USMCA: A View From Mexico

Show Notes

Emmanuel Macron in his own words, The Economist, 11/7/2019

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Transcript

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Jill O'Donnell: Welcome to Trade Matters, a podcast of the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska Lincoln. I am Jill O'Donnell. Our guest today is Kenneth Smith Ramos. He served as Mexico's Chief Negotiator for the modernization of the North American Free Trade Agreement that led to the signing of the USMCA, the U.S., Mexico, Canada Agreement. Currently he is a partner at Agon, a consulting firm based in Mexico City.

Ken, it's an honor to have you on the show today to help us understand Mexico's perspectives on the U.S., Mexico trading relationship, and on the U.S., Mexico, Canada Agreement. As of this recording, here in late November, it does not look like USMCA will be brought up for a vote in the U.S. House of Representatives this year, and we're going to talk about the dynamics surrounding that situation, but first, I'd like to set the stage for our listeners for a moment.

The U.S. and Mexico are both very important trading partners for each other. Mexico is the number two destinations for U.S. goods, exports and is the number one destination for exports for the State of Nebraska, where I'm sitting right now. Shifting directions, the U.S. is Mexico's most important export market with about 80% of Mexican exports coming to the U.S. This is a really robust trading relationship. One that has become even more so over the last 25 years. Since NAFTA went to force, 25 years ago, merchandise trade between the U.S. and Mexico has increased six fold. You began your career working for Mexico's NAFTA negotiating team in 1992, and you served more recently as Mexico's Chief Negotiator on the USMCA.

I'd like to start by asking you, in your view, how did those two negotiating experiences, where were separated by more than 20 years, differ from each other in terms of substance, and in terms of the surrounding political environment?

Ken Smith Ramos: Well thank you very much, Jill. It's a real pleasure to be here with you today, and thank you for the invitation. Indeed, I think that the way we should start looking at this is, in order to understand the results of the USMCA versus the NAFTA, we have to understand that 20 some years ago, when Mexico, Canada, and the US decided to negotiate a free trade agreement, there was a consensus, a joint view, a shared view of the three countries, that are creating a free trade area in North America. It would be beneficial for the region because it would promote trade flows and investment flows into the region.  We had a lot of differences in terms of how to accomplish that, and it was a very difficult negotiation, but the premise, the basic guiding principal was the same. That changed 25 years later, when we began the process of re-negotiating or modernizing our trade agreement, because our largest partner, the United States, with the most powerful economy in the world, came to the table with a different view, a view that it did not have for the past 25 years in terms of international trade. It came to the table with a position that free trade agreements were hurting the United States, that NAFTA in particular had hurt the U.S. economy, despite all the empirical evidence that showed that it has been a great success for all three countries. Regardless of the evidence, the US came to the table with that view, that it needed to fix a problem that was hurting the US economy. That, of course, complicated matters in terms of the political environment between Mexico and the US.

You know that, of course, in addition to this position regarding trade, then candidate Trump, in 2016, was very aggressive in his statements regarding the relationship with Mexico, and pushed actively for the creation of a border wall, etc., so that made it a very difficult environment. The US talked about fixing the agreement, and Mexico and Canada shared a view that we needed to build upon 25 years of successful free trade. That was how the beginning of the negotiation was set up. It made it difficult because we were, in some instances, had very strong differences with the US regarding the approach that we should take in the negotiation.

Jill O'Donnell: Okay, so let's dive into a little bit more of the substance of the USMCA negotiation. I'd like to start by asking you about autos and auto parts. These figure very prominently in a story of US, Mexico trade, as you know very well. Just for the benefit of our listeners, for example in 2018, autos and auto parts together accounted for about a third of US imports from Mexico. That's over $110 billion dollars. In that same year, 2018, the US exported to Mexico about $20 billion worth of auto parts, about 11% of all US exports to Mexico. There were auto rules of origin in place in the NAFTA, which are rules that require that a certain amount of the content of the motor vehicle be produced with parts sourced in North America in order for that vehicle to receive preferential treatment, but I want to ask you specifically about one of the changes that was made in the US, Mexico, Canada Agreement deal regarding the labor value of content, specifically that about 40% of the content of an automobile has to be made by workers making $16.00 per hour.

I'm wondering, from your perspective, how many Mexican made cars meet that standard already? What will it take to reach that standard, and is that a helpful provision in terms of raising workers' wages as part of Mexico's domestic policies?

Ken Smith Ramos: Well I think that in order to understand this provision, it's important to see, what was the main objective of the US in the autos rules negotiation? The US came to the table with an idea that most of the investment taking place in North America, in a growing North American auto sector was going to Mexico. The US had a large deficit in that sector with Mexico in that it was hurting the US economy. We always question whether that was the case, whether you can measure the benefit of a relationship based on the trade deficit, but that was the position of the US. What they tried to do is to make the rules or origin stricter, so that most of the investment taking place in North America would take place in the United States, and that there would be fewer products from other regions of the world coming into the auto sector in North America. It was one of the toughest parts of the negotiation, because what we wanted to do... We were in favor of trying to make the rules of origin a bit stricter, so that there would be more integration, more regional product used in the production of vehicles. We did increase the regional value content from 62.5% to 75%, and introduced new rules on certain percentage, 70% of the steel and aluminum used in automobiles should come from North America. We feel that's positive because it's part of integrating further our industries in the auto sector. However, the US also placed two suggestions from the beginning, which had to do with, on the one had, establishing the salaries in Mexico for the automotive sector, through the trade agreement. That's impossible. That's something that you cannot regulate through a trade agreement. The second issue that they had was trying to make sure that there was 50% domestic content from the US in automotive goods in North America, which breaks with the concept of a regional reward. What matters at the end of the day is whether the products are from Mexico, Canada, and the US. You can't set up a domestic content rule.

What we did, we negotiated with the US very intensively. This was one of the last issues to be resolved. Instead of having this provision that tries to establish or to determine salaries in Mexico for the auto sector to a trade agreement, we agreed to a provision that establishes that a certain percentage of the vehicle had to come from regions that pay $16.00 or higher. Right now those regions are, of course, the US and Canada. We established a level that is acceptable for assemblers in Mexico, because they source from the US, from Canada, and of course from Mexico, when they assemble vehicles in Mexico. That percentage, right now, is between 18 and 25%. It was increased to 40% in the Rules of Origin of the USMCA, but we feel that it's something that the auto assemblers in Mexico can comply with. It is something that, at the end of the day, will help push wages gradually higher in a natural way, in Mexico. Not in the way that originally the US was intending to do so, which was by decree, just establishing a number of what the salary should be in Mexico, but rather doing it in a way that allows auto assemblers in North America to continue to produce competitive vehicles visa vi the rest of the world. We feel that it's a provision that, at the end of the day, will push salaries and wages higher in North America, and will benefit all three countries.

Jill O'Donnell: Okay, thank you Ken for that perspective there. That's really interesting to hear. We're recording this interview almost exactly one year since the signing of USMCA, which occurred on November 30, 2018. Since then, Mexico has ratified the agreement, and that happened back in June. The US has not, and Canada is waiting to act in tandem with the United States, by all reports. One of the sticking points in terms of how the US Congress, the House of Representatives is looking at this has been around labor provisions in the agreement, and their enforceability. This is a major item that a group of Democrats in the US House of Representatives has been negotiating with the US Trade Representative's Office about, and the latest, at least that I've seen as of this recording is that the House Speaker, Nancy Pelosi, met with the US TR, US Trade Representative, Robert Lighthizer on November 21st, and afterwards a spokesperson for Speaker Pelosi said, "We can reach an agreement on USMCA when the Trade Representative makes the agreement enforceable for America's workers."

Now you had written in a recent piece, earlier in November, in a Mexican publication that even if an agreement is reached in the US Congress that satisfies the demands of the Democrats, that does not mean that the result is acceptable to Mexico. Let's just break this down a bit, and help us walk through this from the Mexican perspective. First, when it comes to labor provisions in USMCA, what are those provisions aimed at achieving?

Ken Smith Ramos: One of the most important elements in the USMCA visa vi versus the original NAFTA is that we introduced disciplines that make the agreement more sustainable, more inclusive, and they include disciplines that are aimed at, on the one hand strengthening the defense of worker rights, and then the protection of the environment. What we did, we took the side agreements that existed in the NAFTA on labor and the environment, and we added new provisions. We strengthen, for example on the labor side, the provisions that prevent child labor or forced labor, the three countries agreed to make sure that we would combat any type of discrimination at the workplace, or violence either against women or any other workers. We protect migrant worker rights.

I can tell you that the labor chapter of the USMCA is the most advanced labor chapter in any trade agreement that has ever been negotiated. That is a very important piece of information. We have to understand that in the discussions that are going on between the Democrats and the White House regarding the USMCA and especially for ratification, some Democrats are saying that the provisions are not enough. I can tell you that they are. What the Democrats had asked for in the original NAFTA, and during the negotiations of the USMCA, Mexico, Canada and the US went beyond that. We have the most [inaudible 00:11:58]. However, some Democrats are pushing actively, and they are negotiating very intensively with USDR that there'd be more of an ability for the US to enforce the agreement directly. In other words, make sure that the US, for example, can make inspections to Mexican plants, to make sure that Mexico's complying with the rules established in the labor chapter.

The problem with that is that already in the chapter we have established rules that determine what happens if a party believes that another member of the agreement is not complying with the provisions, and there's a whole process of consultation and dispute settlement. In other words, the establishment of impartial panels that will determine, in an impartial manner, whether a country is complying or not. This idea that some Democrats are pushing, and that the AFLCIO has been pushing actively, of having unilateral visits by the US, and the process of certification by the US to whether Mexico's complying, we see it as unfair. We see it as a mechanism that would, in a way, bypass the transparent and impartial mechanisms of dispute settlement, and it would allow one country to decide unilaterally if another is complying with the agreement. We see that as a bridge too far. It's an extension that goes way beyond what any of the NAFTA members has agreed to in any other trade agreement, and it worries us because we have seen, in the Trump Administration, a tendency to impose protection measures. Let's be very frank. When it came to the national security measures on steel and aluminum, or the threats that President Trump made regarding the increase on tariffs unless Mexico negotiated a deal on immigration, so we have to be very careful that the labor chapter, which is aimed at protecting worker rights, and will do so in a very effective manner, we have to make sure that this chapter does not become an excuse to have protection measures imposed by the US against Mexico. That's one of the key elements that is being negotiated right now.

I did emphasize in that article that you eluded to that regardless of the agreement that the Democrats and the White House come to in these next few days or weeks, Mexico and Canada have to be in agreement with it. We have to look at the results of that negotiation domestically, and make sure that's something that Canada and Mexico can approve. Let's take into consideration that Mexico has already ratified the agreement. We did that in June of this year, so if there's anything in the text, which we have opposed, any changes to the text, we would have to pass it again through our Senate, and that would be a difficult process. We believe we have the most and best labor provisions than any trade agreement, and what the US should do is just conclude their domestic negotiations. Any concerns that Democrats may have on how the agreement would be implemented can be addressed later, through administrative procedures. Let's not take the USMCA as hostage because of these allegations that the US needs more provisions on labor. That would be a mistake.

Jill O'Donnell: You've, excuse me, anticipated several other questions that I had there for you, and addressed several, but I want to, on this last point here regarding with how these labor provisions would be enforced, and whether Mexico would have to, in essence, re-ratify the agreement if certain changes were made that weren't agreed to in the beginning. Now you're in the private sector now, but do you know if there have been consultations between the US and Mexico has this negotiation between House Democrats and the US Trade Representative's Office are occurring, or is there a risk that when a deal, if a deal is reached, that at that time there could be some provisions in there that Mexico would not favor, and this could cause a delay in getting this deal in force?

Ken Smith Ramos: Well we do know that the current administration in Mexico is in constant communication with USTR, Robert Lighthizer, to follow the discussions that are taking place domestically in the US between Democrats and the Trump Administration. The Mexican Government has stated, for example, that it would not be in a position to accept these unilateral visits, or other elements that represent further commitments on labor in the agreement. The Mexican Government has been clear on that. It's, of course, a domestic negotiation going on between Democrats and the White House, so Mexico does not participate directly in those, but we do know that the Mexican Government is looking at this very carefully, as are the Canadians as well, to make sure that whatever is agreed domestically is then shared with Mexico and that we can be in a position to determine whether it's something that would be acceptable.

At the end of the day, the ideal scenario is for the US to conclude its process, to ratify the USMCA as it is written right now, and to deal with any concerns that emerge in the discussion with Democrats through administrative measures that can be addressed later, once the agreement is already in place. The ultimate scenario is for the agreement to be ratified, to come into effect in early 2020.

Jill O'Donnell: Okay, you mentioned also that the labor provisions in the USMCA are the most advanced labor provisions ever in any free trade agreement. Are labor provisions something that have come up in other free trade agreements that Mexico has in place with other trading partners? Are those part of that, or is what's in place in the USMCA really dramatically different from the status quo?

Ken Smith Ramos: No, we have had provisions on trade, things we negotiated in NAFTA originally, 25 years ago. Back then there was a limited scope of the types of disciplines that you would include in trade agreements. Nowadays, that's one of the big advantages of the USMCA, or the Trans Pacific Partnership Agreement, that we also negotiated and already implemented, and also our modernized trade agreement with the European Union, where we introduced new chapters, for example, how to help small, medium sized enterprises take advantage of trade agreement, chapters on digital trade, chapters on new elements of the economy that are essential today, for today's world economy, that didn't exist 25 years ago. That's what we're adding to the USMCA. In addition to those, let's call them economic provisions, we're adding stronger social provisions on labor, on environment. There's a chapter on anti-corruption, combating corruption practices in North America is very important. It helps our own domestic efforts in Mexico.

The answer is yes. Labor provisions have been discussed in different chapters, and different trade agreements throughout the history, when we have begun liberalizing trade 25 years ago. What we're seeing now is we're seeing state-of-the-art disciplines are established in the USMCA. It is very important to take into consideration that now, these provisions that we have established and that I have described, that protect worker rights in a way that they have never been done so before in trade agreements, they also have [inaudible 00:19:06]. In other words, they are subject to the same dispute settlement mechanisms as any other part of the agreement. That wasn't the case in the original NAFTA. It had more of a lax system that made it harder to have specific labor cases brought against members of the NAFTA.

This time around, it reflects Mexico's evolution over the last 25 years. We've done major labor reform in Mexico, and in fact, we have introduced, in addition to the disciplines that I mentioned as to how to protect worker rights, we also introduced something that reflects our own labor reform, which has to do with having more transparency and democracy in union proceedings. That means making sure that collective bargaining agreements are voted by all workers, that there is transparency in how union leaders are elected. Many of the things that are very important to workers in Mexico, and in all countries in the world are now disciplines that are established in the USMCA. That's why I refer to it as the most advanced labor provisions of any trade agreement.

Jill O'Donnell: Okay. Switching gears just a little bit to the surrounding political environment around USMCA, as we've already said, the Mexican Senate passed USMCA back in June. Why do you think it was passed so much earlier there than in the United States? What is the debate like in Mexico, domestically, how is the agreement viewed by the Mexican public there?

Ken Smith Ramos: Well this is interesting, because going back to the original history of the NAFTA, traditionally we have faced difficulties in Mexico, as is the case in the US and other countries in the world, in convincing the population of the benefits of free trade. Despite the big economic impact in terms of the increases in exports, the radical increase in foreign direct investment. There is a perception in the general public opinion that free trade agreements may just benefit certain sectors of the economy. This is false, but you have to sort of always work and try to convince people that trade agreements bring all of these benefits. It's interesting that one of the aspects of the USMCA negotiation that was interesting is that the moment that President Trump, Candidate Trump, and then President Trump threatened to pull out of the NAFTA, that helped to rally the Mexican people behind the NAFTA. There was a realization that it wasn't because of something Mexico was doing that NAFTA might collapse. It was the US that was threatening to pull out of this very successful trade agreement.

We saw a big rallying of the private sector, the US Congress, governors, academic institutions in Mexico defending the NAFTA during the USMCA negotiations. One thing that was interesting is that, what we did while we were negotiating is that, as you know, the negotiation extended past our presidential elections, where the left wing party won in July of last year, and we were still negotiating the USMCA. One thing that we did, which turned out to be a positive thing was to include, as part of the negotiating team, the transition team of the new Mexican administration that was coming in. An administration that had traditionally not been very much in favor of trade agreements, but that very early on in the campaign voiced its support for the NAFTA and for the USMCA negotiations. We included the transition people from the new administration in the negotiations, and we negotiated hand in hand, and closed the deal with the US and Canada. What did this do? It helped us, because once we left office and the new administration entered the government on December 1st, it was able to have legitimacy in going to the new Mexican Senate and explaining why the USMCA was good for the nation, because they had participated in it, and why it would bring strong results for our economy in the future. That helped the administration of President Andres Manuel Lopez Obrador obtain its ratification rather quickly in Mexico, in June. It was approved with 114 votes in favor and 5 votes against, so it was an overwhelming victory in the Mexican Senate, and it sends the signal that there is a strong consensus now in Mexico, and Mexico has to remain an open economy, and that free trade within North America has benefited our population enormously.

Jill O'Donnell: Okay, that's interesting. It seems like a wise strategy to include the transition team in the negotiating team. That's really interesting to hear about. Zooming out just a little bit, I'd like to ask you a bigger picture question. Mexico's trade policy overall is often described as very open. Mexico has about 50 free trade agreement partners. That's more than double what the US has. I wonder if, given all the trade policy uncertainly that's been swirling around the globe since about 2017, has Mexico's longstanding openness helped your country weather any negative impacts of that uncertainty? Has Mexico had to take any other steps to manage that risk that's created by the uncertainty, or diversify its trading partners, or perhaps the entry into force of CPTPP has been a factor? How would you describe that overall preparation of Mexico to weather uncertainty, or any steps that the country's had to take to deal with it?

Ken Smith Ramos: Well that is very interesting because indeed Mexico has pursued a strategy of trade liberalization over the years. It's almost three decades that we have been pursuing this. It has spanned the whole political spectrum. I mean we've had central parties, left of center as we have now. We have had more of a right wing party in power as well. There has been a consistency in the trade liberalization position that the Mexican governments have pursued.  I think that has to do with the fact that throughout the 70s and 80s, we lived first-hand through the shortcomings of protectionism. We were one of the most closed economies in the world, and as the world began to globalize economically, Mexico began to fall behind. We had one of the toughest economic crisis ever in Mexico in the 1980s as a result.

Mexico realizes now that 70% of our GDP is equivalent to our international trade. That's how much we're generating in international trade. It is essential for Mexico, and as I said, the rapid approval of the USMCA by a left wing dominated Congress in Mexico reveals that consensus that the free trade policy in Mexico has been successful. Of course, there is a tendency worldwide, and we see it in the United States, we see it in the process of Brexit, or in Eastern Europe, where there's a lot of challenging free market economics, and the challenging of course whether free trade agreements work for the population. I think it's important for Mexico to continue sending the signal that we're an open economy, that free trade benefits the population. Of course you have to accompany free trade with domestic structural reforms that help you get the most out of your economy, and to make sure that the benefits of free trade trickle down to everybody in the society, small and medium size enterprises, in different regions.

We have a lot of regions in Mexico that are very successful. The central region of the country, the north of Mexico have attracted enormous amounts of foreign direct investment, and wages in the exporting sector pay almost 45% more than salaries in the rest of the economy. Those are obviously very good results for Mexico. Still, for example, the southeast of the country still is where you find the highest proportions of rural population, low salaries, high indexes of lack of education. We need to make sure that we bring the benefits of free trade to different regions of the country. That's why free trade agreements and trade liberalization have to be accompanied by domestic structural reforms in education, labor, health, energy, etc. That's what Mexico has been trying to do over the last six years as well.

Jill O'Donnell: Picking up on that last point there, about how you have to pair a trade policy with investments in education and infrastructure, etc., is trade policy talked about in that way in Mexico, just generally speaking with the public, where you link those different policy areas together? I don't think that happens here in the United States quite a lot, perhaps it should happen more potentially, but I wonder if it's talked about that way, generally speaking, in Mexico.

Ken Smith Ramos: Well it is a challenge, and many times politicians fall into a trap of calling for a more focused on the domestic economy rather than the international economy, which is a trap. It's really something that you cannot do today in today's globalized economy. Whatever you do in the international arena can benefit your domestic economy, as long as you have clear rules in your own country regarding, for example, eliminating barriers to entry, having a strong competition commission that allows you to combat monopolies and anti-trust, or bureaucracy and red tape. It has to go hand in hand, the trade policy with those foreign policy decisions that you make domestically to really free up the potential of the domestic economy. Often times, if we get into a discussion that is just politicized and polarized, where people try to blame whatever negative impacts that the national economy is having on international trade, which is unfair, but it is something that exists. The governments have the responsibility of making sure that the government is showing the benefits of free trade for the majority of the population, and extending those benefits. I think those are the real challenges going forward.

In the USMCA, one of the things that we tried to do is to introduce these new disciplines that include more regions and more sectors of the population into trade. A very important element, we introduce a periodic review of the agreement, where elements can be analyzed as far as how the agreement is being implemented, and whether there are changes, new disciplines to be introduced or different elements that may need to be re-negotiated in the agreement. That will involve doing public consultations and involving civil society in deciding how the agreement must be shaped or re-shaped in the future. That's something that the original NAFTA did not include. I think that it's very useful for the governments of the three countries to have these mechanisms of periodic review so that people can gain confidence and believe they can actually impact the way these trade agreements are effecting their everyday lives. Those are some of the elements that were introduced in the USMCA to try to bring the trade agreements closer to the people, and make them feel that they can have a voice in how these trade agreements get implemented.

Jill O'Donnell: That's a good perspective to share there on the periodic review, as a mechanism for more public input. Thanks for bringing that up too. That's useful to hear. The last question that I ask every guest on this podcast is, what are you reading these days, a book or an article, or something along those lines, that's particularly striking to you, something about trade?

Ken Smith Ramos: Well most recently, I read a very long interview with President Emmanuel Macron from France, in the Economist, where he talks about many of the issues that we've discussed in this podcast, having to do with economic uncertainty worldwide, and the fact that the world is changing dramatically. Like I said, there's a lot of challenging of the impacts of globalization. In some countries in Eastern Europe, you're even seeing a return to the past, where societies are starting to challenge the benefits of a free market, free press, etc.

In this interview, President Macron talks about the fact that people have to get used to the fact that the US is withdrawing, in a way, from the international stage, both economically and politically. He makes an appeal for the European Union, for example, which obviously is an essential player in international trade, to remain open, but no longer dependent on some of the key allies that it had. In this case, he's referring specifically to the US, and that's a very interesting lesson, I think for Mexico as well. We're seeing that the fear or the uncertainty surrounding the global economy is something that is perhaps here to stay. It's not just a phenomenon that has to do with a particular president, whether it's Trump, whether it's somebody else in the European Union. It is not an anomaly that what we're going through in terms of the economic uncertainty, and concerns with globalization.

Countries need to adapt. We need to make sure that, for example in the case of Mexico, that we continue the policy of trade liberalization while at the same time we do strengthen our domestic economy, and are ready to act on the international stage, even if the top player in international trade, which is the United States, seems to be withdrawing from the international stage. I think that's a very important lesson, and we should continue drumming up the message, at least in Mexico, that it is precisely by engaging with the rest of the world, by showing that Mexico is an open economy, an economy that's open for business, that we will help our population, increase their wages and their welfare.

Jill O'Donnell: Ken, thank you so much for this interview today. I've learned a lot, and just really appreciate you taking the time to share all of your experience from being the lead negotiator on the USMCA from Mexico, and drawing on all of the rest of your vast experience with trade policy for your country. Thank you for being here today. We really appreciate this.

Ken Smith Ramos: I really appreciate it, Jill. It's been very enjoyable, and I hope we get a chance to do this again sometime.

Jill O'Donnell: Likewise, we'll definitely have you back.

Ken Smith Ramos: Thank you.

Jill O'Donnell: That's it for this episode of Trade Matters. A big thank you to Bryce Doeschot and Rebel Sjeklocha for helping produce this podcast. Please subscribe to Trade Matters on iTunes, Stitcher, or wherever you get your podcasts. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu, or follow us on Twitter @YeutterUNL [corrected.] Opinions expressed on Trade Matters are solely those of the guest or host, and not the Yeutter Institute or the University of Nebraska Lincoln.