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Andres Manuel Lopez Obrador (AMLO) became Mexico’s president on December 1, 2018. Arguably, this is the most important sexenio (presidency) for Mexico since Lazaro Cardenas (1934-1940) who, among other actions, nationalized Mexico’s oil industry. Mexico today, with AMLO as president, faces enormous challenges. The most important of these includes helping millions of Mexican citizens out of poverty through offering higher wages and better education, health care, and economic growth; reducing a high level of corruption; and dealing with violence (drug-related, oil and mineral theft, kidnappings, extortion, homicide, and others) that is endemic in much of the nation. Also vitally important is maintaining a strong trade relationship with the United States under President Donald Trump, a relationship on which nearly 80% of Mexico’s exports depends, and addressing a petroleum sector in which oil production has been declining by about 6-7% per year, from about 3.5 million barrels per day in 2004 to around 2 million barrels per day in 2018.
However, many opportunities also exist. First, Mexico, Canada, and the United States signed a revised trade agreement, designed to replace the North American Free Trade Agreement (NAFTA) that bound the three countries, on November 30, 2018. Approval of the United States-Mexico-Canada Agreement (USMCA) by the Mexican and U.S. congresses and the Canadian Parliament by the end of 2019 is possible but by no means certain in the United States due to the Democratic Party recently taking control of the House of Representatives.
The successful trade negotiations and the possibility of the USMCA going into effect on January 1, 2020, or soon thereafter should greatly reduce uncertainties about the future North American trade relationship that have chilled new investment and hiring in all three NAFTA countries since Trump was elected in November 2016. But the United States’ potentially disruptive trade war with China continues and deepens. As of March 2019, $250 billion worth of Chinese goods were subject to penalty tariffs of 10-25%, and many observers expect that at least some of these tariffs—and retaliatory tariffs by China—may last for months and perhaps longer unless the negotiations that are currently under way are successful. Consequently, the international supply chains American manufacturers have relied on for low cost parts and components for nearly two decades may at least in part be restructured. Such changes mean shifting production of many parts and components from China to Vietnam, Taiwan, South Korea, and Mexico, among others, likely over a period of several years and at significant cost to American importers and manufacturers.
When NAFTA’s future was uncertain, Mexico was not an attractive investment option. With the new relationship likely to be formalized, albeit perhaps not in 2019, Mexico will once again become a prime source country for lower cost manufacturing of both automobiles and parts to be exported to the United States, despite the somewhat less favorable automotive rules of origin in the USMCA and other disadvantages. Moreover, while the USMCA makes many changes for the automotive production industry, rules of origin for most other manufacturing sectors except textiles are largely unchanged, keeping Mexico an attractive country for the export of goods to the United States. Moreover, if the Trump administration follows through on its plans to impose “national security”-based tariffs of 20-25% on imports of all automobiles and auto parts (with Mexico and Canada both enjoying exemptions under the USMCA), such tariffs could indirectly have a significant positive impact on auto and auto part production in Mexico (although the impacts would largely be negative for many North American auto producers).
Separately, the statutory and constitutional energy reforms engineered by outgoing Mexico President Enrique Peña-Nieto, if they are supported by AMLO, offer Mexico an opportunity to re-energize the declining petroleum sector by encouraging foreign oil companies, including but not limited to those located in the United States, to proceed with investments and exploration activities, which have repeatedly been postponed since many hydrocarbons exploration leases were awarded in 2017 due to both low global oil prices as well as uncertainty as to what AMLO’s energy policies may entail. This could encourage investment in Mexico’s oil sector to go forward, despite the fact that world oil prices have fluctuated recently from more than $70 per barrel to as low as $41 per barrel. That being said, the USMCA on its face maintains the sovereignty of Mexico’s existing legislation and constitutional provisions related to hydrocarbons, although other provisions of the agreement indicate that a rollback of the energy reforms would be a violation of the USMCA. It is still possible that AMLO, who has a supermajority in the Mexican Congress, could seek to roll back the Peña-Nieto administration’s energy policies, though leases previously awarded to U.S. or Canadian enterprises would be subject to challenges under the dispute settlement provisions of NAFTA’s Chapter 11 for up to three years after the USMCA goes into effect.
While this article does not discuss in any detail the domestic promises AMLO made during his campaign and is now seeking to implement, including those related to improving education and combatting endemic corruption and violence, their success all largely depends on AMLO’s ability to encourage investment in the hydrocarbons sector, which would permit Mexico to increase its oil and gas exports—and thus revenue—in the future. Even though the major impact of such investment is not likely to be felt directly during AMLO’s presidency, income from the new leases alone could soon provide some of the funding for AMLO’s promised reforms. Thus, if the AMLO administration fails to encourage and protect new investment in the petroleum sector, in my view his sexenio will be a failure, and will probably result in a level of social and political instability that Mexico has not seen in many decades.
The remaining sections of this paper are organized as follows. Part II presents a brief overview of the USMCA, with a focus on the aspects most likely to affect Mexico and limited attention to contentious issues such as dispute settlement (or the absence thereof) and the “sunset” clause, as well as brief coverage of matters important to Canada. Given the length and breadth of the USMCA, Part III focuses on four key sectors modified under the agreement: automotive, energy, agriculture, and labor. This part seeks to relate the USMCA’s provisions to AMLO’s policies, since Mexico will require wise legal and economic policies throughout its core industries (not only the petroleum sector) to maximize the benefits and minimize the disadvantages of a revised NAFTA.
Part IV addresses several important uncertainties that will affect the U.S.-Mexico trade relationship, including the approval or rejection of the USMCA by the U.S. Congress; AMLO’s domestic policies, which may affect investor confidence in Mexico; and the impact of Trump’s trade policies on both U.S-Mexico trade and unrelated issues such as immigration and the “wall,” which could have spillover effects on trade. Part IV also includes a list of policy recommendations.
This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.