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Free trade optimism in Mexico tempered with caution

The signing of the updated free trade agreement between the United States, Mexico and Canada — now known as USMCA — at the G20 Summit in Argentina on Nov. 30 was an unexpected breakthrough in many ways.

After months of negotiations, it appeared to prove the fears of many were unfounded. Not only had President Trump not proven good on threats to pull out of NAFTA, his newly elected Mexican counterpart and former NAFTA critic, Andrés Manuel Lopez Obrador, had pledged to back the agreement.

Speaking at a recent PMA Mexico meeting, Mexico’s lead NAFTA negotiator, Kenneth Smith Ramos, explained how the outcome was viewed from Mexico, a view best summed up as optimism tempered with caution.

Success story
NAFTA, according to Smith Ramos, was born of the belief that a free trade zone would bring economic benefits for all three countries. The figures appear to back this up. Between 1994 (the year NAFTA came into force) and 2017, Mexico-U.S. agricultural trade grew by 598 percent, during which time Smith Ramos estimates close to $45,000 million worth of business took place.

“Fruits and vegetables account for 50 percent of Mexico’s agriculture exports to the U.S.,” explained Smith Ramos. “Meanwhile grains, meats and oilseeds make up 50 percent of U.S. agricultural exports to Mexico, so it’s complementary.”

Smith Ramos said this success was based on the understanding that Mexico was not just a key destination for U.S. produce, but also a primary source of products that are a part of everyday life in the United States.

“In 2015, Mexico supplied nine of 10 limes and papayas, and eight of 10 avocados consumed in the U.S.,” he said. “Figures like this are important for understanding the symbiotic relationship between Mexico and the U.S.”

Conflicting objectives
So if the data looked so positive, why was there so much tension surrounding the renegotiations? In a word, Smith Ramos said President Trump marked a major shift in the NAFTA talks.

“The U.S. arrived with the belief that free trade deals had damaged its economy, and tried to find people to blame,” he said.

From the moment Trump won the presidency in November 2016, Smith Ramos said Mexico began preparing for a NAFTA renegotiation, basing its position around strengthening competitiveness while avoiding new trade barriers.

“Trump's view is that trade is a ‘zero sum’ game,” argued Smith Ramos. “‘If I have a deficit with you, I’m losing. If I export to you, it’s OK, but if I import from your country, it’s bad’. It has nothing to do with economic reality, but this was what the president brought to the table.”

Counter proposals
As the planned six months of talks stretched to 14, Smith Ramos said Mexico fought hard against U.S. measures that could have adversely affected trade, notably a sunset clause.

“The U.S. wanted a sunset clause after five years,” he recalled. “This would have created terrible uncertainty because exporters work long-term. We would also have had the U.S. on top of us from day one, threatening to pull out if we didn’t agree to demands.”

Instead, Mexico arrived with counter-proposals — that were eventually accepted — for a six-yearly review, which allows for periodical revision rather than an outright withdrawal.

However, Mexico’s chief negotiator said the key intervention came from within the United States, from exporting states such as Kansas, Iowa and Oklahoma that put pressure on Trump not to pull out. Smith Ramos said Mexico also managed to avoid the measures, such as antidumping regulations or produce subsidies, which could have negatively affected Mexican growers.

Trusted traders
But there is one clause Smith Ramos said would not be found in the new agreement, for the simple reason it does not exist: Trump’s pledge to reduce the U.S.-Mexico deficit.

“If Trump had achieved this objective, it would have been hugely negative for trade because it would have meant accepting if you have a deficit you are at liberty to implement protectionist measures,” he argued. “The fact we did not accept this precedent is very important.”

In fact, Smith Ramos said the USMCA maintains zero tariffs and access restrictions for Mexican products in the United States. Commerce will also be eased by faster risk analysis and opening a priority channel for Mexico to the U.S. as ‘trusted traders’, although he stressed Mexico would face the same obligations for U.S. products.

So where do things stand today? Following the singing, it is expected to take six to eight months for the deal to be ratified in each country, with a possible coming into force on Jan. 1, 2020.

However, with the Democratic Congress at loggerheads with Trump and uncertainty over the direction of the new Mexican administration, Smith Ramos admitted many things can still happen.

Industry reaction
“We export organic and conventional produce from Guanajuato, Mexico, to the U.S., including lettuce, cauliflower, celery and broccoli," said Adrián Ortega of Mr. Lucky. "I’m convinced we need the U.S. and the U.S. needs us. It’s a relationship that has to be there and has to be maintained under the present conditions because the two markets are complementary.”

“Cocanmex exports mango, avocados, papayas and coconuts from Mexico primarily to Canada," said Roger Gay of Cocanmex. "I don’t think the agreement is going to affect us, but we’re keeping our fingers crossed until all governments sign it – the new government in Mexico, the Democratic Congress, Canada. There’s still a big hurdle to overcome to get all governments to sign it, and that worries me.”