Earlier this month, Mexico Business Blog was invited to cover the G20 Trade and Investment Promotion Summit held in Mexico City.  The summit was composed of a series of meetings between representatives of trade and investment promotion organizations from a number of G20 countries, as well as from multilateral finance and cooperation organizations.  From the portion of activities we were able to observe, we found the remarks by WTO Chief of Staff Arancha González regarding Global Value Chains to be the most interesting.  Read our post for Mexico Today on the event here.

Earlier this month, the United States invited Mexico and Canada to join the Trans-Pacific Partnership (TPP) trade pact negotiations, generating a certain amount of chatter in the media regarding the proposed agreement.  After reading through numerous articles on the TPP, we can’t help being reminded of the 1958 horror flick “The Blob”, starring Steve McQueen.  A ball of goo pops out of a fallen comet and gets bigger and bigger as it snarfs up the helpless townsfolk, while all the while everyone wonders, ‘what is that thing?’

The TPP apparently began in 2003 as trade talks between Chile, Singapore and New Zealand, then added Brunei in 2005, and was joined by the United States in 2008, followed by Australia, Vietnam and Peru, and then Malaysia in 2010.  Now Mexico and Canada have been invited to join, Japan is pondering the possibility as well, and still, a lot of folks including ourselves are asking just what the heck is that thing.

The TPP is being billed by promoters as a comprehensive trade liberalization agreement that will not only reduce tariffs but will include chapters that go beyond previously negotiated pacts, such as those relating to e-commerce, digital media, the environment, small and medium sized enterprises (SMEs) and intellectual property, among others.  The Office of the U.S. Trade Representative (USTR) identifies the following selected objectives for the agreement:

• Eliminate tariffs and other barriers to goods and services trade and investment
• Facilitate the development of production and supply chains among members
• Establish regulatory coherence to promote trade between the countries by making trade among them more seamless and efficient.
• Address concerns small- and medium-sized enterprises have raised about the difficulty in understanding and using trade agreements, encouraging small- and medium-sized enterprises to trade internationally
• Promote trade and investment in innovative products and services, including those related to the digital economy and green technologies

Criticism of the TPP has been harsh, particularly regarding the scarcity of information available to the public regarding the details of the agreement (legislators in the United States have even complained that large corporations have greater access to information on the negotiations than do members of Congress).  Labor and public policy advocacy groups in at least the United States, Canada and Australia argue that proposed stipulations unfairly favor large corporations and inhibit governments’ ability to legislate for the common good.  Other criticisms have been directed at the broadening of patent protections for pharmaceutical multinationals do the disadvantage of developing countries, the risks of weakening industrial regulation, IP protections that potentially inhibit the free exchange of information on the internet and threats to environmental protection, among others.  In Mexico, industry groups have raised concerns about Mexico’s lack of participation in the first 12 rounds of negotiations, as well as potential threats to the country’s metal mechanic and furniture manufacturing industries under the proposed chapter on SMEs.

Since the administration of President Carlos Salinas de Gortari (1988 – 1994), Mexico has relentlessly pursued free trade.  The country has also put its money where its mouth is, opening up its markets through pacts with trade partners such as the United States and Canada (NAFTA, 1994), the European Union (Global Agreement, 2000), Japan (EPA, 2004) and Peru (AICMP, 2011) among others.  Particularly in light of the recent frenzy of protectionism on the part of Brazil and Argentina, Mexico’s interest in joining the TPP negotiations should further cement its reputation as a dependable and open trade partner.

We generally favor free trade, and we are particularly pleased with how recent administrations’ push for the diversification of trade partners is helping Mexican exporters overcome their historic reluctance to pursue business outside of North America.  Mexican goods producers, particularly in agriculture and food products, are discovering increasingly appetizing markets in Asia, with exports to the region growing by an average 20% annually over the past six years, according to the Economy Ministry.   If joining the Trans-Pacific Partnership will help us increase our exports to Asia, we’re all for that, but we also agree that all the stakeholders should be able to analyze the details of the agreement and make their voices heard before a final decision is taken.  We can start by making drafts of the various TPP chapters readily available for study.

Setting trade policy?

In March 2012, Brazil insisted on putting artificial curbs on imports of Mexican-made automobiles, contrary to the long-standing pact governing vehicle trade between Mexico and the Mercosur trade bloc comprised of Brazil, Argentina, Paraguay and Uruguay.  We’re in a snit about this, because the move creates problems for Mexico and in general adds to the list of alarming actions coming out of Mercosur countries lately that are undermining the environment for trade and investment.

The Economic Complementation Agreement No. 55, known as ACE 55, was negotiated between Mexico and Mercosur in 2002 as a means of reducing tariffs on vehicles and auto parts to facilitate trade in these goods between the five countries.  It worked; automotive trade surged and the deal seemed to suit Brazil just fine as the South American giant racked up a trade surplus in cars with Mexico year after year. But the tide began to turn about three years ago, as Brazil’s strong currency and the relatively high cost of domestic manufacturing helped make Mexican cars cheaper relative to their locally made equivalents.   When Mexican automotive exports to Brazil jumped 70% in 2011, Brazil plotzed, threatening to abandon the ACE 55 protocol if Mexico didn’t accept forced reductions on its car sales to the country.  Mexico announced in March this year that it had agreed to limit the value of its automobile exports to Brazil to US$1.45 billion in 2012, US$1.56 billion in 2013 and US$1.64 billion the year after.  Considering Mexico’s car sales to Brazil exceeded US$2 billion in 2011, the curbs are substantial.  The revisions to the original agreement also include stipulations aimed at increasing the amount of auto parts Mexico’s vehicle manufacturing industry sources from Latin America.

According to the Mexican government, the export quotas will take effect for three years, after which they will be removed.  Nonetheless there are a number of aspects about this issue that we don’t like, for example:

• It suddenly throws the brakes, as it were, on a very thriving and growing market for a key Mexican export.  Mexican automotive exports to Brazil surpassed US$2 billion last year and are on a pace to blow by that mark this year, except that they will now be halted at the relatively paltry level of US$1.45 billion despite the high demand in Brazil.
• It creates an element of uncertainty in the previously strong growth trend in the overall demand for Mexico’s automotive output which has driven substantial direct foreign investment in the sector in recent years.  Foreign automotive manufacturers such as Honda and Nissan which have announced plans for major expansion in Mexico could potentially reconsider or scale back their investment plans if Mexico’s access to the Brazilian market is restricted.
• Brazil’s fair-weather attitude to its trade agreements casts a pall upon trade agreements in Latin America.  If one of the parties abides by the agreement only when the balance of trade is firmly in their favor, what is the point of negotiating an agreement?  Should Mexico and Peru now feel free to apply the same strategy to the FTA they signed last year?
• The bad-faith maneuver by Brazil effectively pulls the plug on exploration of a possible free trade agreement between Latin America’s two largest economies, at least for the foreseeable future.  During the past two years, the tantalizing possibility of such an agreement has been hotly discussed in Mexican media and preliminary explored between the two governments.  Numerous representatives of Mexican industry have expressed trepidation over the idea, due to lack of confidence in Brazil’s commitment to a level playing field.  Now, it will be harder than ever to dispute these claims.

Brazil’s President Dilma Rousseff is scrambling to boost GDP growth while the country’s currency continues to appreciate internationally.  Emergency measures such as capping imports may appease certain industry sectors, but – much like recent nationalizations of foreign industrial holdings in Argentina and Bolivia – shoring up political problems at home may come at a cost to the country’s reputation among trade and investment partners in the future.  We don’t think it’s good for Brazil in the long run, and it sure doesn’t look good for Mexico in the short run.

The Association of American Chambers of Commerce in Latin America (AACCLA) will host the Business Future of the Americas Conference in Mexico City this year, May 14 – 15 at the Hotel Camino Real Polanco.  Aimed at addressing the challenges and opportunities facing intra-regional trade, the conference will bring together leading figures from the private and public sectors to present their experiences and points of view.  The event will feature presentations by key players on topics such as competitiveness, logistics, education and innovation, as well as workshops on corporate social responsibility, energy efficiency and rule of law and transparency.  The conference will include speakers of the stature of President Felipe Calderón of Mexico, U.S. Ambassador to Mexico Anthony Wayne, Mexico Central Bank Governor Agustín Carstens, former President of Peru Alan García, and representatives of top international companies such as BASF, Cisco Systems, Ernst & Young, Amgen and ManattJones, among others.

AACCLA is made up of 23 American Chambers of Commerce throughout Latin America and the Caribbean devoted to promoting trade and investment between their countries and the United States.  The upcoming conference will include a match-making forum with representatives of the Mexico offices of various U.S. states.

Please visit the web site of the Business Future of the Americas Conference for details on how to attend.

Regulatory official

So this morning we were reading through the work plan for the High Level Regulatory Cooperation Council between Mexico and the United States (HLRCC).  We figure you’ve probably already read it too, but just in case you were tied up in a meeting or something, here are a few comments on the Council and its work plan.

As we’ve mentioned before, the Mexican government has been on something of a regulatory-upgrade roll during this administration.  We noted a package of regulatory reforms aimed at facilitating new business startups, the drive to take Customs processing online and a raft of green policy initiatives as some recent examples.  The HLRCC, charged with improving the compatibility, efficiency, transparency and effectiveness of government regulations across the two countries, was announced jointly by Presidents Barack Obama and Felipe Calderón on May 19, 2010.  Both countries held consultations with stakeholders during 2011 to gather input from industry and the public, and the work plan, released February 28, 2012, provides an outline of the objectives and timelines of the Council’s activities for the coming two years.

As always, we greet such regulatory improvement initiatives with a mixture of delight and trepidation; delight because improvement is sorely needed, and trepidation that the proposal may end up creating even more bureaucracy with no tangible benefits.  On the Mexican side, the agencies involved are those with which importers here must grapple regularly in the struggle to properly register and document products for import: the Ministries of the Economy (SE), Health (SS), Environment (Semarnat), Agriculture (Sagarpa) and the at times Darth Vader-like Federal Commission for the Protection against Sanitary Risks (Cofepris) and National Agricultural Health, Hygiene and Quality Service (Senasica).  We have no reason to doubt that our colleagues at these agencies are working hard to protect the public and do their jobs.  But regulatory matters are complex, regulations often unclear or subject to interpretation, and breakdowns in communication can result in an onerous burden on trade, not to mention nasty losses for importers and exporters on both sides of the border.  For these reasons, we fully support the goals of the HLRCC and fervently hope the program yields some concrete results.

Here are some examples of specific areas addressed in the work plan:

• Food safety modernization: Work with Mexican government agencies and private sector representatives to build capacity for Mexico to comply with Food Safety Modernization Act (FSMA) requirements for Mexican food products imported into the United States.
• E-certification for plants and plant products: Develop compatible electronic certificate programs such as phytosanitary e-certificates.  Being able to submit digital certificates acceptable to Senasica would be an important step forward for those of us who have struggled with approvals for plant-based products.
• Transportation: Work with Mexican regulators to harmonize Mexico’s trucking safety standards (NOM-068-SCT-2-2000) with corresponding U.S. standards to simplify and hasten border inspections.  This is timely in the context of last year’s resolution of the cross-border trucking dispute.
• Nanotechnology: Work to develop a harmonized approach to policy regarding applications of nanotechnology and nanomaterials.  Specifics to be addressed include terminology/nomenclature, information-gathering and approaches to risk assessment and management, to achieve consistency across the two countries.
• Offshore oil and gas development standards: Develop a set of harmonized standards related to the exploration and production of oil resources, such as well control and containment standards and requirements for sharing worst-case discharge and spill response plans.  This will be carried out in the context of the recently-signed agreement between Mexico and the United States governing exploitation of transboundary oil and gas reserves in the Gulf of Mexico.

There is more to the work plan than we’ve discussed here, of course, so if you think your business might be affected by the HLRCC, you can read through the work plan itself in English here or in Spanish here.

Or, if you have any questions about how Mexican regulatory environments might affect your products, drop us a line at info@bdp-americas.com .

As another year comes to a close we can’t help feeling some frustration that the economy just doesn’t seem to want to take off, both around the world and here in Mexico.  Between the Eurozone debt crisis and stubborn unemployment in the United States, among other topics, we’ve got plenty to keep us fretting for the foreseeable future.  But since the holidays are upon us and presumably it’s a time for good cheer, here are some of the talking points we’ll have in our pocket as we hit the punch bowl hard in the coming days:

GDP growth: Banco de México and Banamex are projecting final 2011 GDP growth in the range of 3.8%.  OK we’re not talking China numbers here but compared to 2009’s -6.1 we’ll take it.

Hot industries: While most sectors of the economy are merely shuffling along, certain industries are getting, or remaining, seriously hot.  The big star this past year was automotive manufacturing, which after suffering a rough patch during the recession has roared back, with production and exports well up over 2010 and a number of significant new investments announced.  Aerospace manufacturing also continued its unchecked expansion, with new international investments announced and exports projected to post double-digit growth for the year.  Outside of manufacturing, mining surged this year, led by demand for gold, silver, copper and industrial minerals, and is on track to exceed 2010’s record setting production value for the year.

Renewable energy: In the energy industry, 2011 saw continued high interest in renewables, with major new investments in a variety of alternative energy sources.  New wind power generation plans were announced not only in Oaxaca, site of the largest wind developments, but also in northern states such as Zacatecas and Baja California and far south eastern Quintana Roo.  Interest in solar electricity generation appeared to surge as well, with a range of projects announced for manufacturing sites, corporations, municipal lighting and rural electrification, among others.  The growth in demand for solar panels is helping drive expansion of domestic photovoltaic equipment manufacturing.

Agriculture: The agriculture and livestock sector faced a severe challenge this year with devastating drought conditions in various northern states.  A bright spot, nonetheless, is the growing diversification of exports such as meat.  Mexican beef has found a new market in Russia, to which exports of frozen beef surged this year, and exports of pork to China and Japan are expected to rise in 2012 following recent regulatory moves.  Chinese authorities have certified a number of Mexican pork packing plants to export to the Asian giant in 2012, while Japan recently agreed to increase quotas for imported Mexican pork, as well as beef and chicken, beginning next year.

Read about our participation in the Mexico Today program here.

Welcome friend

Since the launch of the North American Free Trade Agreement (NAFTA) in 1994, the Mexican government has pursued additional trade liberalization pacts aggressively.  Remarkably, legislators recently managed to advance on three trade fronts before tearing off to have fun for the holidays.

The first step forward was the November 22 signing of a new single free trade agreement between Mexico and Central America, which our Mexico Today colleague Sean Goforth discussed in a recent post to Foreign Policy Blogs.  Economy Minister Bruno Ferrari and his team had a tougher time, however, with their effort to push through an expanded trade liberalization agreement with Peru.  The proposed pact spent much of this year under consideration in the Mexican Congress before being rejected by the Senate Trade and Industrial Development Committee on December 14, to the supreme aggravation of the Calderón administration.  Despite having the support of various industrial sectors, the Peru deal was initially blocked by influential agricultural interests over fears of increased competition from Peruvian avocados, beans, potatoes and other farm products.  Ferrari faced not only the vexation of the jilted Peruvians but a potential blow to Mexico’s free trade bona fides as it flirts with possible inclusion in the developing Trans-Pacific Partnership trade bloc.  In a surprising turnabout, however, the treaty squeaked through in a vote by the full Senate on December 15, and now goes to President Calderón for signing.

The administration fared better with its effort to upgrade Mexico’s Economic Association Agreement with Japan.  Protocols negotiated between the two countries to expand access to each other’s markets were approved by the Japanese legislature on December 9, sending the new framework back to the Mexican Senate for approval.  In contrast to the Peru agreement, the Japan protocols sailed through with nary a peep and were approved by the full Senate December 15.  The modified agreement will increase Japanese import quotas for Mexican beef, pork, chicken, oranges and agave syrup in exchange for accelerated duty reduction in Mexico for Japanese products such as paper and auto parts, among other stipulations.  Enhanced access for auto parts is presumably of particular interest to Japan in light of the roaring performance of Mexico’s automotive manufacturing industry, much of it composed of Japanese OEMs.  The protocols will now go to the President’s office for signature, where they are highly unlikely to meet resistance.

Read about our participation in the Mexico Today program here.

Fear not for the future, weep not for the past

We’ve posted recently on what we consider to be advances in the regulatory environments for medical devices and plastics here in Mexico.  We crab mightily around the water cooler about all the obstacles that arise when shipping goods internationally, so it’s only fair that we recognize the initiatives of government agencies when we feel that they are on the right track.  So here’s the latest installment: The ongoing process of moving Customs processing onto digital platforms is set to take another step forward next month.  

The project, called Ventanilla Unica de Comercio Exterior (VUCE), or Single Window for Foreign Trade, was launched three years ago as a multi-stage effort to integrate information processing across the many agencies involved in regulating foreign trade.  Mexico’s tax collection agency SAT estimates that some 30 participants are potentially involved in a cross-border trade transaction, such as importers, exporters, freight carriers, Customs agents and regulatory bodies, and approximately 40 different documents are used in the process, between Customs forms, regulatory compliance verification and others.  For more sensitive products such as those related to food or health, special permits may be required from one or more of eight different federal agencies, such as the ministries of Economy, Agriculture, Health, Energy, Environment or Defense.

Throughout the process, SAT estimates that approximately 60 – 70% of documentation required for international trade in Mexico involves submitting some of the same information on multiple forms.  The objective of the VUCE is to create a one-stop internet portal through which importers, exporters and Customs agents can submit documentation digitally for all required forms across all participating agencies.  The system’s integrated data bases are intended to eliminate the need to enter much of the required information repeatedly.  Ideally, the program is optimistically projected to reduce the overall time spent on documentation by up to 90% once in full operation.

So far, the VUCE internet portal has been launched, but the process of incorporating the various agencies and other participants is just getting underway.  On November 22, 2011, electronic documentation for the Mexican Customs Service (AGA) and the Ministry of Economy is scheduled to begin on the site.  Other agencies and importers and exporters themselves will be registered on the site gradually going forward.

Moving the vast, complex bureaucratic morass that is trade documentation from paper to cyberspace is a gargantuan undertaking, so we hold no illusions that the process will be swift or seamless.  Kudos to the SAT and partners, nonetheless, for the very idea of taking on the challenge.

Have a look at the VUCE portal here.

Read about our participation in the Mexico Today program here.

Está en chino

Mexico’s long-running effort to defend its domestic manufacturing industries against cheap Chinese imports is about to take another hit.  The struggle goes back to China’s admission into the World Trade Organization (WTO) in 2001, which Mexico was highly reluctant to accept.    In return for Mexico’s vote to admit China, the two countries agreed to extend an existing Mexican program of compensatory import duties on key-sector products from the Asian giant.  Focusing largely on textiles, apparel and footwear, the duties ranged from over 100% to over 1,000% depending on the product.  The high tariffs helped stave off the inevitable for a while, but the extension was originally agreed to last only six years.  As the expiration date neared in 2007, the Mexican government heeded the frantic entreaties of the affected sectors, particularly the Guanajuato footwear industry centered around the city of León, and dived back into negotiations with the Chinese.  The result was elimination of the compensatory duties on 749 Harmonized Tariff System (HTS) product classifications, but the extension of the duties on some 200 remaining classifications.  The tariff rates on the remaining products have been reduced annually since 2008, but are still substantial, ranging approximately from 65% to 130%.

The jig, however, may now finally be up: The compensatory duty scheme is scheduled to expire on December 11, 2011, and Mexican Economy Minister Bruno Ferrari has declared that the duties will be lifted.  Guanajuato shoemakers are absolutely plotzing, but it’s important to remember that the end of the compensatory duty scheme does not mean that Chinese products will begin to enter Mexico duty-free.  The two countries have no trade liberalization agreement in place, and as such, upon expiration of the compensatory scheme Chinese products will become subject to Mexico’s General Importation and Exportation Tax program (TIGIE), which establishes the tariffs on products from countries with which Mexico has no special trade agreement.  Here’s a sample of selected product classifications and the difference between the soon-to-expire compensatory duties on Chinese-origin goods and the base duty according to the TIGIE scheme:

Source: Diario Oficial de la Federación, Secretaría de Economía

While the new duty rates will still be somewhat steep for some products (30% for footwear, shorts and pants), in other areas the change could mean a real difference for North American and European consumer goods brands manufacturing in China.  If the difference is enough to make products that were previously priced out of the market due to tariff suddenly price-competitive, we could see a surge in Chinese housewares products, for example, in Mexican stores next year.  As it is, recent growth in imports of Chinese-origin products in Mexico has been dramatic, posting an increase of 158% between 2005 and 2010, according to Mexico’s Economy Ministry.  Mexico has expanded its exports to China by an even more impressive 270% over the same period, but the total value of Chinese exports to Mexico is over 10 times that of Mexico’s shipments to China.  That ratio could become even more extreme if the new duties turn out to make the difference for enough foreign brands of consumer goods currently manufactured in China.

Read about our participation in the Mexico Today program here.

To Russia with love

Much wringing of hands is done in Mexico over the country’s excessive dependence on the United States as the primary market for its exports.  With good reason: For years now, the United States has accounted for over 80% of Mexico’s goods exports.  In boom times, Mexico makes hay while the sun shines.  But when the U.S. economy tanks, like it did in a big way in 2009, Mexico suffers severely.  The Mexican government has aggressively pursued trade pacts elsewhere around the world in the hope that local exporters would follow through with enthusiasm in exploring new markets.  It seems to us, though, that Mexican exporters overall have shown little thirst for adventure in foreign lands.  But maybe, with the U.S. economy still slow to gain strength after the long recession, new opportunities are beginning to capture the attention of more Mexican companies.

A look at export figures provided by the Economy Ministry (SE) reveals some interesting details.  First, while the United States was the destination for just about 80% of Mexican exports in 2010, this percentage actually has been declining slowly since a high of 88% in 2002.   A closer look suggests that Mexico has been taking advantage of strong demand from the BRIC economies: exports to Brazil grew by an incandescent 325% from 2005 to 2010, while exports to China increased by a merely torrid but nonetheless impressive 270% over the same period.  China has come from a long way off to become Mexico’s third largest export market as of 2010.  Mexico has also taken advantage of partial bans on Brazilian beef by Russia, developing an important new market in the process.  The value of Mexican exports of frozen beef cuts to Russia through May 2011 had surpassed US$41 million, higher than at least the four previous years combined.

Perhaps the most intriguing growth market for Mexico right now is Japan.  Mexico’s exports to Japan did rise following a trade liberalization agreement that entered into effect in 2005, but the pace of growth has been uneven.  Through May 2011, Mexican exports to Japan are on a record pace, led by the automotive industry and food products.  The current strong performance may be receiving an unusual push due to distortions in the Japanese market following the earthquakes and tsunami early this year.  Nonetheless, the increased presence of Mexican meats and fruits in Japan should help pave the way for the introduction of more variety and greater volumes of Mexican products in the future.

Could Mexico be setting its sights on the Middle East next?  An Agriculture Ministry (Sagarpa) representative recently cited growing numbers of Mexican food producers seeking kosher and halal certification.  The results may yet be a ways off, but we like where this is heading.

To read about our participation in the Mexico Today program, go here.