After more than five years of negotiations, the Trans-Pacific Partnership (TPP) was finally agreed last year across 12 countries in the Americas and Asia. Once the landmark agreement is ratified by national governments, it could reshape trade patterns across the Pacific.
For the Mexican automotive industry, TPP brings the opportunity to further open up key markets in emerging Asia, as well as bringing closer cooperation with important neighbours in Latin America.
The TPP is the continuation of an increasingly open trade policy for Mexico. The country currently has about 12 free trade agreements involving 44 countries, including the US and Canada in NAFTA, as well as deals with the European Union and Latin American countries. Ildefonso Guajardo Villarreal, the secretary of the economy, a government cabinet position that plays a major role in facilitating such deals, is in the process of negotiating or updating agreements with the EU, the EFTA, Turkey, Jordan and Brazil, among others.
These agreements are one of the reasons Mexico is so attractive to the automotive industry, and partly why carmakers from around the world have been so interested in investing in the country. For example, premium carmakers such as BMW, Mercedes-Benz, Infiniti and Audi plan to use the country as a base for global exports. “Free trade means investment in industry. The Japanese came, and then the Europeans came,” said Guajardo at the 2016 Automotive Logistics Mexico conference.
Eduardo Solis, president of the Mexican automotive manufacturers association (AMIA), also credited Mexico’s openness to free trade and foreign investment as being among the reasons the country has grown its production and exports ahead of markets such as Brazil, which remains a relatively closed economy.
“Brazil is in an economic crisis and it will recover, but Mexico is competing against the world, while Brazil is not ready to do that,” he told delegates. “They have a competitive issue, and impose customs duty of 35-60% customs.”
The TPP could be yet another game changer, as it covers around 40% of the world’s economy, and around 27m units of light vehicle production. The 12 countries involved are the US, Canada, Mexico, Chile, Peru, Australia, New Zealand, Brunel, Malaysia, Singapore, Vietnam, and Japan. Of these, Mexico already has trade deals with five of them, including the US, Canada and Japan, but Guajardo maintains that they need modernising.
The agreement covers a number of areas of economic policy, including lowering trade barriers, a common framework for intellectual property, labour and environmental law, and efforts to establish an investor-state dispute settlement mechanism. Guajardo also pointed to countries that have expressed interests in getting involved, such as South Korea, Taiwan and Indonesia, or who will align standards and regulations around the agreement.
However, the TPP was nearly scuppered or significantly delayed because of a key issue concerning the Mexican and North American automotive supplier industry.
Mexico joined the negotiations in December 2012 just days after the administration of the current president, Enrique Peña Nieto, took office. Guajardo said that fortunately at that time, most of the agreements had not yet been reached. “Mexico had the chance to take the pen and write the rules,” he said.
However, as negotiations drew to a close last year, leaders from the countries involved were called for a meeting in Hawaii in 2015 to finalise several outstanding details. Whilst there, Guajardo and his team were discouraged to find that the US and Japan had agreed bilaterally on a 30% rule of origin for automotive production from TPP to allow for reduced-duty imports. If agreed, it would have allowed a large amount of parts and material from non-TPP countries that Japanese carmakers tend to use. Both Mexico and Canada objected strongly to the proposed rule.
“Japan takes a lot from Indonesia and Thailand, but if you are doing 21st century agreements with very high standards and environmental and safety concerns, then why should we give so many rights to non-members?” he said. “That was the basic line of defence.”
Within NAFTA, carmakers can move cars through the region without duty as long as it was built in the region with at least 62.5% content from the US, Mexico or Canada, although this percentage allows for some service and integration costs that are not strictly parts and material.
"Japan takes a lot from Indonesia and Thailand, but if you are doing 21st century agreements with very high standards and environmental and safety concerns, then why should we give so many rights to non-members?" - Ildefonso Guajardo, Mexico's secretary of the economy
Although Japan initially refused to negotiate, eventually a 45% rule of origin figure was adopted. According to Guajardo, this figure is actually quite close to the NAFTA requirements because it does not include those indirect costs. Of course, the 45% is spread across a much broader group of countries than NAFTA, however Guajardo is confident they will allow the Mexican parts industry to compete.
“At the end of the day the effort made was very important because it kept integration of North American industry very strong,” he said.
He also pointed out that this requirement is a strong basis for future countries that may join the agreement. In the US-South Korea free trade agreement, for example, South Korea secured a 30% rule of origin with the US. However, should it join TPP, it would have to accept the 45% origin rule.
Guajardo sees Mexico on the verge of having improved trade relations in every direction, including modernising deals with Europe, the Middle East and Latin America, with TPP strengthening the alliance with North America and further opening up Asia. To capitalise fully on these advantages, however, he asserted the importance of logistics and developing an infrastructure fit for purpose. “We have a 21st century industry operating with infrastructure from the 20th century,” he said. “For example, the industry cannot continue enduring a lack of specialised automotive terminals.”
Guajardo encouraged manufacturers, logistics providers and investors across the private, public and academic sphere to work together to expand logistics capacity. “If we are able to make an efficient logistical platform out of Mexico, the country will become a natural place to join points in international trade,” he predicted.
A video recording of Ildefonso Guajardo’s speech, along with the rest of the conference, is available here.
Christopher Ludwig contributed to this report.