North America is reeling from the economic impact brought by the pandemic. This Thursday, both the United States and Mexico revealed figures on GDP performance during the second quarter of 2020, and the picture is not beautiful. The Mexican economy sank 17.3% in the three months through June compared to the previous quarter, a record low. The U.S., in its turn, contracted 9.5% in the same period – or 32.9% on an annual rate, the standard way of reporting economic data by the U.S. Department of Commerce. Canada has not yet released its results, but it is expected to shrink at a similar pace of Mexico’s.
In the midst of this dire scenario, the United States-Mexico-Canada Trade Agreement (USMCA), or the “new NAFTA“, as the deal was nicknamed, which took effect this month is positive news. The agreement is far from being a panacea for the crisis, but it provides order for a regional trade that moves hundreds of billions of dollars in goods and services and, by doing so, it also serves as a sign on the importance of commercial integration to overcome difficult times. LABS talked to Roberto Salinas León, director of the Center for Latin America at the Atlas Network, about USMCA as well as other aspects of the current economic landscape in Mexico, Latin America’s representative in USMCA and the region’s second biggest GDP, such as the country’s pension reform and investment attractiveness.
LABS – How important is USMCA in the current economic environment?
Salinas – I think it is extremely important that it was signed and that it was implemented, because the real threat two years ago was that Donald Trump wanted to withdraw from NAFTA altogether. That would have been catastrophic for Mexico. So the fact that we have an agreement is a huge step forward for Mexico, in the sense that it can continue to rely on broadly free access to the Canadian and the U.S. markets and that the supply chains that have been developed over the past 25 years and the enormous diversification of the export sector and Mexico will be preserved.
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Do you consider it an improvement over NAFTA?
No, I think it is a step backward. They’ve called it NAFTA 2.0, whereas I think it’s more like NAFTA 0.8. In fact, the words free and trade do not even appear in the agreement. Yes, there are some instances of improvement, but all of them could have been done without necessarily renegotiating a new agreement.
What are those instances? Can you give us an example?
One important point is, for instance, the addition of chapters on competitiveness and small and medium sized enterprises. They’re provisions to set up regional committees in order to work on a trilateral basis to incorporate small and medium sized enterprises into the value chains and into the geoeconomic map of North America. That will be especially beneficial for those states in Mexico where you have budding and promising small and medium-sized enterprises, micro enterprises, that simply do not have the institutional wherewithal or the capacity to become more integrated. I believe Brazil suffers a little bit of this as well.
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Much has been said about a better grasp on the digital economy by USMCA. Do you agree with that?
Especially in view of the pandemic, this has become important. Logistics will be the number one driver of competitiveness. Back in 1994, when NAFTA was implemented, e-commerce was barely beginning, and now we have a huge explosion of e-commerce.
How do you see the environment for investments in Mexico?
The idea is that, especially in areas like agriculture and biotechnology, there would be a greater impulse towards innovation, but all of that is going to depend on the internal willingness of the government to protect investment. So this is one of the great debates that we’re having right now. It seems like President Andrés Manuel Lopez Obrador‘s administration is simply saying, “Oh, now we have USMCA. Things will take care of themselves.” That’s not the case. The signals that he’s sending, especially in areas like energy, where so much innovation investment is required nowadays, or biotechnology, are very hostile to investment.
It has not respected private property as far as energy is concerned. It went straight out to try and de facto expropriate the investments in renewable energies that had been done in solar and aeolic energies. With the new Mexico City’s airport, that was canceled, that was an absolutely disastrous and highly populist measure. It was just throwing away $13 billion in investment. Independently of the fact that Mexico needed to modernize its airport infrastructure in the city.
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How do you evaluate the policy toward the oil sector, so relevant for the Mexican economy?
Now, there are these ideas “Maybe [state-owned] Pemex should seize areas where discoveries have been made by other firms”. Well, no. Those were not the rules of the game. That was an idea that was popular back in the 70s, about national sovereignty in oil. But Mexico already imports 75% of its refined products. It was coming to a point where it may have even had to import crude oil in order to meet its rising demand. But those are the signals that somehow this administration does not seem to be paying as much attention as it should, in respecting the fact that you need to breed confidence in the investment regime. USMCA alone is not going to do that.
The Mexican government recently advanced proposals for a pension reform. Are they good, in your opinion?
The good news about this modification is that it does not scrap the individual retirement account system. But, it does represent a significant increase in the cost of financing the retirements, all borne by private sector employees. It is, in a sense, a de facto special tax that employers will have to add to their total cost structure. If this was the price to keep the reform, so be it—especially as some of the so-called “ultras” of the Morena party were calling for an outright expropriation of the retirement funds. I think these are clearly sustainable if the increase here is compensated with a reduction of transaction costs, or taxes, elsewhere, in the medium and long-terms.
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Businesses seemed to back the proposal.
The former Minister of Finance Carlos Urzua revealed that this modification is the outcome of a proposal designed and delivered by the Business Coordinating Council in 2019, as an attempt to manifest greater business solidarity with the worker establishment. So, in a sense, the government is taking credit for someone else’s initiative — which again, is just a point of order, and not significant, in light of the fact that the modification respects the framework of the individual retirement account system.
How would a Joe Biden administration in the U.S. affect cross border trade?
Well, it remains to be seen. I think the Biden administration would be different certainly than the openly nationalist positions that Trump has been espousing and the idea of a trade war with China. I think you would probably have a far more welcome approach to the treatment of trade deficits. So this manipulation of trade deficits, I think it’s something that would not happen under Biden. But there is a point that China has not played by the rules of the game. I mean, stealing intellectual property should not be condoned and should not be allowed. But that’s very different from talking about trade wars and protection. No, what you need to do is sit down and negotiate with China.