Afraid of losing the US-Canada trade pact, Mexico alters its laws and removes Chinese parts

[November 25, 2024]  By MARK STEVENSON and MARÍA VERZA

MEXICO CITY (AP) — Mexico has been taking a bashing lately for allegedly serving as a conduit for Chinese parts and products into North America, and officials here are afraid a re-elected Donald Trump or politically struggling Canadian Prime Minister Justin Trudeau could try to leave their country out of the U.S.-Mexico-Canada free trade agreement.

Mexico’s ruling Morena party is so afraid of losing the trade deal that President Claudia Sheinbaum said Friday the government has gone on a campaign to get companies to replace Chinese parts with locally made ones.

“We have a plan with the aim of substituting these imports that come from China, and producing the majority of them in Mexico, either with Mexican companies or primarily North American companies,” Sheinbaum said.

While Sheinbaum claimed Mexico had been working on that effort since t he 2021 global supply chain crisis — when factories around the world were stalled by a lack of parts and particularly computer chips from Asia — it appears to be an uphill battle. Even the United States has faced big challenges in moving chip production back home despite billions in subsidies and incentives.

Mexico gained tens of thousands of jobs when U.S. and foreign automakers moved their plants to Mexico under the free trade pact to take advantage of much lower wages. But the idea that Chinese parts — or even whole cars — could be piggybacking on that arrangement to further hollow out the U.S. auto industry has enraged some people north of the border.

So Mexico is scrambling with private companies to get them to move parts production here.

“Next year, God willing, we are going to start making microchips in Mexico,” Mexican Economy Secretary Marcelo Ebrard said on Thursday. “Of course they're not yet the most advanced chips, but we are going to start producing them here.”

Mexico's nationalistic ruling party, which is normally very resistant to being seen as bending to U.S. demands, is scrambling in other ways, too.

The ruling party is in the process of eliminating a half-dozen independent regulatory and oversight agencies that were established by former presidents. That includes the anti-monopoly, transparency and energy regulatory bodies. Together with reforms that will make all judges stand for election in Mexico, that has sparked concern in the U.S. and Canada.

Countries are required under the agreement to have some independent agencies, in part to protect foreign investors. For example, they could prevent a government from approving a monopoly for a state-owned company that could force competitors out of the market.

So ruling-party legislators are actually re-writing the proposed laws to exactly mimic the minimum accepted requirements under the trade accord.

“What is being done is to create a reform so that its almost exactly equal to what exists in the United States, so we can clear that up,” Ebrard said.

It's all part of a very legalistic defense of the trade accord, signed in 2018 and approved in 2019. Mexico hopes the rules of the agreement would prevent the U.S. or Canada from simply walking away when the trade pact comes up for review in 2026. Experts agree, saying that totally abandoning the accord is unlikely.

Mexican President Claudia Sheinbaum gives a media briefing from the National Palace in Mexico City, Oct. 2, 2024, the morning after her inauguration. (AP Photo/Fernando Llano, File)

Gabriela Siller, director of economic analysis of the financial group Banco Base notes that if a country is dissatisfied with the trade agreement during the periodic reviews, like in 2026, there is a clause in the pact that says they can ask for a review each year to work out a solution, and keep doing that for a decade while the agreement remains in force.

“That is, they wouldn't be able to get out until 2036,” Siller said. “I think they will play hardball with Mexico in the 2026 review.”

Like any marriage, when the pact no longer works for one party, it may still drag on for years but it’s death by a thousand cuts.

C.J. Mahoney. who served as deputy U.S. trade representative in Trump's first administration, said in a talk for the Texas-based Baker Institute in September that the United States probably wouldn't end the trade agreement. But with growingly vocal critics of the pact it could hold up renewing it for years.

“The costs of not renewing immediately are actually quite relatively low,” Mahoney said. “I think the inclination to just kick the can down the road will be pretty strong.”

Because many companies won't make big investments in production facilities without certainty, that could be a serious if not fatal blow to the pact.

How much does Mexico actually buy from China? Mexican officials say they have fewer imports of Chinese parts and products than the United States does. But given the enormous size difference between the two countries' economies, it is a true but weak argument.

In July, the U.S. imposed tariffs on steel and aluminum shipped from Mexico that were made elsewhere, in an attempt to stop China from avoiding import taxes by routing goods through Mexico. It includes a 25% tariff on steel not melted or poured in Mexico and a 10% tariff on aluminum.

Sen. Sherrod Brown, an Ohio Democrat, has called for stopping Mexican steel imports, saying “the alarming rise in Chinese steel and aluminum coming into the country through Mexico ... is unsustainable and a threat to American jobs, as well as our economy and national security."

In the end, Mexico may be forced to crack down on Chinese imports, but it won't be easy.

“Reducing the dependence on Chinese imports is not going to be achieved in the short or medium term," said José María Ramos, a professor of public administration at the Colegio de la Frontera Norte in Tijuana.

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