New Era of Free Trade Leaves Mexico More Isolated
(Bloomberg Opinion) -- The rejiggered North American Free Trade Agreement pulls the Mexican and U.S. economies closer together, and raises the drawbridge to reduce trade with Asia. For Mexicans who already felt too dependent on the U.S., this is a grim combination.
The reconfigured accord, announced last week, seems like another chapter in the global playbook of muscular regionalism. Globalization is morphing into a new kind of trans-border commerce.
USMCA, as the new pact is known, draws supply chains further inward among the U.S., Canada and Mexico, and away from the outside world.
Beefed-up Rules of Origin, which mandate the extent to which products and components must be sourced within the three countries, extend to chemicals, an array of steel goods, glass and optical fiber. The U.S. is touting provisions limiting non-trio components in textiles and apparel in quite some detail: sewing thread, pocketing fabric, narrow elastic bands and coated fabric.
Autos catch the eye, in part because some of the clauses seem designed to win support, or at least mute opposition, from Democrats and unions. Local content requirements rise to 75 percent from 62.5 percent. Between 40 percent and 45 percent of that content has to be produced by workers earning at least $16 an hour. This can only mean a diminished role for Asia.
Similar restrictions on steel and aluminum underscore the corrosive effect. “For suppliers based outside of Nafta, this is going to be extremely problematic or even catastrophic,” wrote Deborah Elms, executive director of the Asian Trade Centre in Singapore. “Orders could be cancelled outright and never replaced.”
The content of the new Nafta pegs Mexico more firmly to the U.S. and deepens the country’s dependence on the world’s largest economy. Of course, a redone Nafta is better than an end altogether. But as I wrote a year ago, Nafta is much more than a trade relationship.
An entire national model has been based around the 24-year-old bloc. Mexico is mortgaged diplomatically, as well as commercially and economically. In some ways, it’s an emerging market that’s pasted onto a developed country’s pace of growth and fully integrated into the fabric of America’s economic life.
Mexico suffered from China’s ascension into the World Trade Organization because China competed in many of the same export markets as Mexico, and China eroded Mexico’s status as a premier low-wage producer.
Thanks to the new Nafta, Mexico’s ability to diversify beyond customers to the north appears greatly restricted. Mexican department stores stock plenty of goods made in China or assembled in Mexico with Chinese components. It’s hard to see that disappearing, but now it’s also hard to see it growing much.
At a conference in October 2017, Mexican executives made clear that they didn’t see Trump, or someone like him, coming. When the next Trump comes along and thunders about ripping up agreements, Mexico may be even harder pressed to push back, because then it will be even more dependent than it was this time, with even less ability to diversify with Asian suppliers and customers. This is not the globalization we once knew.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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