When President Trump was sworn in as the 45^th President of the United States there was a mood of unease, even fear, among Mexican businesses given Trump had threatened to scrap the North American Free Trade Agreement (NAFTA). Trump’s position rested on the assertion that the United States had a trade deficit with Mexico of more than US$64 billion (2016) and that his country was losing manufacturing jobs to Mexico. In the firing line was Mexico’s automotive production; a key aspect of US’ demands was that the local content requirement for autos produced in North America should increase.

NAFTA was hugely important in the growth of Mexico’s manufacturing industries as it provided tariff free access to the world’s largest market and enticed many American OEMs to move manufacturing down to Mexico to take advantage of lower labor costs. In terms of the chemicals industry, since NAFTA came into effect, trade in chemicals between NAFTA countries more than tripled from US$20 billion to US$63 billion in 2014, according to ANIQ and its equivalent associations in the US and Canada. The American Chemistry Council (ACC) says that duty-free exports to Canada and Mexico support 46,000 chemical sector jobs in the US, and that, since NAFTA started in 1994, US exports to the other two countries in North America have soared from US$13 billion to US$44 billion in 2018.

After a fairly long negotiating process, in August 2018 the US and Mexico announced a preliminary agreement to revise NAFTA that maintained the core of the original trade pact but included updates to provisions on several items, notably auto manufacturing. For some weeks there were rumors that Canada may not join the new agreement, reducing NAFTA to a bilateral trade pact between the US and Mexico, but on September 30^th a new deal was finally struck including the three countries.

“It is clear that the relationship between Trump and Trudeau is not at its best moment, but the majority of the initial treaty should be maintained because it has provided good results for the three countries. For the chemical and petrochemical industry, the treaty is very important. The U.S. sells US$20 billion worth of chemical and petrochemical product to Mexico, every year – but also Mexico and Canada sell important volumes”, affirmed José Luis Uriegas, CEO of Grupo Idesa and past president of APLA.

Indeed, leaving the political issues aside will benefit the chemical industries across the three countries, according to Miguel Benedetto, general director of the Mexican Chemical Industry Association (ANIQ): “The chemical industries in the three countries are broadly in alignment.”

ANIQ has been leading on negotiations for the chemical sector and rules of origin for all the industrial and agricultural sectors in Mexico.

Under the new agreement, that still needs to be approved by the three countries’ legislatures and therefore is not expected to go into effect until 2020, cars will need to have 75% of components manufactured in North America to benefit from zero tariffs (as opposed to 62.5% before), and 30% of the manufacturing work on new vehicles must be completed by workers earning at least US$16 per hour – this is triple the salary of the typical car manufacturing worker in Mexico.

Before the new agreement was reached, the Chemistry Industry Association of Canada (CIAC), ANIQ, and the American Chemistry Council (ACC) made a joint statement calling for “Strong protections for cross border data flows, which is an essential element of global value chains. An updated NAFTA should also set key standards, such as on the competitive practices of State Owned Enterprises (SOEs). It should also close inefficiencies on trade disciplines that are already codified in the agreement, including rules of origin and duty drawback.”

The associations also advocated for enhanced regulatory cooperation from all three jurisdictions to promote innovation, growth and jobs, whilst safeguarding health and safety. Indeed, the new USMCA agreement contains more stringent intellectual property protections.

Trading Places

Along with putting significant resources into the NAFTA renegotiations, over the last months the Mexican government has also been pursuing a strategy of trade diversification in order to broaden free trade opportunities for Mexico’s companies. This follows a trend of successive Mexican governments being open to free trade and Mexico already benefits from 44 free trade agreements with countries around the world, which brings tangible benefits to its petrochemicals industry. According to Uriegas, it is a key advantage: “Producers benefit from lower duties and the absence of non-tariff barriers. For example, we have a trade agreement with Israel which has allowed us to gain 65% stake in the ethanolamines market in that country.”

Before the agreement for USMCA was announced, in April 2018 Mexico reached an agreement with the European Union to virtually eliminate tariffs. Also in April, Mexico ratified the Trans Pacific Partnership (of which the U.S. is not a party). Furthermore, in 2018 Mexico and Brazil are due to conclude a comprehensive free trade agreement where the chemical industry will make up 75% of the total agreement, according to ANIQ. The Mercosur trade bloc of South American nations is also prioritizing improved trade ties with Mexico, while Mexico and Argentina are currently discussing a free trade agreement. All these moves are seen as an effort by Mexico to diversify its destination markets and rely less on trade with its northern neighbor.