth place.

Yael Gutiérrez, Foreign Trade Manager at SGS Mexico, said that the first six months of the T-MEC have represented a challenge for Mexico's exporters and importers, as it is handled differently from what was observed in the North American Free Trade Agreement (NAFTA).

"COVID-19 caused a shake-up in international trade during 2020, however, our T-MEC partners and all countries internationally are aware that supporting foreign trade is a symbol of economic reactivation, so we expect a better 2021," he said. During 2020, Mexican exports to North America fell 9 percent, while imports fell by 18.3 percent.

Changes made to the T-MEC

Labor Standards

U.S. unions accused NAFTA of stealing manufacturing jobs because Mexican labor is cheaper. Democrat Nancy Pelosi, Speaker of the House of Representatives, had warned that she would not admit the new agreement unless they provided guarantees that Mexico would meet labor standards.

After months of negotiations, Pelosi said Tuesday that the agreement was "infinitely better" than the original. The new text was also welcomed by the powerful AFL-CIO union whose president, Richard Trunka, said that for the first time there will be labor standards whose compliance can be monitored.

The new provisions will force Mexico to comply with labor reforms it has already approved and to allow verification of its labor standards for goods and services, under penalty of sanctions.

The verification will be carried out by "independent labor experts. Mexico did not allow factory inspections.

Environmental regulations

The Democrats insisted on including strict environmental standards and mechanisms to monitor compliance.

As with labor, the agreement creates "environmental aggregates" in Mexico City that will oversee its laws and regulations.

Medicines

The revision of the text included the chapter on medicines.

The changes removed rules requiring the three partners to grant at least 10 years of exclusivity for biological drugs, which will facilitate the rapid entry of generics into the market and thus reduce prices.

Economic impact

From its entry into force, NAFTA boosted U.S. trade, helped stabilize Mexico's economy, and restructured the manufacturing sector into a tri-national production chain.

Some, including Trump, accuse NAFTA of destroying U.S. jobs, but more jobs were lost to technology.

And NAFTA gave a big boost to GDP that surpassed the jobs lost by the treaty, according to the Peterson Institute of Economics.

An analysis by the U.S. International Trade Commission said that in six years, the T-MEC will raise U.S. real GDP by 0.35 percent and generate 176,000 jobs, especially in the manufacturing sector.

Increased trade

The Commission believes that the new pact will increase U.S. imports from Canada and Mexico, and equally so exports to those markets.

In 2017 Canada and Mexico were among the United States' largest partners.

The United States exported goods worth 292 billion dollars to Canada and 243 billion dollars to Mexico in 2017.

In comparison, the United States exported to China, its third-largest customer, goods for only $130 million dollars.

Meanwhile, the leading global economy received products from Canada for $314 million dollars in 2017 and $299 million from Mexico.

Cars: higher wages

Car manufacturing was a key element. To be traded duty-free, T-Mec will require that 75 percent of the composition of the vehicles originate in the region, when under NAFTA the rate was 62.5 percent. Also, between 40 and 45 percent of it must be manufactured by operators who earn at least 16 dollars per hour.

Mexico has admitted to respecting the safety standards established by the United States, unless the Mexican authorities conclude that they are inferior to theirs.

Dispute Resolution

At Canada's insistence, the United States agreed to maintain the system of dispute settlement among partners; formerly known as Chapter 19.

But some changes were made to the mechanism known as "Investor-State Dispute Settlement. Critics say this allows powerful companies and investors to override local laws or judgments through a mechanism that is not subject to arbitrations demanding accountability.

Digital Commerce

When NAFTA was born in 1994, digital trade hardly existed at all, but 25 years later it became a key negotiating factor for a new agreement. The T-MEC prohibits the application of customs duties to digitally distributed goods such as software, games, books, music, and films.

It also restricts the power of governments to force companies to reveal ownership of source code or impose restrictions on where data can be stored.

Chinese clause

Included in the agreement is a provision that seems designed to prevent Mexico or Canada from seeking a better agreement with Beijing.

If a signatory seeks a free trade agreement with an economy not considered as "market" - read China - the other parties can cancel the trilateral agreement and establish a bilateral one.

Twilight clause

The new agreement will be in force for 16 years, but will be reviewed every six years. If the parties decide to renew it, it will be in force for another 16 years. But if a problem arises, a period of 10 years is opened to negotiate a solution and if it is not reached, the T-MEC will expire.