South Korea and Mexico eye trade pact as Trump looms

Thanks to BDP Managing Partner José A. Jiménez for contributing the following post

mexico-koreaNow that the Trans-Pacific Partnership (TPP) has been, for all practical purposes, ditched by U.S. President-elect Donald Trump, a wait-and-see phase has begun regarding what will happen to U.S. foreign trade policy once Mr. Trump assumes power on January 20, 2017 — particularly his threats to renegotiate the North American Free Trade Agreement (NAFTA) with Mexico and Canada, and impose prohibitive tariffs on imports from China.  With this backdrop, Mexico and South Korea have pledged to move forward with the trade negotiations begun by the TPP and establish a formal trade agreement between the two countries.

On her visit to Mexico in April 2016, President Park Geun-hye of South Korea and Mexico’s President Enrique Peña Nieto reiterated their support for integration into the then expected TTP and signed a 17-point memorandum of understanding with the aim of strengthening bilateral economic relations.  The cooperation agreements signed cover areas such as clean energy, technology, law enforcement, telemedicine and tourism, among others. The two countries further announced two new lines of credit, one for US$1 billion for electrical infrastructure development and another for US$200 million to finance Mexican suppliers of Korean industries.

More recently in November, the South Korean Ambassador to Mexico Chun Behoo stated that there are internal talks in his country to sign a Free Trade Agreement (FTA) with Mexico in 2017, which could enter into effect in 2018.  Mr. Chun emphasized Mexico’s need to look for alternatives to diversify its exports with free trade agreements with different countries such as those in Asia.  For its part, Mexico sees a free trade agreement with South Korea as a means to strengthen its presence in the Asian market, beyond the trade facilitation agreement it already shares with Japan.  Ambassador Chun further explained that at a recent meeting of the Asia-Pacific Economic Cooperation Forum (APEC) in Lima, Peru, both countries agreed to hold discussions to accelerate the FTA process. The Korean private sector considers Mexico to be an attractive market for exports, which is demonstrated by an increase in individual and group visits to the country.  BDP (the authors of this blog) recently organized a successful trade mission of nine Korean manufacturers of construction equipment looking to expand their sales in Mexico. We found Mexican construction equipment distributors to be enthusiastic about meeting Korean manufacturers.

Mexico and South Korea are already doing an increasing volume of trade and Korea has strengthened its investment in Mexico.  In 2000, total bilateral trade was US$4 billion and by 2015 it reached almost US$17.5 billion.  During the same period, Korea’s annual investment in Mexico has multiplied 24 times. Korean investments between 2015 and 2016 reached US$5.5 billion with the arrival of Kia Motors and its suppliers. Kia is expected to be producing 300,000 vehicles at its new plant in Mexico by 2017, for which an FTA with Mexico would be highly advantageous, as Ambassador Chun has observed.  Other Foreign Direct Investment (FDI) is expected to be made in new manufacturing plants in the states of Guanajuato, San Luis Potosí and Nuevo Leon by Korean companies interested in petrochemicals and auto parts. This will be in addition to the already 1,800 plus Korean companies already in the country.

In the event that Mr. Trump renegotiates existing U.S. trade agreements to make good on his threat to implement punitive tariffs to Mexico and China, some economists have warned that these actions could spark a trade war that threatens to roll back decades of international trade liberalization.  It will also leave a vacuum of economic power which China will eagerly fill.  China is pushing its own Regional Comprehensive Economic Partnership (RCEP), which conspicuously excludes the United States. The RCEP is a more traditional trade agreement, involving cutting tariffs rather than opening economies and setting labor and environmental standards as TPP would. In the long run, whatever changes are forthcoming, it will force Mexico to work harder to wean itself from dependence on the U.S. economy.

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