Nearshoring – Opportunities and Challenges!

Dear Members and Friends:

First of all, we hope you had a great holiday season. Now that we are officially in 2024, it’s time to look at what will be dealing with in the new year.

Not a week goes by when those of us looking at trade and investment matters don’t come across an item or two (or three) on “nearshoring.” Just what is nearshoring, and what opportunities and challenges are out there for us to know?

What. Let’s begin by using ChatGPT (isn’t everyone?) for a tentative definition. “Nearshoring” refers to the process of outsourcing a business or production process to a provider located in a geographically close country – close to the parent company or home market. It differs from “offshoring,” in which a process from the parent country is taken to a foreign country, and “reshoring,” which refers to taking the process from a foreign country to the home or parent country.

When. Although the process has become more popular of late, its origins for Mexico may be traced back to 1965, when the Border Industrialization Program, better known as the maquiladora program, began and when both US and foreign companies used the border zone to produce products for global markets. Although we in the US relate nearshoring with Mexico, it can relate to China and countries in Europe as well.

Why. There are several reasons for the recent increase in nearshoring activity, especially as regards Mexico.

• The relative increase in fully loaded hourly wages and manufacturing costs in China compared with Mexico

• The growing eco/political clash between the US and China during the Trump Administration, resulting in each country imposing tariffs on the other – many of which are still in existence

• The reduction in production and realignment of global supply chains during COVID as globalization turned into regionalization

• The uncertainties and costs associated with shipping from Asia to the US

• The structuring of the USMCA from NAFTA providing a more modern agreement with further clarity and certainty for those wishing to produce and trade in North America

• The Mexican government initiating new policies supporting investment in nearshoring

Let’s look at a number of recent reports that discuss nearshoring activities with Mexico.

The first, “The Position of Mexico in the First Wave of Nearshoring,” prepared by Mexicom Logistics earlier last year, looks at Mexico and Altasia as likely geographic areas that could benefit from Nearshoring. Altasia refers to the Asian nations that are replacing China as the center of supply chains, such as Vietnam, Bangladesh, and the Philippines, among others.

In making its case for Mexico, Mexicom Logistics refers to two studies done by A.T. Kearney’s Supply Chain Institute in the US, “America is Ready for Reshoring. Are You?” and Savills World Research in the UK, “Global Manufacturing Supply Chain: The Future.” The Kearney report indicates that, since COVID, an indicator of the growth of nearshoring in Mexico is that imports of manufactured goods from Mexico has increased 26%, from $320 billion to $402 billion. The Savills report has Mexico as 15th on their list of countries with nearshoring potential – the highest one for the Americas. It indicates that the relative low labor cost and the proximity to the US market secures it as a key nearshoring destination. The report also points out that Chinese manufacturing companies have emerged in Mexico as a strategy to build and expand their capabilities closer to the American market.

Blue Grace and the Journal of Commerce have done a brief report, “Harnessing Nearshoring Potential: Answers to Key Questions,” that details why nearshoring is gaining traction and what the potential would be for Mexico. They mention the June 2022 study by Inter-American Development Bank (IDB) indicating that nearshoring could boost Mexico’s annual exports to the United States by $35.3 billion, of which $29.7 billion could be what IDB describes as “quick wins” whereby Mexico-based producers replace suppliers from outside the Americas for the top 50 products imported to the United States. At the same time, IBD announced it would provide up to $2.25 billion in short- and long-term financing to help build new industrial parks, invest in so-called “anchor” companies – including relocation expenses – and develop innovative financing mechanisms for small and mid-size companies (SMEs) working within global supply chains.

Xometry, a company involved with digital manufacturing, has put together an interesting list: “11 Benefits of Nearshoring: Why You Should Choose Nearshoring.” The benefit list includes:

• Access to skilled workforce

• Faster market access

• Decreased Customs expenses

• Strengthened intellectual property control

• Minimized digital disturbance

• Speedy delivery

• Increased operational flexibility

• Improved customer satisfaction

• Faster problem solving

• Improved supply-chain management

• Enhanced risk management

Although Xometry does not mention Mexico in their piece, most of the benefits would accrue particularly to US companies in Mexico. They also compare nearshoring with offshoring, reshoring, and onshoring. They indicate that there could be some downside to nearshoring:

1. The act of moving production from overseas to a closer point is resource-heavy and can result in disruption

2. There are always new challenges with setting up production in an area you haven’t previously used for production

3. The organization will need to forge new relationships with suppliers and logistics

4. Although the quality of the new production may be better, it will still be a change; some customers dislike changes of any kind 

The Federal Reserve Bank of Dallas (FRB) has put together a very detailed report, “Mexico Awaits ‘Nearshoring’ Shift as China Boosts its Direct Investment.” The report, which was done nine months ago, makes some interesting observations. “Anecdotal media reports suggest that the nearshoring move to Mexico is at hand, while hard data provide no such conclusive evidence. . . Nearshoring to Mexico should be reflected in foreign direct investment (FDI) data. But FDI in Mexico was largely flat from 2015 to 2022.” (Note: See further discussion below.) In 2022, the US accounted for $15 billion, or 42.6%, of the total FDI in Mexico. The manufacturing sector accounted for 47% of US investment and the automotive industry took up $3 billion of that – primarily automobile manufacturing and auto parts.

China only accounted for $0.3 billion, or less than 1 %, of FDI in 2022. However, an FRB chart shows that the pace of Chinese investment has increased significantly since 2016. This investment is mostly directed toward manufacturing plants and regions that export to the US. It’s not certain whether China’s investment increase was due to companies trying to maintain access to the US market or if that investment had been planned before the twin shocks of higher tariffs and pandemic limitations. The manufacturing sector accounted for 47% of US investment and the automotive industry took up $3 billion of that – primarily automobile manufacturing and auto parts.

The FRB ended the report by saying there’s “no free lunch.” “Rising geopolitical tensions, barriers to trade, and the pandemic have influenced investment decisions and the movement of goods around the world. The resulting investment and trade distortions may be necessary for national security or supply-chain resiliency, but they come with a cost by creating inefficiencies in the use of capital, labor, and technology and resulting in the production of goods at a relatively higher price.”

A recent release by Mexico News Daily, “Foreign Direct Investment in Mexico Hits Record High,” indicates that FDI in Mexico reached $32.9 billion in the first nine months of 2023, with three months of data still to come! This could mean that 2023 will be a banner year for FDI in Mexico – and would put a different spin on the observations in the FRB Dallas report above. The majority of the FDI, 76%, came from reinvestment of profits, while 16% came from loans and payments between companies and 8% was new investment. About $13.5 billion, or 41% of the total, came from the US. China was not one of the top ten countries for investment. Although not mentioned, 8% of the $13.5 billion from the US would amount to a little more than $1 billion in new investment. Other than Mexico City, Nuevo Leon attracted the most investment of almost $3 billion – and this does not appear to include several projects that have been announced, including the planned $5 billion for Tesla.

BBVA Research and the Mexican Association of Private Industrial Parks (AMPIP) did a survey of AMPIP members to learn what their concerns were about nearshoring, “Nearshoring Outlook: Mexico’s Industrial Parks Survey.” The report highlights that, although there are many opportunities for Mexico via nearshoring, there are also drawbacks regarding industrial parks that must be addressed going forward. AMPIP in 2023 represented 430 industrial parks in 21 states with over 3,800 companies installed and growing at a rate of 35% in the North and Central regions. About 20% of the companies in the parks surveyed were domestic, while American firms represented about 38%. Between 2018 and 2022, an average of 207 new companies came in per year. Between 2024 and 2025, AMPIP expects to receive 453 new companies, of which 77 or about 20% would be Chinese – a much higher incoming rate than before.

AMPIP members were asked about concerns they had in bringing in new companies. Of those surveyed, 91% reported experiencing drawbacks related to energy supply, 63% related to water scarcity, and 74% of the parks reported drawbacks in terms of ease and speed of procedures – likely legal and permitting matters. The responses on drawbacks varied with different states and regions. The report ended by stating “Mexico must prepare its energy infrastructure for an expansion by focusing on renewable energies that, in addition to being more efficient in terms of costs, represent an improvement in terms of emissions that in the medium term could be an increasingly relevant requirement for the companies.”     

The final report covered was released recently by the law firm of Cacheaux Cavazos Newton (CCN), based in San Antonio and with eight offices in Mexico. The report, “CCN Guide to Nearshoring in Mexico,” is meant “to provide foreign investors with an executive summary of Mexico’s legal system, as well as a general and practical overview of key items to be taken into consideration when conducting business operations in Mexico and the different options to conduct such.” It contains detailed sections on corporate governance, foreign investment, taxes, labor and Social Security, international trade and customs, real estate, environment, energy, intellectual property, compliance, and dispute resolution.

 Conclusions. Can any conclusions be inferred from the above reports?

• Mexico has many investment attributes that would be a fit with companies interested in nearshoring there

• Although FDI in Mexico in 2023 will show a very good year, the portion of FDI taken by new investment is not growing and may reflect that announcements of new projects have not yet been turned into real pesos

• China is growing its presence in projects in the country, although its investments are still fairly low compared to the US and other countries

• Mexico appears to have increased its lead over China in imports into the US, indicating that nearshoring has had an effect; in the first ten months of 2023, Mexico has been considered the US’s number one trading partner

• The federal government and the private sector must do more to ensure that infrastructure and skills are in place in the major states and cities to support new nearshoring investment

USMCA Disputes, US and China Tariffs, Mexico Trade and Investment – and More!

Dear Members and Friends:

Hope your summer is going well and safe! We have a number of interesting reports to go over with you.

USMCA Disputes

In two previous Updates, we covered the yet-to-be-resolved issue involving Mexico’s decree on December 31, 2021, that called for a phaseout of use of both glyphosate and genetically modified (GE) corn for human consumption in the country by January 31, 2024. This matter is of the utmost importance to two of our Mid-America members.

In a letter from USTR Katherine Tai to Mexico’s Secretary of Economy on March 6, Tai requested a meeting with the appropriate Mexican representatives to resolve the matter within 30 days of the receipt of the letter. Although the meeting was held, the matter was not resolved to USTR’s satisfaction. As a result, on August 17, USTR released “United States Establishes USMCA Dispute Panel on Mexico’s Agricultural Biotechnology Measures.” The release highlights the process of engagement USTR has gone through on the issue. The details are contained in “Dispute Panel Request” and comments from a bipartisan group of elected officials and industry leaders are contained here: “WHAT THEY ARE SAYING: U.S. Establishes USMCA Dispute Panel on Mexico’s Agricultural Biotechnology Measures.”

US, China, Mexico Tariff Update

In a landmark decision on August 16, the World Trade Organization (WTO) found that the retaliatory tariffs imposed by China on US imports in response to US steel and aluminum tariffs were inconsistent with international trade rules. The WTO decision had two main aspects:

• The panel upheld that the US tariffs on steel and aluminum, imposed under Section 232, were justified as necessary for national security purposes

• China’s retaliatory tariffs were “inconsistent” with various articles of the General Agreement on Tariffs and Trade (GATT)

The WTO report, “China – Additional Duties on Certain Products from the United States,” is attached, as are comments by the USTR on the ruling, “Statement from USTR Spokesperson Sam Michel on Today’s WTO Panel Ruling.”

In another recent decision, on August 15, Mexican President Lopez Obrador issued a Presidential Decree increasing import duties on 392 tariff items by between 5% and 25% ad valorem to products originating from countries that are not party to Mexico's free trade or tariff preferential agreements. As Mexico has free trade agreements in force with 59 countries, imports from China, which account for 17.9% of total imports, would be the most affected. A brief discussion from the firm of White and Case, “Mexico Imposes Temporary Import Duties up to 25% on More Than 588 non-FTA Tariff Items,” is attached. The increase will apply on a temporary basis until July 31, 2025. It is important to note that imports under IMMEX, PROSEC, and the Fiscal Stimulus Programs for the Border Regions will not be affected. The complete listing of the products affected is contained in the Official Mexican Gazette, “DECRETO por el que se modifica la Tarifa de la Ley de los Impuestos Generales de Importación y de Exportación” of August 15.

On August 28, The Department of Commerce’s Bureau of Industry and Security (BIS) published a proposed rule that would revise the Section 232 Steel and Aluminum exclusion process. The BIS has been responsible for administering the product exclusion process that allows US businesses to request exemptions for specific steel and aluminum imports from the 25% tariff. The proposed rule outlines four main amendments designed to make the exclusion process more “transparent, equitable, and streamlined”:

• Revised Approach to General Approved Exclusions (GAEs)

• Implementation of General Denied Exclusions (GDEs)

• Modifications in Certification Requirements for Exclusion Requests

• New Certification Requirements for Objectors

The Federal Register announcement, “Revisions of the Section 232 Steel and Aluminum Tariff Exclusions Process,” contains background information on the process as well as the reasoning behind the proposed changes.

Mexico – 2023 and 2024

AMPIP’s annual report, “Mexico in Brief: 2023,” contains a wealth of current information on Mexico as a place to do business. Among some of the important factors for investment are the 59 free trade and other agreements Mexico has with other countries; FDI inflows of $30-35 billion annually over the past 5 years – 36% going to advanced manufacturing industries; the high concentration of R+D+I centers; and at least 35 competitiveness clusters in a number of industries. AMPIP members have developed 430 industrial parks in 27 states.

In a slightly more focused look at 2024, the Center for Strategic and International Studies (CSIS) has released a report, “After AMLO: The Economic, Security, and Political Outlook for Mexico in 2024.” The report looks at three dimensions: economy, security, and politics. Within those three, nine areas are reviewed with a look at what has been accomplished in each and what trends might exist after AMLO leaves office – energy reform, nearshoring movements, southern Mexico, state capacity and bureaucracy, organized crime, human security and human rights, reorganization of the security sector, attacks against democracy, elections and party dynamics, and US-Mexico relations. Each of these is evaluated in detail. Although it was not the authors’ intent to forecast outcomes, they identify areas that have profound implications for Mexico and its relationship with the US.

Microchips

One area where Mexico can take advantage of a movement of technology and production away from China is in microchips. Several of our recent Updates have covered elements of the CHIPS Act and other legislation in support of the onshoring and nearshoring of chip production. Foreign Affairs has taken a look at this in their report, “Mexico’s Microchip Advantage: The Right Way to Shift the Semiconductor Supply Chain Away From China.” With economic tensions high between the US and China, nigh technology companies are beginning to locate production out of China – but still within Asia. With “nearshoring” as a way to bring regionalization to our hemisphere, Mexico could be a place to start. Although not known historically for high technology production, Mexico is a critical player in several advanced manufacturing sectors, hosts several semiconductor assembly and packaging plants, and has a high density of chip-intensive end users. In addition, it is well integrated with international supply chains due to the USMCA; it has free trade agreements with major economies; it has a large cost-efficient workforce; and it has a good relationship with the US.

However, problems exist that could shortchange a nearshoring effort in chips and semiconductors. Mexico is still not cost-competitive with Asian rivals. Investment packages have not always been well designed. Workforce readiness presents a challenge. And infrastructure is not always available in the best place for incoming companies. As a result, no large investments have been made by semiconductor companies.

What can be done, according to the authors? First, the Mexican government has to develop a clearer strategy for attracting assembly, testing, and packaging (ATP) facilities as well as component production. Next, the US should be prepared to assist Mexico if they develop a strong, clear strategy. Also, the three countries of USMCA need to bolster efforts to improve competitiveness, especially as relates to semiconductor development and production. Both Mexico and the U.S. have a lot at stake here, as Asia commands a whopping 81% of semiconductor ATP activity, including 38% in China.

US and Global Economic Forecasts

The Economic Intelligence Unit (EIU) has issued two brief economic forecast reports.

On the domestic side, in “US Economic Slowdown: How to Read the Mixed Signals,” the EIU makes the following points:

• The US economy is expected to experience a mild technical recession in 2023 with a modest recovery in 2024

• The jump in real incomes at the start of 2023, together with still-low unemployment, will help to sustain consumer spending in the short term; however, this pace of growth is not expected to continue

• Overall household debt is rising, partly due to the increase in credit card balances

• US economic growth is expected to increase in 2024, especially beginning in the second quarter, as interest rates and inflation continue to decrease

On the global side, in “Global Economic Outlook 2023: Low Growth Amid Persistent Threats,” the EIU makes the following points:

• Despite a resilient start in 2023, growth of 2.1% this year would still represent a slowdown

• Although global inflation will ease slightly, from 9.2% in 2022 to 7.1% in 2023, the high global commodity prices, continued supply chain disruptions stemming from the invasion in Ukraine, and, in some parts of the world, the still-strong US dollar will keep annual inflation well above 2019 levels

• The forecasts globally and for particular countries could be negatively impacted by escalation of the war in Ukraine, social unrest due to high inflation, financial contagion following the financial collapse of three banks in the US, and extreme weather conditions

Mexico Trade and Investment News

Business Development Partners’ “Mexico Monthly Economy and Politics Brief” for August is attached.

Special Edition: Investing in Mexico

Dear Members and Friends:

Over the past few weeks our Mid-America Chapter has welcomed the visits of three State Secretaries of Economic Development, one State Governor and her staff, and one Cabinet Minister.

Secretaries of Economic Development of Sinaloa, Chihuahua, and Queretaro participated in a roundtable session hosted by Nepanoa, one of our members. We hosted a breakfast for the Secretaries and their staffs and listened to their goals for investment in their states. We also hosted a breakfast meeting for the Governor of Aguascalientes, Maria Teresa Jimenez, and her staff at the offices of RSM, one of our bi-national members. Prior to that, we had a meeting with Secretary of Tourism Miguel Torruco and his staff related to generating action items for promoting tourism in our geography this fall.

We were fortunate to obtain the presentations of all of our visitors. These are linked below, and you will find the email addresses of the key persons you should contact with questions.

State of Sinaloa
Javier Gaxiola Coppel, Secretary of Economy
Javier.gaxiola@sinaloa.gob.mx
PRESENTATION

State of Chihuahua
Maria Angelica Granados, Secretary of Innovation and Economic Development
maria.granados@chihuahua.com.mx
PRESENTATION

State of Queretaro
Marco del Prete, Secretary of Sustainable Development
mdelprete@queretaro.gob.mx
PRESENTATION

State of Aguascalientes
Guillermo Gonzalez Engelbrecht, Strategy Deputy Director
guillermo.gonzalez@aguascalineyes.com.mx
PRESENTATION

Secretariat of Tourism
Humberto Hernandez Haddad, Undersecretary of Tourism
hhh@sectur.gob.mx
PRESENTATION

If you need any assistance with contacts, please let us know.

US Trade Policy, USMCA Disputes, 232 and 301 Tariffs, Mexico Trade and Investment, and Brexit Update

Dear Members and Friends:

Our inbox has gotten filled with a number of reports, mostly trade, trade policy, and USMCA related—with an update on Brexit activity. We’ll break them down for you. And remember, all of the links contained in past Updates can be found at www.usmcocma.org/resources.

2023 US Trade Policy

Our previous Updates looked at the outlook from independent, non-governmental organizations. The USTR just released its annual review of trade in the previous year and trade policy going forward — “2023 Trade Policy Agenda and 2022 Annual Report of the President of the United States on the Trade Agreements Program.” The 354-page document contains a lot of useful information in addition to trade policy objectives. However, beginning with that, there are five initiatives that we have reported on before:

1.      Advancing a Worker-Centered Trade Policy

2.      Re-aligning the US-China Trade Relationship

3.      Engaging with Key Trading Partners and Multilateral Institutions

4.      Promoting Confidence in Trade Policy Through Enforcement

5.      Promoting Equitable, Inclusive, and Durable Trade Policy and Expanding Stakeholder Engagement.

Although it is a lengthy report, there are a number of interesting sections:

• New initiatives including the Indo-Pacific Economic Framework for Prosperity, the United States–European Union Trade and Technology Council, and the Americas Partnership for Economic Prosperity

• Sections 201 and 301 activities

• WTO and FTA enforcement

• Annex of all of the US trade-related agreements by country

USMCA Disputes

In the previous Update, a yet-to-be-resolved issue involving Mexico’s decree on December 31, 2021, that calls for a phase-out of use of both glyphosate and genetically modified (GM) corn for human consumption in the country by January 31, 2024, was discussed. There are two new documents that indicate the matter may be moving closer to a dispute resolution panel.

In the first report, “Where Could the US-Mexico GM Corn Dispute End Up?”, Ohio State University details the issues and then provides estimates on how Mexico’s decree could affect the corn market in Illinois and Iowa. They find that, if the decree stands, there would likely be a ripple effect as additional supplies are diverted to the domestic market, driving down corn prices. Also, it would introduce considerable regulatory uncertainty. This would also be a major test for the Sanitary and Phytosanitary Measures chapter of USMCA.

The second document is a letter from USTR Katherine Tai to Mexico’s Secretary of Economy on March 6, “USTR Letter to Secretary Raquel Buenrostro.” Tai’s letter documents the inconsistency of the decree to a wide variety of SPM obligations already made by the Mexican government and ends by stating, “We look forward to fixing a mutually convenient date to hold the technical consultations with the appropriate Mexican representatives and authorities within 30 days of Mexico’s receipt of this request, with the aim of resolving the matter cooperatively if possible.”

On the positive side, the USTR and the Department of Labor released a note, “United States Announces Successful Resolution of a Rapid Response Mechanism Petition Regarding a Unique Fabricating Facility in Mexico,” on April 23. The announcement marks the eighth facility in which the United States has successfully used the Rapid Response Mechanism (RRM) to benefit workers in Mexico. The review took place and was completed about ten weeks after the petition of the “Transformation Union” in Queretaro. USTR and the Secretary of Labor co-chair the Interagency Labor Committee for Monitoring and Enforcement (ILC), which is tasked with reviewing RRM petitions within 30 days after they are received.

Section 232 and 301 Tariffs

The US International Trade Commission has released a report, “Economic Impact of Section 232 and 301 Tariffs on US Industries.” It provides a history of the statutory provisions and recent investigations under the two tariff items and also details the products and countries covered by section 232 tariffs imposed on US imports of steel and aluminum articles and section 301 tariffs imposed on US imports of certain products originating in China as well as the applicable duty rates. The report then details the economic effects of Section 232 tariffs on the steel, aluminum, and downstream industries and the effects of Section 301 tariffs on ten separate industries. Many figures and tables are provided.

Near-Shoring Risks

With the recent attention and activity being given to “near-shoring” by companies in the US, the Economics Intelligence Unit (EIU) has issued a report, “Mexico Operational Risk Review,” outlining five scenarios that US organizations should be watching for this year. They are:

• Governmental monopolistic practices – high probability, very high impact

• Organized crime activities – very high probability, high impact

• Energy policy disputes – high probability, high impact

• Passage of proposed electoral reforms – moderate probability, high impact

• Increased anti-government protests – moderate probability, high impact                   

Mexico Trade and Investment

Business Development Partners’ “Mexico Monthly Economy and Politics Brief” issues for February, March, and April are available here. The briefs cover economic and political news with details on a wide range of recent industrial investments. In general, the news is fairly upbeat, highlighted by “Mexico closed 2022 as the United States’ second largest trading partner, behind Canada and ahead of third place China. Mexico’s exports to the US exceeded US$454.9 billion last year, representing growth of 18.3% over the 2021 total.”

Brexit Update

For those who have been following the twists and turns of Brexit, the Northern Ireland Protocol has continued the difficulties of the post-Brexit settlement for Northern Ireland. On February 23, UK Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen shook hands on a “political agreement in principle” called the Windsor Framework. The framework establishes unique new arrangements on the movement of goods to protect internal UK trade – removing EU restrictions and oversight on goods bound for Northern Ireland as a final destination. It narrows the amount of EU rules applicable in Northern Ireland to less than 3% overall. The details of the arrangement as presented to Parliament are contained in “The Windsor Framework: A New Way Forward.” On March 24, the EU-UK Joint Committee, which is the forum responsible for consultation on the EU-UK Withdrawal Agreement, adopted a decision laying down the arrangements relating to the Windsor Framework. What follows will be legislation by both the EU and UK to provide a legal basis for the framework.

Mexico in a World of Electric Vehicles

For those of you who did not attend our recent webinar on electric vehicles, the six presentations and the video can be found at www.usmcocma.org/webinars. Stay tuned, we have more webinars in the works.

USMCA Disputes, Texas Borders, International Trade in 2023, Productivity Growth in Mexico, Trade Issues Looking Ahead, and More

As we progress into 2023, we have a number of interesting reports on a variety of topics. So, let’s get started. At the end of this Update, we will give you a glimpse of webinars that the Mid-America Chapter will be having this spring.

USMCA Disputes

The five-member automotive disputes panel, set up last January, made its preliminary decision in November, but the final report was not released until January 11, a day after the Three Amigos concluded their meetings in Mexico City. The firm of Thompson Hine released a detailed report on the dispute, “Panel Concludes Automakers May Continue Core Parts ‘Roll-up’ to Meet USMCA’s RVC Passenger Vehicle and Light Truck Requirements.” The panel “concluded that automakers may continue to use the longstanding practice of “roll-up” when calculating the percentage of North American originating materials used in production of core automotive parts (e.g., engines) that is subsequently factored into the computation for determining the total amount of originating content (the ‘regional value content’ or ‘RVC’) for passenger vehicles and light trucks.”

The panel rejected the US position that “roll-up” did not apply to core parts in the calculation. The US position would have made it harder for plants in Mexico and Canada to meet the new duty-free threshold of 75 percent regional content, up from 62.5 percent under NAFTA. The three countries have 45 days from January 14 to accept and comply with the decision with a number of options. If a resolution is not found, USMCA authorizes Mexico and Canada to take remedial measures against the United States by suspending USMCA benefits of “equivalent effect” for the US automotive sector and potentially other sectors of the US economy. Although “the clock is ticking” on this one, the US may soon be issuing new guidance on automotive Rules of Origin that may indicate the route it will take.

In January 2022, a USMCA dispute settlement panel found Canada’s dairy TRQ allocation measures to be inconsistent with Canada’s USMCA obligations. However, the US has found that Canada’s new policies are still inconsistent with its obligations under the USMCA and it has requested new talks, “United States Requests New USMCA Dispute Consultations on Canadian Dairy Tariff-Rate Quota Policies.” If the countries are not able to resolve the matter through consultations, the US may request the establishment of a panel under the USMCA. (See a copy of the Consultation Request with all the details.)

An issue that has yet to be resolved involves Mexico’s decree on December 31, 2021, that calls for a phase-out of use of both glyphosate and genetically modified (GE) corn for human consumption in the country by January 31, 2024. A report was issued by USDA’s Foreign Agricultural Service at the time of the Decree, “Mexico Publishes Decree to Ban Glyphosate and GE Corn.” Although the majority of US corn exports to Mexico go into the livestock feed industry, US corn is imported for use in the processing sector to make cereals, starches, and other processed products. There is no GE corn cultivated in Mexico. Mexico proposed some modifications to the Decree at the end of 2022, but both USDA and USTR, in meeting with government officials on January 23, indicated that the changes were not sufficient and “if this issue is not resolved, we will consider all options, including taking formal steps to enforce our rights under the U.S.-Mexico-Canada Agreement” (“Statement by USDA, USTR Officials Regarding Meetings in Mexico Today”).

Texas Border

The Texas Border Coalition has released a very interesting report, “Texas Borders, History, Policy and Management.” The Coalition is a group of nonpartisan elected officials and business leaders who make policy recommendations to help the Texas-Mexico border region grow and prosper economically. The white paper brings into focus the development of the border region historically and then the growing need for immigration regulations. Initially the concern was for the collection of tariffs rather than the exclusion of people as, prior to the 1880s, no federal limitations on immigration were written into law. The paper goes through the numerous laws initiated to control the flow of immigrants and discusses their successes and failures over time and the actions that the President and Congress can take to ensure that border communities are safe and thriving.

Productivity Growth in Mexico

The World Bank has issued a report, “Productivity Growth in Mexico: Understanding Main Dynamics and Key Drivers,” They conducted a comprehensive firm-level analysis of the entire Mexican economy over 25 years and surveyed more than 20 million businesses. They found that “Mexico’s disappointing aggregate productivity masks large differences in productivity levels and growth across locations, sectors, and firms” and that a “geographic productivity divide runs between the North-Center and South of Mexico, but large differences also persist between municipalities within regions.” The report goes on to show that “Mexico’s aggregate productivity is weakened by structural factors at industry and firm level — access to finance, lack of incentives to invest in technology, managerial capacities, and the business environment — that impede productive firms’ access to resources.” The productivity issues have been compounded by COVID-19.

There are several very detailed chapters:

• Productivity Growth in Mexico: An Economy in Slow Motion

• Understanding Local Differences in Productivity

• Economywide Productivity Drivers and Job Dynamics

• Raising Productivity through Participation in Global Value Chains

• Financial Constraints and Misallocation

• Innovation, Technology, and Management as Drivers of Productivity

Each chapter contains policy recommendations that will help offset the listed issues.

Trade Issues Looking Ahead

Several weeks ago, the firm of Thompson Hine did a webinar on trade matters, “What Will Happen in International Trade in 2023?” The topics were similar to the presentation given by John Murphy of the US Chamber of Commerce and discussed in our last Update – but with more details in some areas. On Section 301 tariffs, the levels will likely continue. Although many product exclusions have expired, some may continue through this September and new ones may be added. The presenters list “Best Practices” for handling 301 matters. There was a detailed discussion of the Uyghur Forced Labor Prevention Act (UFLPA), signed into law and becoming effective on June 21, 2022, and how this will affect importers who will have to show supply chain mapping for the imported good indicating it was sourced outside of the Xinjiang region. With the continued restructuring of supply chains, proving origination and substantial transformation will be more important in order to meet USMCA rules.

The presenters also discuss the new rules being introduced by new legislation. These include the Inflation Reduction Act (IRA), the Buy America Act, and the Build America, Buy America (BABA) provision of the Infrastructure Investment and Jobs Act. On the trade front, the Biden Administration themes are:

• Focus on worker-centric trade policy and agreements

• Move beyond traditional FTAs

• Pay attention to values, the “new global code of conduct”: worker rights, better labor conditions, environmental standards, anti-corruption, stable business investment climate, national security concerns, and resilient supply chains

Other New Rules to Watch for Importers

On February 8, in his State of the Union address, President Biden detailed his standard to require all construction materials on federal infrastructure projects to be made in the US. The Office of Management and Budget (OMB) on February 9 released proposed rules on the subject. Thompson Hine provides details in “OMB Issues Proposed Rule and Guidance on U.S.-Made Construction Materials in Infrastructure Projects.” The rules would standardize implementation of the Build America, Buy America (BABA) provisions of the Infrastructure Investment and Jobs Act. The construction materials covered include nonferrous metals; plastics and polymer-based products; composite building materials; glass; fiberoptic cable; optical fiber; lumber; and drywall. For each material, all manufacturing processes must be done in the US. Companies that work on federally funded construction projects need to monitor evolving domestic preference standards to ensure that they are not using imported materials in these projects.

Upcoming Webinars

Our Mid-America Chapter of the Chamber has set its sights on a number of webinars for the next few months at least. The first, “Mexico in a World of Electric Vehicles,” will be held on Wednesday, April 19, from 1:00 to 2:30 pm CDT. You will be receiving an announcement and registration materials shortly. Please plan to join the conversation!

The Three Amigos, Economic Outlooks for 2023, Maquiladoras

Dear Members and Friends:

Hope you are staying well. 2022 is behind us and 2023 is beginning. What kind of year will it be for us? We have assembled a number of reports that may give us a glimpse of what to expect.

So, let’s get started.

The Three Amigos

President Biden, President Lopez Obrador, and Prime Minister Trudeau, sometimes known at the Three Amigos, met on January 9 and 10 in Mexico City, preceded by Biden’s two-day visit to the border in El Paso. The event, the 10th North American Leaders Summit (NALS), was an occasion to review the progress on the ambitious agenda approved at the November 2021 NALS and the work plan that the three leaders tasked their officials to deliver over the year ahead. The sessions included many cabinet members from all three countries and a broad set of topics.

The White House has released a number of documents on the two-day sessions. The first, “FACT SHEET: Key Deliverables for the 2023 North American Leaders’ Summit,” contains details on the major topics covered:

• Drive North America’s economic competitiveness and promote inclusive growth and prosperity

• Recognize the urgency for rapid, coordinated, and ambitious measures to build clean energy economies and respond to the climate crisis

• Reaffirm their commitment to work together to achieve safe, orderly, and humane migration in the region

• Commit to coordinate actions and strategies to combat arms and drug trafficking, as well as trafficking in persons

• Commit to share information and develop public policies to protect our countries against current and future health crises

• Commit to promote diverse, inclusive, equitable, and democratic societies that combat racism

Another document was also released, “Declaration of North America (DNA),” which builds on the above points and looks forward to reviewing progress at the eleventh NALS (NALS XI), to be hosted by Canada.

Under the first bulleted topic above, the leaders agreed on “Organizing the first-ever trilateral semiconductor forum with industry to adapt government policies and increase investment in semiconductor supply chains across North America. Participation will include senior industry representatives and cabinet level participation from the United States, Mexico, and Canada in early 2023.” Biden met with Andres Manuel López Obrador on January 9 in Mexico City and the two agreed to set up high-level teams to spur economic cooperation on chips and other measures. US Secretary of Commerce Gina Raimondo will be heavily involved in managing the effort of the US side.

In December, the Arizona Commerce Authority (ACA) together with the Boston Consulting Group released a report, “The National Semiconductor Economic Roadmap,” which is an industry-led initiative designed to advance semiconductor competitiveness and craft a blueprint for future-proof semiconductor manufacturing in the US. The report is a follow-up to the CHIPS and Science Act, signed into law last August 2022 and appropriating $52 billion and creating a five-year investment tax credit to support expanding the US semiconductor industry. The report focuses attention on four domains of industrial effort—infrastructure, supply chain, workforce, and entrepreneurship.

Economic Outlooks for 2023

We have assembled a number of reports that look at this year from a country, regional, and international viewpoint.

The Economics Intelligence Unit (EIU) has issued its annual report on risks, “Risk Outlook 2023: Ten risk scenarios that could reshape the global economy”:

Scenario 1: Cold winter exacerbates Europe’s energy crisis—High probability, very high impact

Scenario 2: Extreme weather adds to commodity price spikes, fueling global food insecurity—High probability, high impact

Scenario 3: Direct conflict erupts between China and Taiwan, forcing US to intervene—Moderate probability, very high impact

Scenario 4: High global inflation fuels social unrest—Very high probability, moderate impact

Scenario 5: New variant of coronavirus, or another infectious disease, sends global economy back into recession—Moderate probability, very high impact

Scenario 6: Interstate cyberwar cripples state infrastructure in major economies—Moderate probability, very high impact

Scenario 7: Further deterioration in West-China ties forces full decoupling of global economy— Moderate probability, high impact

Scenario 8: Aggressive monetary tightening leads to global recession—Moderate probability, moderate impact

Scenario 9: China’s zero-covid policy leads to severe recession—Low probability, high impact

Scenario 10: Russia-Ukraine conflict turns into global war—Very low probability, very high impact

EIU details each of these scenarios in its report. Three risks, numbers 1, 2, and 4, carry the highest risks. Of those three, two are related to the environment.

EIU also released “Latin America Outlook 2023: Spotlight on New Governments.” It finds that there will be opportunities for growth in 2023, particularly in agriculture, mining, and nearshoring. However, capturing those opportunities will depend on the success or failure of the many new governments in the region as they attempt to address the voter demands that swept them into office while grappling with serious macroeconomic dilemmas and divided legislatures. EIU feels that “the bifurcation of the world economy will present a huge opportunity for Latin American countries in the form of nearshoring” and that Mexico is in a position to compete and benefit from trends in nearshoring.

Fitch presents two reports. The first is “Global Economic Outlook—December 2022: Inflation, Interest Rate Hikes and Recessions.” On a global basis, Fitch expects global growth to fall to 1.4% next year, which would, abstracting from the pandemic in 2020, be the weakest expansion since 2008. The reasons are monetary tightening and a darkening outlook for China’s property sector. Fitch covers all regions of the world as well as the major economies with much detail for each. For the US, GDP for 2022 will end up around 1.9%. However, average annual growth in 2023 is only expected to be 0.2% with contraction in the second and third quarters. The recessionary climate in the US will have an impact on both Canada and Mexico as exports to the US of manufactured and other goods will decline. Canada’s GDP growth will be 0.6%. Mexico, which should reach 3.0% in 2022, may only reach 1.4% in 2023.

In the second report, “Key Global Macroeconomic Themes For 2023,” Fitch looks at a number of areas:

• Slowdown in global growth

• Inflation easing slowly but a still tight monetary policy

• Fiscal policy tightening

• US dollar at an inflection point?

• Fragmented parliaments in a number of countries

• Increasing tensions between the US and China

• Global property markets coming under pressure

• Unemployment rates increasing

On the recession possibilities, Fitch has the Eurozone in contraction currently and the US in the third and fourth quarters. With the global slowdown, manufacturing orders will decline, resulting in reductions in exports volumes.

Last week John Murphy, Senior Vice President for International Policy at the US Chamber of Commerce, gave an informative presentation on the “Global Trade Outlook 2023: Rebooting the American Trade Agenda.” While first considering the conditions around the world and their possible impacts including in the US, where there is the potential arrival of a recession, a divided government looking at a debt ceiling, and increasing industrial policies, the focus shifts to President Biden’s trade policy, where the key words are “caution, continuity, and change”

Some points here.

• We’ve been cautionary on trade agreements with the UK, Kenya, and China

• Trump’s tariffs have become Biden’s tariffs

• It’s been more than a decade since we’ve added new trade partners

• The EU has trade agreements with 78 countries, Canada with 54, Mexico with 50, and China with 35

• Our trade-weighted average tariff rates are the highest among the major economies in the world—due to those on China

• Trade policies are becoming “worker-centric”

John Murphy’s message is that we are losing competitive advantage and the “US needs to get back in the game” by selling “Made in America” products to new markets in the world.

McKinsey just released a very interesting report on “Automotive Software and Electronics 2030: Mapping the sector’s future landscape,” which details challenges to the automotive industry in the coming years. Some of the insights:

• The software and electronics architecture in vehicles will see a major evolution and will outgrow the automotive market; as a result, they have become the focus of most automotive companies and their executives

• Autonomous driving (AD), connected vehicles, electrification of the powertrain, and shared mobility (ACES) are mutually reinforcing developments in the automotive industry; combined, they are not only disrupting the automotive value chain and impacting all stakeholders involved but also are a significant driver of the expected 7% compound annual growth rate (CAGR) in the automotive software (SW) and electrical and electronic components (E/E) market from USD 238 billion to USD 469 billion between 2020 and 2030

• New technologies are breaking up the “power dynamic” of traditional relationships between OEMs and tier 1 suppliers

• Separation of hardware and software is leading to new sourcing models

• New companies are entering the playing field in nontraditional and automotive areas

Maquiladoras

The Federal Reserve Bank of Dallas has been a great source of information and data concerning the border and especially the “maquiladora” industry, today known as the “Manufacturing, Maquila, and Export Service Industry Program,” or IMMEX. Their recent report, “Maquiladoras, Mexico’s Engine of Trade, Driven to Navigate Evolving Demand,” highlights the maquila’s historical role in accounting for manufacturing GDP (58% in 2021), industrial employment (48% in 2021), as well a majority of exports. Relatively low wages continue to be a reason why companies invest there. The average hourly wage was $6.57 in purchasing-power-adjusted dollars in 2021, compared to its neighbors of $25.24 in Canada and $34.74 in Canada.

The slow shift from low-skill, low-wage production to high-skill, high wage production has been evident in the high-tech industries such as automotive, aerospace, medical devices, and electronics. The transportation industry accounts for one-third of maquiladora employment and production and 3.6% of Mexico’s GDP. One area in particular, internal combustion engines, is where Mexico is a global leader—No. 7 in total world vehicle production and No. 1 in Latin America. In addition, it is the primary source of auto parts imports to the US.

However, as noted in McKinsey’s report cited above, the shift to electric vehicles will bring changes to Mexico’s leadership. In the next few years, “a large share of automotive component demand will shift toward electric powertrains, batteries, advanced driver assistance systems, sensors, infotainment and communication at the expense of conventional components such as transmissions, brakes, axles, exhaust systems, steering and fuel systems.” The new componentry, including electric vehicle batteries, is expected to bring in competition from new market entrants.

Economic Trends, Supply Chain and Nearshoring, Brexit/EU/UK Update

Dear Members and Friends:

Hope you are staying well and had an enjoyable Thanksgiving. Let’s get started on the recent news.

Economic Trends

We have several reports on global economic trends. Fitch’s report from October, “Global Monthly Presentation,” shows their consensus forecast to be lower than that of the IMF, with slowing for almost all areas primarily due to monetary tightening to battle inflation. Sentiments and expectations are lower and continued tightening seems to be the trend. The Eurozone will be especially hard hit with energy price increases. Although the US had a better third quarter, Fitch predicts a mild recession in 2023.

In a second report by Fitch, “Latin America Macroeconomic Update: Challenging Growth Outlook, Despite Q222’s Overperformance,” some countries such as Venezuela, Colombia, Nicaragua, and Brazil have done very well in real GDP growth since March due to private demand and elevated commodity prices that benefited exporters. However, newly restricted interest rates will cause growth to slow. In looking at particular countries, Mexico will see only 2.0% growth for 2022 and only 1.0% for 2023 as the US has a mild recession, limiting Mexico’s exports to the US and remittances from the US.

The EIU’s recent report “Global Economic Outlook 2022 - Explaining the Main Drags on Global Growth,” indicates that the war in Ukraine, monetary tightening, and an economic slowdown in China are weighing on the global outlook. The Eurozone will have an economic recession next year and the US economy will experience a mild recession in the next 12 months, with real GDP growth slipping from 1.5% in 2022 to just 0.5% in 2023.

Supply Chain and Nearshoring

The global supply chain is both the cause of and an effect on economic and political conditions in the world. A few recent reports are relevant here.

Brookings has released a report, “Six Ways to Improve Global Supply Chains,” that can provide some guidance for the future. The author suggests:

• Boosting domestic production through on-shoring and near-shoring

• Easing transportation jams

• Prioritizing public health

• Managing labor shortages

• Fighting anticompetitive practices; and

• Mitigating geopolitical tensions

The author ends by saying that

Resolution is going to require progress on many different fronts. There will need to be improvements on a variety of factors to make a difference in production, logistics, and distribution. Progress will not be easy or quick but can be made if there is a clear and comprehensive strategy to deal with the multiple challenges and complex interconnections.

CED, The Committee for Economic Development of The Conference Board, released a very detailed report, “A Road Map to Achieving Free but Secure Trade with Resilient Supply Chains,” which goes through the recent history of trade and supply chain issues beginning with the Great Recession of 2008. CED lists four factors that affected the supply chain crisis and changes to trading patterns we have today: changes in the US-China trade and strategic relationship; the pandemic; Russia’s invasion of Ukraine; and the transition to stakeholder capitalism. The solutions addressing supply chain issues include reshoring, nearshoring, and friend shoring. On trade, the authors indicate that we have lost presence in the new relationships in the Pacific – CPTPP and RCEP – and need to renew leadership in trade through forthright engagement and a serious plan to respond with determination and imagination to the significant developments that have occurred. Much good material in the report’s thirteen main sections.

While the CED report covered several thoughts on “shoring,” according to an analysis by the Inter-American Development Bank (IDB), nearshoring could add $78B in exports of goods and services to Latin American countries – with Brazil and Mexico getting to highest benefit. The report, “Nearshoring Can Add Annual $78 bln in Exports from Latin America and the Caribbean,” gives details for each country based on estimates of trade ministers from those countries, with Mexico’s total amounting to $29.6B. At the same time the report was issued in July, IDB announced support for plans by the government of Mexico to promote nearshoring, or the relocation of companies closer to end markets, to help foster sustainable development, especially in the country's south-southeastern states (“IDB Joins Forces with Mexico to Promote Nearshoring”). In the next three years, IDB Invest will provide an estimated $1.75 billion to $2.25 billion in short- and long-term financing and mobilized resources for new industrial parks, investment in anchor companies (including relocation expenses), and development of innovative mechanisms to finance small and midsize companies (SMEs) working in global supply chains.

Brexit/EU/UK Update

Although already almost three years old, the UK’s departure from the EU is in the news again. Former Prime Minister Liz Truss’s quick departure from office brought up discussion of what Brexit has done to the UK economy in the interim. The Economic & Social Research Institute (ESRI) has provided some information on the subject, “How Has Brexit Changed EU-UK Trade Flows?” The report from October is very detailed and shows not only UK but also EU trade with each other and the world. An earlier analysis, “Unravelling Deep Integration: UK Trade in the Wake of Brexit,” was done in March by Freeman, Manova, Prayer and Sampson (FMPS).

The reports use slightly different data sources and arrive at different conclusions when looking at percentage changes. ESRI’s initial estimates using EU data and the EU’s trade with the rest of the world as a control group show a big decline in UK to EU trade, and a smaller impact on EU to UK trade. FMPS found a positive impact of Brexit on UK to EU trade and a strongly negative effect on EU to UK trade. Although the reports only cover trade patterns through 2021 and result in different conclusions, the fact remains that Brexit has resulted in a decline in total trade flows between the UK and the EU. This, combined with the causes of PM Truss’s departure, has resulted in those opposing Brexit in the UK to question whether the their decision to leave the EU and gain “independence” was a wise move. Recent polls show the public doesn’t think so.

One last point on former PM Truss. Before departing, she was asked about the possibility of a trade agreement between the UK and the US. She said that no deal was on the horizon due to the US.’s lack of interest at this time.

Remember that all of our past updates and webinars can be found on our website at www.usmcocma.org/resources.

Have a great and safe holiday season. See you after New Year!

USMCA Disputes, US-Mexico Relationship, China and Tariffs Update

Dear Members and Friends:

Hope you are staying well and enjoying fall!

With the amount of new information recently received, we will divide the news into two sections: the first on USMCA disputes, the US-Mexico relationship, and China tariff update; the next on economic news, supply chain, and Brexit.

USMCA Disputes

In our last update following the second anniversary of the USMCA, we announced that the “United States Requests Consultations Under the USMCA Over Mexico's Energy Policies.” That was on July 20. Not mentioned at that time was that Canada also requested consultations. The Canadian announcement is “Statement by Minister Ng on Canada Launching Canada-United States-Mexico Agreement Consultations on Mexico’s New Energy Policies.” Although the statement is short, Minister Mary Ng, in an earlier meeting in Mexico City with Rocío Nahle García, Mexico’s Secretary of Energy, expressed similar concerns with Mexico’s energy policy as did the US in its request. She mentioned that Canada currently has $12.9 billion in investments in Mexico’s energy industry including more than $5 billion in innovative and cost-effective renewable energy projects that support affordable energy for Mexican consumers.

Under USMCA’s Article 31.2 and 31.4, the parties shall enter into consultations within 30 days of a member country’s request, unless the parties decide otherwise. If the parties do not resolve the matter through consultations within 75 days of the request, the requesting party may ask for the establishment of a panel. So, here it is, October, and what is happening? In the interim, Secretary of Economy Tatiana Cloutier resigned and was replaced by Raquel Buenrostro, former head of SAT. USTR Katherine Tai expects to meet with Secretary Buenrostro shortly. According to insiders, although requesting arbitration has opened as an option, it is more likely that negotiations will continue – at least for a while.

In another industrial area, on August 29 Ottawa indicated that it would request dispute settlement to challenge US duties on softwood lumber, saying the tariffs have caused “unjustified harm” to the industry and workers (Statement by Minister Ng on U.S. Duties on Softwood Lumber Products from Canada). This was following the final results of the third administrative reviews on August 4 by the US Department of Commerce of its anti-dumping and countervailing duty orders on certain softwood lumber products from Canada.

Negotiations under the USMCA Dispute Settlement Articles continue in the automotive sector, where Mexico and Canada have brought a complaint regarding the US interpretation of the rules of origin. Hearings in the dispute settlement panel began on August 2 and 3.

HLED Update – and the CHIPS Act

Another session of the High Level Economic Dialogue (HLED) was held in Mexico City on September 12. The session included Secretary of State Antony J. Blinken, Secretary of Commerce Gina Raimondo, and Deputy US Trade Representative Jayme White. Ambassador Ken Salazar chaired the meeting for the United States. The participants from Mexico included Secretary of Economy Tatiana Clouthier, Secretary of Foreign Relations Marcelo Ebrard, and Secretary of Finance and Public Credit Rogelio Ramírez. Ambassador Esteban Moctezuma chaired the meeting for Mexico. A joint statement was released by the participants, “Joint Statement Following the 2022 U.S.-Mexico High-Level Economic Dialogue,” accompanied by a fact sheet on the accomplishments to date, “FACT SHEET: 2022 U.S. – Mexico High-Level Economic Dialogue.”

Following the HLED, Monarch Global Strategies released a detailed report related to the HLED sessions. The report, “All CHIPS on the Table: The HLED Goes All-in on Semiconductors EV Supply Chains,” emphasized that the sessions focused on two recent pieces of legislation, the CHIPS and Science Act (CHIPS or Creating Helpful Incentives to Produce Semiconductors for America Act) and the Inflation Reduction Act (IRA). The senior leaders co-chairing the US delegation made clear the US’s desire to involve Mexico as a key partner in the realignment of the semiconductor and high-tech global value chain. They indicated that the sessions may have been the first time that the HLED delivered on the promise of its original vision: advancement of a strategic partnership for the United States and Mexico to enhance their collective competitiveness within the larger North American enterprise. The report looks at the opportunities and the challenges ahead.

A summary of all of the numerous elements contained in the Act, “CHIPS and Science Act of 2022 – Division A and B Summaries,” signed into law on August 9, is attached. It invests nearly $250 billion in semiconductor and scientific research and development and seeks to return the United States to dominance in chipmaking and to combat supply chain issues that have arisen from the country’s decline in science and technology. It has two main objectives: implementing previously authorized programs under the CHIPS for America Act of 2021 and authorizing the most extensive publicly funded five-year R&D program in the country’s history. Additional details can be found in Investopedia’s report, “CHIPS and Science Act of 2022.”

Lithium

Although the CHIPS Act involves the future supply of semiconductors to a large degree, supply of another material will also affect the automotive industry – and that is lithium. On the day following President Lopez Obrador’s loss in the lower Mexican House to pass his initiatives to change the Constitution on energy, a piece of legislation overwhelmingly passed that would make lithium deposits in Mexico a national strategic resource with the government responsible for mining and development. Several overseers of USMCA on the US side indicate that Mexico’s declaring lithium a “strategic resource” could violate sections of the USMCA.

In 2021, the PRC-based firm Gangfeng Lithium spent $264 million to acquire 100% ownership in the Bacanora lithium deposit in Mexico’s Sonora desert. However, President Lopez Obrador’s setting up a State company, now called LitioMx, to control mining and development could affect the future of this concession.

The US Geological Survey (USGS) reports it has identified resources of 1.7 million tons of lithium, positioning Mexico 10th globally. However, development of these resources would be slow due to clay substrates. Yet, the use of lithium in batteries may account for 95 percent of all use by 2030. Three pieces are of interest here: McKinsey’s “Lithium mining: How new production technologies could fuel the global EV revolution”; Shearman & Sterling’s “Mexico Nationalizes Lithium Mining”; and The Federal Consortium for Advance Batteries’ “National Blueprint for Lithium Batteries: 2021–2030.” Considering the projected dramatic growth in the production of electric vehicles in the next 20 years and the importance of lithium batteries in the supply chain, both the US and Mexico could play important roles in that future from a manufacturing perspective.

China, Tariffs, et al

Notwithstanding the press that Chinese President Xi Jinping has been receiving the past few weeks, there have been developments in the background on the trade and tariff front.

To begin with, an interesting primer on China’s relationship with Mexico, “The Evolution of PRC Engagement in Mexico,” is provided by Global Americans. The report has details on a number of industrial and economic sectors and concludes with the comment that “The progress that the PRC and its companies are beginning to make under the AMLO government with respect to Mexican infrastructure projects, the digital sector, and other areas of the Mexican economy has significant strategic implications for Mexico, the United States, and the region.”

On the tariff front, a number of recent pieces are available. Not too long ago, our Update reported that the feeling was that existing tariff rates for goods coming from China would be moderated, although primarily for goods that were not “strategic.” This would have assisted the fight against inflation. However, that did not materialize. On September 2 the USTR confirmed, as part of its statutory four-year review process under the Trade Act of 1974, that existing tariff would continue. The USTR notice, “Continuation of Actions: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” provides the rationale for the continuation. The USTR request for public comments indicates that comments can be submitted between November 15, 2022, and January 17, 2023. Then last week, USTR released a “Four-Year Review Docket,” which provides questions in three sections inviting the public to reply concerning the Section 301 actions: Section A invites views at an economy-wide level, Section B at a sector/industry level, and Section C at the level of tariff headings. This is definitely something those interested in commenting need to review in advance.

In another tariff-related area, the US International Trade Commission has been involved in Investigation No. 332-591, “Economic Impact of Section 232 and 301 Tariffs on U.S. Industries.” The goals of this ongoing investigation are to provide background information on the Section 232 and 301 tariffs and an overview of the tariffs that were in effect as of March 15, 2022; and an economic analysis of the impact of these tariffs on US trade, production, and prices in the industries most affected by these tariffs. A report is due to Congress by March 15, 2023.

Finally, on October 27, CBP announced it is adding a Uyghur Forced Labor Protection Act (UFLPA) “Region Alert” with a new mandatory data element for reporting imports via the Automated Commercial Environment (ACE) system. A complete listing is contained in the “Notational Development and Deployment Schedule for Automated Commercial Environment (ACE).”

Tune in next week for development on the economic and supply chain side.

USMCA and Summit of the Americas Update, China Tariff Relief and Nearshoring, US-Mexico Relationship Going Forward

Dear Members and Friends:

Hope you are staying well and enjoying the beginnings of summer!

The last few weeks have brought more “vision” on our overall relationships in the Americas going forward, and that will affect our decision-making as companies and organizations.

USMCA Update

July 1 marked the second anniversary of the USMCA and, as is typical with agreements, is an occasion to review how the implementation is going – or not going! The Brookings Institution has recently released two reports on the USMCA. The first, “USMCA Forward 2022: Building a More Competitive, Inclusive, and Sustainable North American Economy,” is an extensive (94-page) report that identifies five main priority areas: improving North American economic competitiveness; strengthening supply chains; expanding digital trade; improving labor conditions and wages; and supporting the transition to low-carbon economic growth. It is led off by viewpoints of Canadian Trade Minister Mary Ng, Mexican Secretary of Economy Tatiana Clouthier, and United States Trade Representative Katherine Tai. It is definitely a document worth reading as a basis for the important aspects of the agreement.

The second report, “USMCA at 2: Visions for Next Steps,” just released, looks at several areas of importance in improving North American economic relations as we move toward the first formal review of the agreement by the three parties in 2026. These include a new agenda for border cooperation; greater commitment to supply chains, labor, digital trade, and expansion; continuing to meet the letter and spirit of the agreement and promoting its benefits; continuing to work on the betterment of US-Mexican relations even after new presidential elections in both countries; and making the USMCA the cornerstone of new agreements with Latin America via the Americas Partnership for Economic Prosperity (APEP) presented at the recent Summit of the Americas.

Three weeks ago the USTR released its first biennial “Report to Congress on the Operation of the United States-Mexico-Canada Agreement with Respect to Trade in Automotive Goods.” The report goes through the key facets of Section 202 and the Rules of Origin. In particular, there is a detailed section on the Alternative Staging Regimes (ASRs) that allow for a tailored plan to gradually meet RVC and LVC levels for up to five years before satisfying the standard requirements. The ASR differs from the standard staging regime by providing additional time and a different phase-in of the new requirements. Thus far, thirteen vehicle producers requested and received approval for their ASR. On external factors affecting the US auto industry, the report finds, “Assessing the full impact of the USMCA on the U.S. and North American automotive industry is difficult at this time due to three extraordinary external factors that have adversely impacted the industry since early 2020: the COVID-19 pandemic, the subsequent supply chain shortages of semiconductors and inputs, and the 2022 Russian invasion of Ukraine.”

On July 8, USTR released a “Joint Statement of the Second Meeting of the USMCA/CUSMA/T-MEC Free Trade Commission,” which took place in Vancouver between USTR Katherine Tai, Canadian Minister of International Trade, Export Promotion, Small Business and Economic Development Mary Ng, and Mexican Secretary of Economy Tatiana Clouthier. It was the second meeting of the three trade representatives. The meeting covered a number of topics, including North American competitiveness; SMEs and inclusive trade; labor; the environment; and next steps.

In more recent activity, the USTR on July 20 indicated that the “United States Requests Consultations Under the USMCA Over Mexico's Energy Policies.” Ambassador Tai said in the announcement:

“We have repeatedly expressed serious concerns about a series of changes in Mexico’s energy policies and their consistency with Mexico’s commitments under the USMCA. These policy changes impact U.S. economic interests in multiple sectors and disincentivize investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy. We have tried to work constructively with the Mexican government to address these concerns, but, unfortunately, U.S. companies continue to face unfair treatment in Mexico. We will seek to work with the Mexican government through these consultations to resolve these concerns to advance North American competitiveness.”

Two additional documents are related to this announcement, “WHAT THEY ARE SAYING: United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies on Behalf of U.S. Stakeholders” and “Copy of the Consultations Request.”

Summit of the Americas

The Ninth Summit of the Americas came and went in Los Angeles five weeks ago. It was the first time the United States hosted the Summit since the inaugural meeting in Miami in 1994 – and it was not without its share of strife.

Not all of the countries of the region were invited. Only 23 of the hemisphere’s 35 heads of government participated in the summit along with representatives of eight other countries. There were also three official stakeholder forums occurring alongside the summit to discuss regional challenges and interact with the assembled leaders.

The Congressional Research Service provided a summary of the outcomes, “2022 Summit of the Americas,” following the event. One of the outcomes was President Biden’s announcement of a new program to work with the countries in Latin America and the Caribbean. A fact sheet from the White House, “FACT SHEET: President Biden Announces the Americas Partnership for Economic Prosperity,” is attached. Some additional comments on the partnership and what it might accomplish are contained in the Center for Strategic and International Studies piece, “Taking the Americas Partnership for Economic Prosperity as an ‘Opening Bid’ to Go Bigger.”

At the time of the Summit, representatives of the US, Mexico, and Canada released a statement, “Joint Statement on Canada-Mexico-United States Cooperation,” affirming their commitment to working together to solve problems of the region.

Following President Biden’s inability to see President Lopez Obrador at the Summit, they did meet at the White House on July 12 in a session that was previously scheduled. Their remarks prior to the formal meeting are contained here: “Remarks by President Biden and President López Obrador of Mexico Before Bilateral Meeting.”

China Tariff Relief and Nearshoring

Will we or won’t we? President Biden has been considering reducing the 301 tariffs on goods coming from China. A decision could be made this month. The reason? Recent reports have tied in a reduction in the tariffs with a reduction in inflation – now a problem in the US economy. The Peterson Institute’s (PIIE) analysis, “To fight inflation, cutting tariffs on China is only the start,” indicates:

“The direct effect of removing tariffs on imports from China could lower consumer price index (CPI) inflation by 0.26 percentage point—only marginally reducing inflation. But as US corporations trim their markups to compete with imports, the competitive impact of cutting the China tariffs could eventually lead to about a 1 percentage point reduction in inflation.”

PIIE details other possible changes to US trade policy that can affect costs in the inflation sphere. What products that are part of the 301 tariffs could see relief remain to be seen, although consumer goods that figure more in lower-income households' expenditures, like clothing, furniture, school supplies—and baby formula – might be on the list.

Not all parties are in agreement with lifting tariffs on China, wanting to continue waging a trade war and limiting abilities for US companies to invest in the country. The White House, working to improve competitiveness and resolve supply chain issues, is working with Congress to pass a $52 billion subsidy bill to support semiconductor chip research and manufacturing. However, the White House supports prohibiting semiconductor companies from expanding certain investment in China if they take new subsidies to build plants in the US. The China investment restrictions are still under negotiation and are a target of heavy lobbying by the semiconductor industry. Currently, the legislation would prohibit companies from expanding their semiconductor manufacturing in China for 10 years after they take a grant to build a US plant. The Senate is debating the language of the legislation this week.

In another activity affecting China and nearshoring, legislation has been introduced by Rep. Mark Green (D-TN). The bill, H.R. 7579 Western Hemisphere Nearshoring Act, has as its goal “To decrease dependency on People’s Republic of China manufacturing and decrease migration due to lost regional economic opportunities.” Among other things, the legislation would provide duty-free treatment for goods and services of companies moving from the Peoples Republic of China to Latin America and the Caribbean. It also supports having the USTR initiate free trade agreements with countries in the region that do not now have agreements with the US.

You can view all of our past updates including, links to articles and documents, at www.usmcocma.org/resources.

Also, stay tuned for more webinars from our Chapter, including a two-session "USMCA Update," "Mexican Investment in the State of Illinois - Opportunities and Process," and "Mexico in a World of Industrial Clusters."

US Trade Policy Revisited, China Tariff Relief (?), Section 301 Review, Trade and Economics Going Forward

Dear Members and Friends:

Hope you are staying well. 

For a while it appeared that we were entering “calmer waters,” both economic and political. But now some more storms have set in due to the continuing Russia-Ukraine conflict and COVID in China. The result is more supply chain disruption, escalating prices for everything consumers purchase (especially food and gas), globalization going to regionalization, and shifts in trade policies going forward.

US Trade Policy

On March 30, US Trade Representative Katherine Tai testified before the House Ways and Means Committee on the “Biden Administration’s 2022 Trade Policy Agenda.” We previously provided that Agenda to you. The testimony was a summary of the key features of the Agenda. Although the invasion of Ukraine by Russia had taken place a month earlier, there was no mention of that in Tai’s formal remarks.

In her testimony remarks on China, Tai said:

“While we continue to keep the door open to conversations with China, including on its Phase One commitments, we also need to acknowledge the Agreement’s limitations, and turn the page on the old playbook with China, which focused on changing its behavior. Instead, our strategy must expand beyond only pressing China for change and include vigorously defending our values and economic interests from the negative impacts of the PRC’s unfair economic policies and practices.”

Nevertheless, in a meeting with Canadian Trade Minister Mary Ng in Ottawa on May 5 (articles “USTR Tai says China tariff review will have 'robust' industry consultations” and "US Must Be ‘Strategic’ on China Tariffs, Trade Chief Says"), she said that “all tools were on the table to address rising inflation, including reductions of tariffs on Chinese imports, but that any policy shift needed to keep medium-term goals in mind.” Similar comments on possible tariff reductions were made recently by President Biden, Deputy National Security Adviser Daleep Singh, and Treasury Secretary Janet Yellen. It remains to be seen which items would be on a list for tariff reductions.

 Section 301 Reviews

On April 22, USTR released its “2022 Special 301 Report” on the adequacy and effectiveness of the US trading partner countries’ protection and enforcement of intellectual property rights. The report details the USTR’s findings of more than 100 trading partner countries after significant research and enhanced engagement with stakeholders and is done on an annual basis. There were seven countries on the “Priority Watch List,” including China and Russia. There are a number of issue areas involving China. The issues are discussed in detail including developments, progress, and actions taken that should be reviewed by those who may be affected.

At the Ottawa meeting, USTR Tai mentioned that a Federal Register notice will be issued regarding a statutory four-year review of the initial Section 301 tariffs it imposed on Chinese imports in 2018 when the Trump administration had a dispute with Beijing over China's intellectual property and technology transfer practices. That notice, “Initiation of Four-Year Review Process: China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” was issued on May 5. The first phase of the review process involves notification to representatives of domestic industries that benefit from the two trade actions under Section 301, as modified, of the possible termination of the actions, and of the opportunity for these representatives to request continuation of the actions.

Trade and Economics Going Forward

We are including two recent reports on the trade and economic impact of the Russia-Ukraine conflict.

The first is a report by the Economist Intelligence Unit (EIU), “The Outlook for Asia Following the Russian Invasion of Ukraine.” Although Asia is not in the eye of the storm of the crisis triggered by Russia’s invasion of Ukraine, it will nevertheless feel its effects. Economically, this will include weaker growth and higher inflation this year for the fifteen countries in the region including China. Several countries are more dependent than others for gas, cereals, fertilizers, and especially arms from either Russia or Ukraine. Investment projects between Asian countries and Russia could be affected partly by sanctions. EIU finds that “One likely consequence of the crisis is that the U.S. will be less able to deliver in the near term on its Indo-Pacific strategy, which is designed to finally bring about the ‘pivot’ in U.S. military and diplomatic resources to Asia first promised in the late 2000s.” They conclude by indicating, “Overall, the Ukraine conflict adds another layer of complexity to the geopolitical environment in Asia.”

The second report, by Fitch Solutions, “Global Macroeconomic Update,” begins by presenting four possible scenarios to the Russia-Ukraine conflict. The most likely scenario, with a probability of 50%, indicates that fighting would continue into the second half of the year before easing to a stalemate by end of year, and that Moscow is unable to make further substantial gains, but Ukraine cannot expel Russian forces. Their findings include:

• Global growth will slow but will be supported by elevated savings and a strong labor market

• Despite the fact that imports from Russia and Ukraine account for only a small percentage of global imports, supply chain risks can pose significant risks for the global economy in select areas such as gas and food products like wheat, which will cause inflationary pressures and weigh on political stability

• European and US growth will slow and be impacted by higher inflation especially in Europe, which is affected more by Russian and Ukrainian imports

Upcoming

The United States is scheduled to host the Ninth Summit of the Americas in Los Angeles this week from June 6-10. The Summits of the Americas, held roughly every three years, serve as opportunities for the Western Hemisphere’s heads of government to engage directly with one another and address issues of collective concern. We will cover the activities in our next update – and the success of the Summit may well depend on who is on the final list of invitees as well as which heads of government actually attend! For more information, see www.ixsummitamericas.org.

U.S. Trade Policy, CPTPP, HTS Updates, China, and the Ukraine Crisis

Dear Members and Friends:

Hope you are staying well.

With the ongoing conflict in Ukraine and sanctions being issued by the U.S. and other major allies, economic conditions, the supply chain, and trade will likely be adversely affected worldwide in the coming months. This topic will be covered at the end of this update. In the meantime, we have a number of important reports for your consideration.

U.S. Trade Policy

The USTR has issued two reports in the past few weeks. The first, “2022 Trade Policy Agenda & 2021 Annual Report,” is in two parts. There are five major areas of focus in the Trade Policy Agenda:

• Advancing a Worker-Centered Trade Policy

• Re-aligning the U.S.-China Trade Relationship

• Engaging with Key Trading Partners and Multilateral Institutions

• Promoting Confidence in Trade Policy through Enforcement

• Promoting Equitable, Inclusive, and Durable Trade Policy and Expanding Stakeholder Engagement.

The 2021 Annual Report includes an annex listing trade agreements entered into by the United States since 1984. It also includes an annex on U.S. trade in 2021.

The second USTR report, “Strategic Plan FY 2022 – FY 2026,” lists and details six goals to be achieved in the next five years:

• Open Foreign Markets and Combat Unfair Trade

• Fully Enforce U.S. Trade Laws, Monitor Compliance with Agreements, and Use All Available Tools to Hold Other Countries Accountable

• Develop and Implement Innovative Policies to Advance President’s Trade Agenda

• Develop Equitable Trade Policy Through Inclusive Processes

• Effectively Communicate the President’s Trade Agenda

• Achieve Organizational Excellence as a Model Employer

Each of the goals has detailed strategies and objectives.

The CPTPP

Although not a main focus of the Administration’s trade policy, and not mentioned very often by the USTR, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership has quietly been growing in the past few years. The Economist Intelligence Unit (EIU) has just released a report, “What’s Next for the CPTPP?”, which explores how further growth might be achieved by the addition of new members. Over the 2022-2026 period, EIU assumes that an enlarged CPTPP will include the UK, Ecuador, and South Korea, as well as emerging markets such as Colombia, Indonesia, Thailand, and the Philippines. China and Taiwan may also be in the mix, and much detail is related to the possibilities of their entry. However, regarding the U.S., EIU feels that “bipartisan domestic hostility to trade agreements and some of the CPTPP’s more controversial clauses, such as the investor-state dispute mechanism, will deter the US president, Joe Biden, from re-opening discussions on membership.” A number of possible scenarios over the next five years is presented with percentages for outcomes.

China Phase 1

January marked the final year of the Phase 1 agreement with China. Unfortunately, not much has been accomplished with China over that time. The Petersen Institute for International Economics (PIIE) covers this in a report, “China bought none of the extra $200 billion of US exports in Trump’s trade deal.” The agreement committed China to increases its purchases of certain U.S. goods and services in 2020 and 2021 by at least $200 billion over 2017 levels. China agreed to buy at least $227.9 billion of US exports in 2020 and $274.5 billion in 2021, for a total of $502.4 billion over the two years. The agreement also established legal commitments for a defined set of manufacturing, services, agricultural, and energy products. Ultimately, China bought only 57 percent of the US exports it committed to purchase over 2020–2021. U.S. exports of covered goods and services to China over the two years were $288.8 billion. In the end, tariffs are still in place.

PIIE covers many of the commodity and services areas in the detailed report and concludes by saying that “U.S. policymakers have to seek a new approach.” Some thoughts on new policy areas are covered in the aforementioned USTR “2022 Trade Policy Agenda & 2021 Annual Report” in the section “Re-aligning the U.S.-China Trade Relationship.”

HTS Modifications

The U.S. International Trade Commission (USITC) initiated an investigation of recommended changes to the Harmonized Tariff Schedules (HTS) on October 1, 2019, and published those recommendations in the Federal Register on November 17, 2020. They went into effect on January 27. The USITC report on the modifications (here), “Recommended Modifications to the Harmonized Tariff Schedule, 2021,” lists all of the changes to about 350 products and product group. Importers should review the 2022 HTS amendments to determine how they may impact their product classifications.

Ukraine Crisis and Its Impacts

Regarding the conflict in the Ukraine and the sanctions that have been issued thus far, Fitch Solutions has dedicated their monthly report to the “Global Implications of Russia’s Invasion of Ukraine.” The report covers three areas of interest: growth, inflation, and geopolitics. It lists the sanctions that have been issued by country thus far – but that is as of March 1. Although Fitch estimates that there will be only a modest impact on growth exposure worldwide, there will be impacts on inflation, especially on energy prices. They indicate that the strategic shifts to watch will be European defense policy, European energy policy, and geopolitical relations. We have seen movement in these areas in the past two weeks alone. A detailed list and explanation of sanctions to date is provided by Thompson Hine, “The Latest on the Ukraine-Russia Crisis.”

The Economist Intelligence Unit released a brief report, “Five Ways in Which the War in Ukraine Will Change Business,” looking at the supply chain, commodities, energy, monetary impact, and technology.

Investment in Hidalgo

Recently we reported about the “Memorandum of Understanding Between the United States-Mexico Chamber of Commerce and the Mexican Association of Secretaries of Economic Development.” In this new relationship, the Chamber will be working with each of the States to promote trade and investment, among other goals. Several weeks ago, Ambassador Reyna Torres, Consul General of Mexico in Chicago, held a Virtual Trade Mission with Sergio F. Vargas Téllez, Secretary of Economic Development for the State of Hidalgo, and his staff. Their presentations, “Commercial Mission: North America 2020” and “Hidalgo: The Mexican Spot,” give a complete overview of the reasons so many companies have set up operations there.

USMCA Update, Sec. 232 Tariffs, Supply Chain, and Trade Looking Forward

Dear Members and Friends:

Hope that your holidays were enjoyable and that you are staying safe. As we get into the new year, we have a number of important items to report.

USMCA Update

A few issue areas are in the works affecting all three countries. First, on January 4, the US prevailed in the first Dispute Settlement panel proceeding ever brought under the USMCA. In the proceeding, a panel was asked “to determine whether Canada’s current practice of reserving 85 to 100% of 14 separate dairy tariff rate quotas (“TRQs”) for ‘processors and further processors’ is inconsistent with its obligations under the Canada-United States-Mexico Agreement/United States-Mexico-Canada Agreement.” The proceedings go back to December 9, 2020, when the US requested consultations with Canada on the matter. Articles 31.2 and 31.4 of the Treaty, which are part of the Chapter on Dispute Settlement, were the ones called upon. The panel agreed with the US position in the case. Although the panel’s report, “Canada – Dairy TRQ Allocation Measures (CDA-USA-2021-31-010),” is a lengthy one to go through, the panel’s decision is the first of its kind under the USMCA’s “state-to-state” dispute settlement mechanism and may be the template for the settlement of future disagreements.

On the auto-related sections of the USMCA, which is also involving a dispute settlement panel, Mexico has joined Canada in questioning how the US has chosen to interpret the automotive rules of origin policy that forms part of the agreement. Mexico requested the establishment of a panel on January 6 and Canada followed on January 13. Canada believes that the US interpretation of the rules – especially the calculation of regional value content (RVC) – could make it harder for Canadian vehicles and main components such as engines, transmissions, and steering wheels to qualify as duty-free. Mexico, in part, feels the rules as interpreted by the US might hinder the development of electric vehicles and components. Both parties agreed to approach the US on a consolation on this past August 20. A panel ruling is expected this summer.

On the labor provisions of the USMCA, the US has already filed two complaints under the “Rapid Response Mechanism.” Both are in the process of being resolved. The Congressional Research Service just released an update to their earlier piece on “USMCA: Labor Provisions” and earlier this month also did an update to the “U.S.-Mexico-Canada (USMCA) Trade Agreement.”

Section 232 Tariffs

On December 28, 2021, two proclamations were issued by the White House – “Adjusting Imports of Steel into the United States” and “Adjusting Imports of Aluminum into the United States.” These are the result of an agreement on October 30, 2021, between the US and the EU on the Section 232 tariffs that were implemented during the Trump administration. Under the agreement, the United States will replace the current Section 232 duties with tariff-rate quotas (TRQs) for covered EU products effective January 1, 2022. The EU will suspend related retaliatory tariffs on US products, and the United States and EU have agreed to suspend their World Trade Organization (WTO) disputes against each other regarding these Section 232 tariffs. The details can be found at “Announcement of Actions on EU Imports Under Section 232: October 31, 2021.” The Department of Commerce will issue a notice in the Federal Register no later than February 10 seeking comments from interested parties on the Section 232 steel and aluminum exclusion processes.

Caribbean Basin Initiative

Although sometimes hidden in all of the other trade news of the world, the Caribbean Basin Initiative (CBI) was initially launched in 1983 with the passage of Caribbean Basin Economic Recovery Act, substantially expanded in 2000 with the Caribbean Basin Trade Partnership Act and later with the Trade Act of 2002. As of last year, the CBI provides 17 countries and dependent territories with duty-free access to the US market for most goods. In 2020, CBI beneficiary countries supplied $5.1 billion of US imports, ranking 49th among US import suppliers. The detailed annual report of USTR for 2021 is “Fourteenth Report to Congress on the Operation of the Caribbean Basin Economic Recovery Act.”

Looking Forward

The Economist Intelligence Unit has released a report, “North America in 2022: key trends and forecasts,” that provides glimpses on a number of issue areas including the mid-term elections, the economic outlook, monetary policy, foreign policy, and energy.

Fitch Solutions also provides a look at the economic side with “Key Global Macroeconomic Themes For 2022.” Ten different themes are covered, including economic normalization and COVID-19, economic growth, tourism, inflation, monetary policy, polarization, and regional and global political tensions. Fitch ends with the need to look at four key risk areas: credit stress from the property sector in China, price pressures remaining strong, new COVID-19 variants, and geopolitical missteps between Russia and Ukraine.

John Murphy, Senior Vice President for International Policy at the US Chamber of Commerce, provided a presentation (here) from a webinar last week on “Global Trade Outlook 2022” that covered a broad area of issues including supply chain woes. Very good overview on the outlook especially for trade and geopolitics.

Thanks to our partners at Manchester Trade, we have a report from IHS Markit, “Global Trade Outlook 2022.”  It indicates that the “COVID-19 pandemic is the most prominent driver of the current global economic situation. As a pandemic cannot be fully predicted, it leads to significant uncertainty.”  Despite the negative impact COVID has had on economic activity, real global trade increased by 12.6% in 2021 and will increase 4.3% in 2022. IHS also forecasts that, after a 3.4% decline in 2020, world real GDP will increase 5.6% in 2021 and 4.3% in 2022. On qualitative factors affecting trade going forward, they indicated, “Over several decades, the global trade system is likely to develop into a system of several large RIAs or mega-regional trade agreements (e.g., European, Pan-American & Asian) with a significant role in the global trading system and potentially large tensions between them. The launching of RCEP (Regional Comprehensive Economic Partnership) can be considered an essential step in this process.”

Finally, on US-Mexico Trade, as of November, Mexico was still our leading trading partner for 2021 to date with Canada and China very close. The three accounted for 43.3% of all trade with the US. Mexico’s total trade with the US was $58.71 billion in November.

Upcoming Webinars

Our Mid-America Chapter has done seven webinars thus far on subjects involving Mexico and trade.  We have several more in the works, including Tourism; a USMCA Update; a Legal, Tax, Fiscal and Supply Chain Update; Industrial Clusters; Electronics; Appliances; and Agriculture.  We will keep you posted.

US Relations with Mexico and China, Supply Chain Outlook, COVID and the Economy

Dear Members and Friends:

Hope you are well and staying safe!

As we transition to a new year, many of the topics and issues we faced in 2021 will continue to follow us to 2022.  We will continue to keep all of you informed with news as we receive it.

US Relations with Mexico

The biggest occasion in the month of November was the meeting of the Three Amigos in DC on November 18: President Biden, President Lopez Obrador, and Prime Minister Trudeau.  It was the first such meeting in five years.

President Lopez Obrador, President Biden, and Prime Minister Trudeau.

According to the White House, the meetings “will reaffirm their strong ties and integration while also charting a new path for collaboration on ending the Covid-19 pandemic and advancing health security; competitiveness and equitable growth, to include climate change; and a regional vision for migration.”  However, aside from the “niceties” of the sessions, the question remains whether the three individuals and the three countries will be able, in the coming months and years, to tackle and solve the  problems of migration, border management, and protectionism.

The first North American Leaders Summit was hosted by George W. Bush at Waco in 2005 with Canada’s Paul Martin and Mexico’s Vincente Fox. Many efforts, some successful and some not, have been tried since. Is there a true desire, with detailed policies, plans, and programs, for the countries to achieve a “trilateral industrial policy” together? We will see! A Fact Sheet released by the White House, “Key Deliverables for the 2021 North American Leaders’ Summit,” and the verbatim opening remarks by the leaders, “Remarks by President Biden, Prime Minister Trudeau of Canada, and President López Obrador of Mexico Before North American Leaders’ Summit,” are linked here.

At the same time as the Summit, El Financero published a national survey of the opinions of Mexicans of the relationship between the two countries. The details are in a brief article released by the Mexico Institute, “Most Mexicans perceive a positive U.S.-Mexico relationship,” on November 23. The November data shows that 64% of respondents think that relations between Mexico and the US are good or very good, as opposed to 18% who think that they are bad or very bad. The September poll recorded 65% positive opinion; these are the two highest marks on the perceived bilateral relationship since February 2019.

The favorable opinion about the bilateral relationship was much lower, 33% in February 2019 and 20% in June of that year, with Donald Trump still in the White House. With Joe Biden in the presidency, the relationship has been perceived with ups and downs, but favorable opinions have generally been more numerous.

US-Mexico Chamber

During the celebration of the Annual Board of Directors Meeting in Washington on October 20, the President and CEO of the Chamber, Albert Zapanta, and the President of the Mexican Association of Secretaries of Economic Development (Asociación Mexicana de Secretarios de Desarrollo Económico-AMSDE), and Secretary of Economic Development of the State of Coahuila, Ing. Jaime Guerra, signed a “Memorandum of Understanding”  to promote the development of binational economic activity and recognize that trade and investment relations between Mexico and the United States are vital to promoting the economic development of both countries.

Among the goals of the relationship are to exchange periodic information on the supply and demand of goods, services, and investments in both countries to benefit producers, exporters, and/or investors; and to disseminate information and promote the results of research and analysis of public policies on trade and investment relations between Mexico and the United States.

US Relations with China

January 15 will mark the second anniversary of the establishment of Phase One trade agreement between the US and China. On the initial date the White House released a Fact Sheet entitled “Economic and Trade Agreement Between the United States of America and the People’s Republic of China.” The agreement itself is attached here. There were seven chapters to the agreement: Intellectual Property; Technology Transfer; Agriculture; Financial Services; Currency; Expanding Trade; and Dispute Settlement.  This past year has not seen movement forward on the agreement from an economic perspective with growing state control over the private sector and economy more generally in China, and a shift to a more socialist direction with its new “Shared Prosperity” policy.

MarshMcLennan covers a number of these concerns in an article, “Where Is the US-China Relationship Heading in 2022?”  As a response to China’s more aggressive economic and foreign policy, President Biden has focused on multilateralism, something not popular with his predecessor. New initiatives such as AUKUS (Australia, United Kingdom, and the United States) and “the Quad” (Australia, India, Japan, and the United States) have sought to jointly promote free and open trade and rules-based order for the Indo-Pacific region. However, on the negative side, there is no likelihood of the US rejoining the Comprehensive, Progressive Trans-Pacific Partnership or the new Regional Comprehensive Economic Partnership – of which China is a member.

Lastly, the U.S.-China Economic and Security Review Commission has released its “2021 Report to Congress.” The 551-page report has several major chapters: US-China Global Competition; US-China Economic and Trade Relations; US-China Security, Politics, and Foreign Affairs; A Dangerous Period for Cross-Strait Deterrence: Chinese Military Capabilities and Decision-Making for a War over Taiwan; and Hong Kong’s Government Embraces Authoritarianism. Each chapter has key findings, and the report ends with 32 very detailed recommendations organized by chapters.

The tenor of the report is dominated by the following words from the Executive Summary:

“China’s leadership is increasingly uninterested in compromise and willing to engage in destabilizing and aggressive actions in its efforts to insulate itself from perceived threats or to press perceived advantages.  As Beijing views itself facing a more adversarial international environment, its attempts to impede political and economic coordination between the United States and other democracies will likely intensify.” 

Supply Chain Outlook

On supply chain, we start with a link provided by our Chamber’s strategic partner in Washington, Manchester Associates. Certainly supply-chain issues have been exacerbated by the lack on the supply side of semiconductor chips, especially affecting the auto industry, among others.  A recent article in the International Business Times, “The Semiconductor Shortage Is an Opportunity to Create a Win-Win Situation for Mexico and US,” brings up some interesting possibilities:

“In the most adverse scenario, the lack of semiconductors would cause a decline of 2.16 [percent] in the participation of secondary activities in GDP; 3.57 [percent] in the case of manufactures; and 10.9 [percent] in the manufacture of transportation equipment where the automotive industry is located. Despite being the seventh largest car manufacturer and the fifth largest auto parts producer in the world, the production in Mexico is the lowest it has been in a decade, and Mexican manufacturers stopped producing 493,410 vehicles from January to October 2021.”

One solution, in planning for the future, would be to relocate more semiconductor manufacturing to Mexico, either the Baja California region or the southern states where more water is available, a key ingredient in semiconductor manufacturing. Mexico and the United States agreed at the HLED to create bilateral working groups on supply chains for semiconductors, as well as on medical devices and pharmaceuticals, according to Tatiana Clouthier, Secretary of Economy. Preliminary reports are due soon. In a recent article of news, Keith Patridge, CEO of the McAllen Economic Development Council, indicated that “MEDC will soon be welcoming a microchip manufacturer to the RGV [Rio Grande Valley].” This would include a 90-acre campus in the McAllen, Texas, area.

Also, thanks again to Manchester Associates, we have a report from the Council on Foreign Relations on “What Happened to Supply Chains in 2021?” Although with our recent reporting it might be easy to answer this question, the CFR brings up many of the details and focused part of their analysis on semiconductors. The other keys to the ongoing problem include pent-up demand, soaring shipping costs, and growing cargo wait times. There have, however, been several policy initiatives, including providing Department of Energy loans for battery manufacturing, upgrading US port infrastructure, improving roads and bridges, improving data sharing and freight planning, and operating the Port of Los Angeles 24/7.  Also important will be the “CHIPS for America Act,” which will provide $50 billion to support chip development in the US. The Act was passed by the Senate but is stalled in the House.

However, Foreign Affairs points out that alterations to the industrial policy in the US could be counterproductive in their piece, “Why the Supply Chain Slowdown Will Persist.” Some of these policy changes, including tariffs between the US and China, affected supply chains especially in the semiconductor industry. They conclude that governments should be sparing in their use of industrial policies and more broad-based in their economic interventions such as funding basic research and development and setting global standards that define the basics of industrial processes, protocols, and products.

Our last report on supply chain by McKinsey covers another element, “Navigating the labor mismatch in US logistics and supply chains.” The contention is that

“… the recovery has seen an unusual reduction in labor force participation and that jobs are available—the job-openings rate is around 50 percent above pre-pandemic levels—but the workforce to fill them has contracted. About four million people have left the civilian workforce and, with demand for workers exceeding supply, the cost of labor has increased accordingly. Despite wage increases, logistics operations are still having difficulty hiring and retaining frontline workers, while also seeing increased absenteeism, causing knock-on effects across the supply chain.”

The authors indicate that the mismatch is unlikely to dissipate quickly but that companies are taking steps to address the imbalance.  Some of these are ensuring viability of the supplier base; creating capability to identify the stressed nodes and adjust labor flows; reducing complexity and labor content of products and services; and exploring lean management and automation.

COVID-19

Although much of the news today is dominated by COVID, the Albright Stonebridge Group (ASG) has been releasing timely information on the COVID impact in different regions in the world from both a medical and an economic standpoint.  The report, “ASG Update: Covid-19 Global Progression and Response,” was released just two weeks ago but, as we have seen, the transmission of the omicron variant has increased dramatically since then. The Chief Medical Officer of ASG ends his introductory letter to the report with the words “With increased global vaccination rates, new medications, and stronger pandemic surveillance, we may finally see the arc of the pandemic bend in 2022.” Hopefully!

US-Mexico and US-China Relations, Supply Chain, Energy, Economic Outlook

Dear Members and Friends:

Hope you are well and staying safe!

We have a number of different topics to cover in this update with a lot of links to recent reports and podcasts.

US-Mexico Relations

On September 16 the US State Department released a fact sheet on “US Relations with Mexico” that covers a number of key areas of interest, including Pandemic Response, Bilateral Economic Issues and the United States-Mexico-Canada Agreement, Migration, US-Mexico Border, US Security Cooperation with Mexico, Educational and Cultural Exchanges, and Mexico’s Membership in International Organizations.

Although some of the data is only for 2020, the fact sheet provides a good summary of items of mutual concern. It follows by about a week the September 9 High-Level Economic Dialogue, or HLED, session—the first since 2016. We covered the HLED in our last Update.

Security and Migration

On October 8 the White House released a fact sheet on US-Mexico High-Level Security Dialogue entitled “The US-Mexico Bicentennial Framework for Security, Public Health, and Safe Communities” that covers three goals:

• “Protect Our People” — Public Health, Support Safe Communities, and Homicide and High-Impact Crime Reduction

• “Prevent Transborder Crime” — Secure Modes of Travel and Commerce, Reduce Arms Trafficking, Disrupt the Capacity of TCOs and their Illicit Supply Chains, Reduce Human Smuggling and Trafficking

• “Pursue Criminal Networks” — Disrupt Illicit Financiers, Strengthen Capacity of Security and Justice Sector Actors to Investigate and Prosecute Organized Crime, and Increase Cooperation on Extraditions.

As the fact sheet presents, Secretary of State Antony Blinken, Secretary of Homeland Security Alejandro Mayorkas, Attorney General Merrick Garland, and Deputy Secretary of Treasury Wally Adeyemo have discussed the bilateral framework and security priorities with Mexican counterparts after meeting with President Andrés Manuel Lopez Obrador. They confirmed that cabinet officials from the United States and Mexico will meet annually to advance implementation of the new framework, while subcabinet officials work toward these goals year-round.

On migration, a matter affecting border security, the liberal-leaning Migration Policy Institute provides global research and policy development on immigration especially regarding Mexico. Following a report by the Border Patrol on migrants crossing the southwest border without authorization, MPI issued a press release, “While Migrant Encounters at the US-Mexico Border in 2021 Were High, They Likely Do Not Set a New Record Level of Migration.” The release, with additional commentary, goes through interesting details on migration trends and concludes that additional work must be done to provide procedural guarantees for protection as well as to deter potential migrants from crossing.

Supply Chain

The Peterson Institute for International Economics released a report in October on “Bringing Supply Chains Back to Mexico: Opportunities and Obstacles.” The report, contributed to by leading scholars and former government officials, sets out the case for a shared Mexican and US interest in building resilient supply chains in North America and prioritizing the economic policies Mexico needs to succeed as a destination for relocated production from China. Each author goes through a lot of detail and analysis in developing their conclusions. In the forward, the editors indicate that “The most promising candidate for large-scale nearshoring is Mexico, due to its geography, existing high level of economic integration with the United States, and participation in the high standards USMCA. Significant concerns remain, they say, about Mexico’s viability as a nearshoring location.” You can draw some conclusions by reading each of the sections.

On the Automotive Industry and Near-Shoring, the Institute for New Economic Thinking put out a working paper on October 5, “Mexico’s Automotive Industry: A Success Story?” The authors summarize, “The paper traces the evolution of the Mexican automotive industry, emphasizing the difficulties faced by a late-comer country in developing an independent industry, and the importance of policy choices as well as the macroeconomic context in affecting its development.”

It runs sort of chronologically, beginning in the “import substitution” era of the 1960s and 1970s, and travels to today’s facilitation of USMCA. Five sections include a lot of data going back to the early 1980s. In looking at “the road ahead,” the authors indicate that “The automotive industry is facing the transition to the production of electric vehicles and autonomous driving; automation, robotics and digitalization; new forms of car ownership and mobility. All these changes have the potential to reshape existing industrial geographies, affecting the relative advantage of integrated peripheries versus semi peripheries and of different regions within and between cores, as leading companies adopt new digital technologies and alter their component supply chains and sourcing practices.” Whether all of this is do-able remains to be seen.

Mexico Energy Policy

Mexican President Lopez Obrador sent the Mexican House of Representatives legislation to amend the Constitution regarding the electric power sector on October 1. This follows amendments made to the Hydrocarbons Law on May 5, which expanded governmental authority over the hydrocarbons sector. The report provided by the law firm of Akin Gump, “Proposed Constitutional Reform in Mexican Power Sector,” details what the legislation would require. The report concludes that “If the proposed amendment is enacted in its current form, it will drastically change the regulatory framework and landscape of the electric power sector in Mexico, with adverse effects on the contractual and constitutional rights of private investors in the industry.”

On October 19, a group of Members of Congress from Texas sent a Letter to US Ambassador Ken Salazar that said, “These steps [of the Mexican government], among others, harm our critical trading partnership with Mexico and potentially violate key tenets of the USMCA.”

US-China Relations

The WTO released their eighth “Trade Policy Review of China,” which is done every three years, on September 15. The report has five sections: Economic Environment, Trade and Investment Regimes, Trade Policies and Practices by Measure, Trade Policies by Sector, and Appendix Tables.

There is a lot of detail in its 206 pages. Following the release of the report, USTR Katherine Tai on October 22 provided a “US Statement on the Trade Policy Review of China.” This followed a statement on the previous day by David Bisbee, Chargé d’Affaires, a.i., Permanent Mission of the United States to the World Trade Organization, on the same subject. Also here is the “Fact Sheet: The Biden-Harris Administration’s New Approach to the US–China Trade Relationship” which was released by the White House on October 5.

US Economic Outlook

Thomasnet released their 2021 Annual Report on the “State of North American Manufacturing.” Of note over the past year is that there was a significant increase in the interest in re-shoring among industrial buyers and that “If four in five US manufacturers bring on one new domestic single-contract supplier, it will inject $443 billion into the US economy.” There was also a sharp rise in the supply-chain demand for a number of industrial sectors.

Economist Intelligence released a report (here), “EIU Risk Outlook 2022: 10 Scenarios That Could Impact Global Growth and Inflation.” Of interest is that four of the ten scenarios involve economic and political issues with China. At the end of the report, EIU’s Risk Briefing rates each scenario according to its probability, impact, and intensity.

US-EU Trade

Good news: At the G20 Summit in Rome, negotiators announced modifications to the existing tariffs on steel and aluminum coming from the EU. The tariffs, which applied to every country except Canada and Mexico, were first introduced in 2018 under the Trump Administration—25% on steel and 10% on aluminum. Although tariffs will remain, a certain amount of steel and aluminum produced in the EU will be able to enter the US tariff-free. Details can be found in the “Joint US-EU Statement on Trade in Steel and Aluminum” and “Announcement of Actions on EU Imports Under Section 232,” both released on October 31.

Before we leave, the latest edition of our Chamber magazine, Alliance, has just been released with articles on key US-Mexico issues by senior Mexican government officials as well as Chamber members. It’s a good read. The electronic version can be found here.

Have a safe and great Thanksgiving!

U.S.-Mexico Relations, Trade Outlook, Supply Chain Quandary

Dear Members and Friends:

Hope you are well, staying safe and have gotten your vaccines. Boosters are next!

September 9 marked an important day in relations between the U.S. and Mexico. It was the first time the High-Level Economic Dialogue, or HLED, had met since 2016. The HLED first began in 2013 during the Obama administration but stalled for four years after the election of then-President Donald Trump.

The meetings, held in Washington, were attended by Vice President Kamala Harris, U.S. Commerce Secretary Gina Raimondo, Secretary of State Antony Blinken, DHS Secretary Alejandro Mayorkas, U.S. Trade Representative Katherine Tai, USAID Administrator Samantha Power, and the U.S. Ambassador to Mexico, Ken Salazar. Mexico’s delegation included Foreign Secretary Marcelo Ebrard, Secretary of Economy Tatiana Clouthier, Ambassador to the U.S. Esteban Moctezuma, Under-Secretary of Finance Gabriel Yorio, Under-Secretary of Foreign Trade Luz Maria de la Mora, Chief Officer for North America Roberto Velasco, and Director General for International Treaties’ Monitoring, Administration and Compliance Oversight Lydia Antonio.

An excellent overview of the Dialogue, “The Return of the HLED: Better Late Than Never, But No Time to Waste,” is provided by Monarch Global Strategies, a consultancy headed by former U.S. Ambassador to Mexico James Jones. Michael Camuñez, President and CEO of Monarch, was one of the architects of the HLED when he was Assistant Secretary of Commerce. Monarch’s overview concludes by saying that “... time is running short, and if the U.S. wants to maintain its global leadership on matters of economic policy at least, much less re-establish its claim to moral and economic leadership in the Americas at large, it better start tending meaningfully to relationships in its immediate orbit, and that begins with Mexico and North America.” The plans for HLED going forward are contained in a Fact Sheet released by the White House.

On the trade front, Mexico ranked number one in two-way trade with the U.S. for year-to-date through July. However, Canada has taken over the number one position for the past three months. Through July, U.S.-Mexico trade totaled $376 billion with Canada and China slightly behind. Will Canada continue the leadership? In previous years China trade came on strong in the later months of the years due to holiday items. However, a number of supply-chain issues (to be covered below) might forestall a surge in China trade, especially imports. For those looking for a wealth of detail on U.S. trade, World City would be a great source (www.ustradenumbers.com). Their latest report covering primarily 2020, “2021 U.S. Trade Numbers,” provides details on trade with countries, products traded, and ports used.

On the supply-chain front, still a lot of turmoil. The initial issues with supply chain appeared with the first wave of COVID-19 when much economic activity was forcibly or voluntarily curtailed or stopped altogether in the major countries of the world as the virus spread. With any vaccines still way in the future, things got out of hand quickly. Demands were uncertain as were suppliers’ capabilities. Manufacturers began reconfiguring their chains with some suppliers offline and others struggling to figure out what was doable.

This year, with vaccines becoming more available, things were trying to get to a “new normal.” However, the Delta variant has interfered, thwarting efforts of employers to build new workforces – either on-site or virtual. Take your pick of recent issues: ports, chassis, containers, labor – all adding to woes. And part of this, maybe a large part, is the increase in consumer demand. On shipping, when the demand increased, ships and containers were not in the right position. Increased demand with limited capacity increased container costs and the backlog caused delays at ports – both loading and unloading. Container ships from China are now waiting up to four weeks to be unloaded on west coast ports. And now we have a power shortage in China. The news isn’t good for the holidays. Some knowledgeable sources say that the chaos will definitely last well into 2022. Possibly more opportunities for re-shoring!

Please find Business Development Partners’ latest report here: “Mexico Monthly Economy and Politics Brief - September 2021.”

On the European Union, President Joe Biden, European Commission President Ursula von der Leyen, and European Council President Charles Michel launched the Trade & Technology Council at the US-EU Summit in June. The Council's inaugural meeting was held in Pittsburgh on September 29. See the White House and USTR Fact Sheets on the Council and the outcome of the first meeting.

There are a number of areas of concern that the Council will address going forward: global trade challenges and non-market, trade distortive practices; semiconductor supply chains; investment screening; export controls; and artificial intelligence. An interesting view from the British perspective is provided by the Tony Blair Institute for Global Change in their recent piece, “What is the US-EU Trade and Technology Council?” The Institute’s feeling is that “Success is not guaranteed, however: the geopolitical incentives and regulatory philosophies of the EU and US are still far apart in many areas. Even if the EU and US can work together, they cannot go it alone.”

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We hope that you have been taking advantage of the webinars our Chapter has been doing in light of COVID. We have held six thus far under the title “Mexico in a World.” The recent ones have been on Globalization, Automotive, Technology, and Medical Devices. Our next one, “Mexico in a World of Aerospace,” will be held on Wednesday, October 13, from 1:00 to 2:30 p.m. You can find registration materials at our website at www.usmcocma.org. No registration fees involved.

USMCA Anniversary, Mexico in the Supply Chain, Promoting Competitiveness - and More

Dear Members and Friends:

The month of July was filled with webinars and sessions associated with the first anniversary of the USMCA. Although there were cheers, there was also the realization that challenges lie ahead and that the agreement is a work in progress.

In particular, the Wilson Center’s Mexico Institute has done many sessions on the USMCA from the beginning of negotiations until now. Their recent webinars have provided two reports. One is “USMCA and North America: Year One” by former Ambassador Earl Anthony Wayne. In the report Wayne indicates, “The lasting impacts of these changes are not yet clear, but throughout the last year, both private sector and government officials made clear that they see the great value of having the certainty provided by a clear set of rules and processes that will govern North America’s commerce until at least 2036.”

The other report, “A Winning Bet: The USMCA at One Year,” by Andrew Rudman and Chris Sands, mentions that, when the new USMCA Trade Commission met for the first time on May 17-18, 2021, U.S. Trade Representative Katherine Tai, Mexican Secretary of the Economy Tatiana Clouthier Carrillo, and Canadian Minister for Small Business, Export Promotion, and International Trade Mary Ng met virtually rather than in person. In fact, almost all of the negotiating sessions between the three countries were held via phone calls, video chats, and email. Nonetheless, the three trade representatives did meet face-to-face following the first-year anniversary in Mexico City, as the photo below attests.

On a somewhat negative event that took place, Trade Promotion Authority (TPA), otherwise known as “Fast Track Authority,” expired on July 1. It is unlikely that President Biden will prioritize the reauthorization of TPA as his campaign released no plans to negotiate new trade agreements as a part of its platform. However, this could change depending on ongoing reviews of trade negotiations in process by USTR Katherine Tai.

On the supply chain front, Alix Partners released a report, “Revisiting Mexico: A Critical Link in the Supply Chain,” which looks at four areas of interest: proximity and access; cost; resources and infrastructure; and business environment. Alix Partners concludes that “Its value has only grown since the advent of the COVID-19 global pandemic because rising labor costs in China and increasing awareness of the risks inherent in long supply chains have led companies to seek more resiliency and agility. Solid infrastructure, geographic proximity, and relatively low costs make Mexico a prime location.” Good details in the report cement those conclusions.

Bruce Stokes of the German Marshall Fund, presenting at a session of the Canadian Global Affairs Institute in late July, provided a report (here) on “Americans’ Views of Their Role in the World: Implications for the Biden Era.” The report, much based on research by the Pew Research Center, looks at Americans’ view of the world, countries of the world, and issues facing us. It also covers what others in the world think about us. Very interesting details—especially those charts showing trends in positions and views over time.

On July 9, President Biden issued Executive Order (EO) 14036, “Promoting Competition in the American Economy.” The White House issued a lengthy fact sheet on the EO, which includes 72 initiatives by more than 12 federal agencies aimed at addressing competition issues across the economy and different industries. However, the law firm of Thompson Hines provides a nice summary of the EO (here), which establishes a new White House Competition Council to coordinate the White House response to anticompetitive behavior, as well as various deadlines for agency response. The summary concludes that the EO is a significant pronouncement of the Biden administration’s position on competition matters and business practices generally.

On the other side of the Atlantic, although initiated by the UK following the Brexit agreement at the beginning of this year, the government has just released a report on “UK Accession to CPTPP: The UK’s Strategic Approach.” The UK currently has free trade agreements with seven of the CP-TPP members, but becoming part of the CP-TPP could add additional benefits to those provided by the FTAs. Accession could see 99.9% of UK exports being eligible for tariff-free trade with CPTPP members and increase trade in services with the UK being the second largest services exporter in the world. The report is very detailed on the desired accomplishments of accession and provides negotiating goals and objectives.

We hope you have been attending our webinars. We have had six thus far, with the last three co-hosted by the Consulate General here in Chicago. Our planning includes another four on Aerospace, Appliances, Supply-Chain, and Clusters.

In the meantime, please look at our Webinars page at our website, www.usmcocma.org.

Ralph Biedermann
Executive Director
U.S - Mexico Chamber of Commerce, Mid-America Chapter

USMCA Update, Mexican Elections, Trade Highlights, Supply Chain – and More!

Members and Friends:

Hope you all are well as we begin crawling out of our pandemic crisis!

First, on some breaking news, President Biden has nominated former Interior Secretary and Senator from Colorado Ken Salazar to be U.S. Ambassador to Mexico. Salazar served as co-chair of Biden’s Latino Leadership Committee, and former Democratic presidential candidate Hillary Clinton tapped him to chair her transition team in 2016. He must be confirmed by the Senate and more information will be available as he prepares for the hearings.

In our last Update, we mentioned the development of the USMCA Free Trade Commission. The first meeting with USTR Katherine Tai, Mexico’s Secretary of Economy Tatiana Clouthier, and Canada’s Minister of Small Business, Export Promotion and International Trade Mary Ng, was held on May 18. A report on the meeting from the firm of Thompson Hine is attached. There was a discussion of several issues on USMCA implementation, issues involving the environment, small and medium-sized enterprises (SMEs), the automotive industry, and labor.

Mexican elections took place on June 6 and the results were widely reported. President Lopez Obrador’s Morena party won 12 of the 15 gubernatorial races but lost about 50 seats in the Chamber of Deputies. Although Morena’s seat totals would not give it a qualified majority by itself, it is projected to reach a majority with the support of its allies, the Labor Party (PT), the Green Party (PVEM), and the Solidary Encounter Party (PES). The elections were the largest in Mexican history.

Given the COVID-19 epidemic, it is not surprising to see many analyses of supply-chain issues with companies seeking to rethink, reorganize and realign their supply chains to better meet future needs. We have four reports here. The White House just released its report, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth,” which provides six sets of recommendations that, collectively, not only will strengthen the four prioritized supply chains, but will rebuild the U.S. industrial base. It fulfills President Biden’s Executive Order (EO) 14017 titled “America’s Supply Chains” issued February 24, 2021, ordering 100-day and 1-year reviews of certain critical supply chains. The critical sectors reviewed in the report include the defense industrial base; public health and biological preparedness industrial base; information and communications technology industrial base; energy sector industrial base; transportation industrial base; and supply chains for production of agricultural commodities and food products. Each is reviewed in detail. There is a set of interrelated themes and findings identified that contribute to supply chain vulnerabilities: insufficient U.S. manufacturing capacity; misaligned Incentives and short-termism in private markets; industrial policies adopted by allied, partner, and competitor nations; geographic concentration in global sourcing; and limited international coordination. Detailed recommendations are provided as solutions to the vulnerabilities.

The Economist Intelligence Unit just released a report, “North American Supply Chains: Will Reshoring Actually Happen?” The Intelligence Unit does not expect a significant relocation of supply chains out of Asia, at least in the medium term, for four reasons:

1. Supply-chain diversification is on the cards, particularly within Asia, but any movements to North America will remain an exception to the rule.

2. Companies and investors will remain deterred by North America’s relative lack of competitiveness.

3. Lingering protectionism and cross-border tensions within North America will also complicate options for arbitraging production costs throughout the region

These factors will discourage the types of investment required to transform North America into a viable, self-sustaining supply-chain ecosystem.

There is a case to be made for North America, and the final element in this equation is Mexico.  “The country plays an essential role in boosting the credibility of North America’s reshoring potential. Production costs are far lower than in the US and Canada and have remained stable as China’s wage levels have grown sharply in the past decade. While Mexican wages will rise in the medium term, in part owing to USMCA requirements, we expect them to stay competitive, even compared with low-cost production hubs in South-east Asia,” according to the Economist.

A new report, “The Case and Path of Development for Ally-Shoring: Mexico,” is from the U.S.-Mexico Foundation. Ally-shoring is described as “the process by which countries rework critical supply chains and source essential materials, goods, and services among and between trusted democratic partners and allies, with a focus on investing in the short and long-term relationships that protect and enhance joint economic and national security.” The rationale for Mexico was lengthy – sixteen points covering geographic, political, and economic reasoning. In terms of “What Can Be Done Now,” several points are made: COVID-19 pandemic containment and treatment; critical supply chain rework, with a focus on transformational export and emerging sectors; smart border infrastructure, trade facilitation and data-driven supply chain management and security systems; and rule of law enhancement: US-Mexico institution building and trust strengthening.

Finally on reshoring and supply chain is the 2021 annual report from ThomasNet, “State of North American Manufacturing.” Through surveys and data from industrial buyers, Thomas found an increased interest in reshoring; the possibility of a large injection into the U.S. economy if one, new, single-contract domestic supplier is found; “total cost of ownership” is the motivator for reshoring, but price is the biggest obstacle; and an increase in demand for steel, chemicals, paper, and other raw materials. Snapshots are given for aerospace and defense, agriculture, automotive, construction, energy & utilities, food & beverage, healthcare & medical, and manufacturing.

On a positive note on the U.S.-Mexico trade front, Mexico has been the U.S.’s leading trade partner for the first four months of this year, topping Canada and China. Total two-way trade between the two countries was $208.6 billion for the four months, which tops the $175.2 billion from 2020 for the same period. Total two-way trade with the three countries was very close and likely China will catch up later in the year as the supply chain issues between the U.S. and China begin to sort themselves out – especially on freight capacity, cost and shipping times.

Ralph Biedermann
Executive Director
U.S - Mexico Chamber of Commerce, Mid-America Chapter

Mexican Elections, Amb. Tai Testimony, USMCA Progress, and Global Economic Trends

Members and Friends:

In our second Update on a variety of important events, activities, and trends, we should begin with the upcoming Mexican elections. On June 6, 500 deputies will be elected to the Chamber of Deputies. Also, governors will be elected in 15 states. Finally, 30 state legislatures (1,063 state deputies) and 1,926 local governments in 30 states will be elected. Given that President Lopez Obrador has been in office about three of his six-year “sexenio,” it will be a very important election to indicate the country’s support for his Morena party, with 92 million registered voters eligible to define the balance of power.

The Mexico Institute has initiated a series of webinars and reports on the elements of the election and the electoral process in Mexico. Two weeks ago they had a session on Mexico's Mid-Term Elections: What's at Stake and What to Expect. Alejandro Moreno of ITAM/El Financiero provided this brief but focused presentation on the upcoming event. The Mexico Institute also has developed a Guide to the elections. There are four sections: To Get You Started, The Process, Political Parties, and Electoral Maps – each with many details and worth reviewing.

Our Chamber will have people on the ground at the elections and we will be producing a report of the results afterward.

On May 12, Ambassador Kathy Tai, the USTR, gave Testimony To The Senate Finance Committee on the President’s Trade Agenda. It reinforced the testimony she gave at the occasion of her nomination hearings a short while ago. In one comment on the “rapid response mechanism” (in the USMCA), she said it “will allow us to address long-standing labor issues in Mexico. Today I am proud to announce the inaugural use of this mechanism in our request that Mexico review whether workers at a General Motors facility in Silao, located in the State of Guanajuato, are being denied the right of free association and collective bargaining.” A copy of the USTR USMCA Review Request can be found here. There will likely be many other areas of issue as the USMCA moves forward.

USTR also announced that Ambassador Tai will host the inaugural Free Trade Commission (FTC) of the United States-Mexico-Canada Agreement (USMCA) on May 17-18, 2021. Mexican Secretary of Economy Tatiana Clouthier and Canada Minister of Small Business, Export Promotion, and International Trade Mary Ng will attend the virtual meeting. The FTC is the first step toward realizing the full potential of the Agreement and building an inclusive trade policy for North America that fosters broad-based and equitable growth, spurs innovation, protects our shared environment, and helps people from all walks of life.

On May 7, Vice President Kamala Harris met virtually with Mexican President López Obrador ahead of her long-anticipated trip to Mexico and Guatemala on June 7-8 as President Biden’s migration czar. Although the conversation was amicable, prior to the meeting Lopez Obrador announced that his government sent a diplomatic protest note to the US government “asking for an explanation” of the US aid that goes to Mexicanos Contra la Corrupcion, an anti-corruption group.

On May 12, the law firm of Thompson Hine hosted a webinar on Navigating a New North America Trade, Supply Chain & Energy Issues in a Post-Pandemic and USMCA World led by our good colleague Dan Urzco of the firm. The materials presented were in three sections:

• USMCA’s Challenges and Opportunities

• New Year, New NAFTA – Evaluating USMCA’s Impact on Current Operations and Due Diligence Procedures

• North American Competitiveness in the World

Each section is worthy of your review as they contain important information as we move toward the second year of the USMCA.

Last for this Update is the Fitch Monthly Global Outlook Presentation – April 2021. Again, the format for the monthly outlook consists of charts showing trends of major indices – economic and other such as those relating to the COVID-19 pandemic. Of interest is that global exports are picking up as well as global commercial flights.

Stay safe.

U.S.-Mexico Chamber: Trade Barriers, Trade Policy and Globalization

Members and Friends:

Hope you are well, signing up for your shots, and following the rules to get us all back safely from the pandemic.

A number of new reports have come out in the past few weeks. To keep things simple, we will divide them between this Update and the next.

A short while back we sent you a timeline for trade-related events released by Inside U.S. Trade. One item on the list was the USTR’s annual “2021 National Trade Estimate Report on Foreign Trade Barriers.” The report is organized by country and, wherever possible, presents estimates of the impact of specific foreign trade barriers and other trade-distorting practices on U.S. exports, U.S. foreign direct investment, or U.S. electronic commerce. It classifies foreign trade barriers in 11 categories. As an example, the section on Mexico includes a number of non-tariff barriers to trade and technical and sanitary and phytosanitary barriers as well as barriers in the Government Procurement, Intellectual Property Protection, Services, Investment, and Digital Trade areas. The list for China, as can be expected, is much longer.

We have included for discussion in the past reports generated by the Congressional Research Service (CRS), which provides valuable and timely information to Congress on a wide variety of issues. A recent report on “U.S. Aluminum Manufacturing: National Security and Tariffs” provides an update on issues in this industry including Section 232 matters.

A very interesting report that the CRS regularly provides to new members of Congress, especially those on committees having to do with trade, is “U.S. Trade Policy Primer: Frequently Asked Questions.” The report is organized into five sections: The Basics of Trade; U.S. Trade Trends; Formulation of U.S. Trade Policy; U.S. Trade Policy Tools; and the Link Between International Investment and Trade. The detailed information contained in the report can be a primer to all of us new to the trade area and is useful in explaining aspects of U.S. trade to others. The CRS site can be found at crsreports.congress.gov.

Late last year, the Chapter had a very interesting session on “The North American Trading Bloc in a World of Globalization.” Since 2011, DHL has been producing an annual report assessing the state of globalization in a “distancing world.” There are two companion volumes released last December, “DHL Global Connectedness Index 2020 Report” and “DHL Global Connectedness Index 2020 Country Book.” The Index measures globalization based on four pillars: international flows of trade, capital, information, and people. Three country characteristics—GDP per capita, population, and distance from foreign markets—explain 73% of the variation across countries’ levels of global connectedness. Internationally, the three pillars of trade, capital. and people have seen modest growth between 2001 and 2019. The pillar of information, however, has seen relatively larger growth. After holding steady in 2019, the world’s level of global connectedness is set to decline in 2020 due to the COVID-19 pandemic. However, it is unlikely to fall below levels seen during the 2008-09 global financial crisis. For North America, in terms of rank for all countries, Canada was number 32 in 2019, Mexico was number 65, and the U.S. was number 37. The two countries with the highest rank and scores in 2019 were the Netherlands and Singapore. Detailed information on each of 169 countries is contained in the second volume.

Please don’t forget that, in addition to the links to reports above, all reports from our Breakfast Series and Updates can be found at www.usmcocma.org/resources.

Thanks for your continued support.

The President’s Trade Agenda Plus More Reports from Mexico

Members and Friends:

Hope you are staying safe.

Several weeks ago, we included a timeline for trade-related events for this year.  On top of the list was the submission by USTR of the 2021 President’s Trade Agenda and 2020 Annual Report.  Both a Fact Sheet and the complete report (all 308 pages) were released on March 1.  As the report is required by Section 163 of the Trade Act of 1974, it follows a set format.  However, the trade policies outlined by the President are:

• Tackling the COVID-19 Pandemic and Restoring the Economy

• A Worker Centric Trade Policy

• Putting the World on a Sustainable Environment and Climate Path

• Advancing Racial Equity and Supporting Underserved Communities

• Addressing China’s Coercive and Unfair Economic Trade Practices Through a Comprehensive Strategy

• Partnering with Friends and Allies

• Standing Up for American Farmers, Ranchers, Food Manufacturers, and Fishers

• Promoting Equitable Economic Growth Around the World

• Making the Rules Count

The report covers all agreements and negotiations; ongoing enforcement activities; and other trade activities such as agriculture, digital trade, intellectual property, manufacturing and trade, the environment and trade, labor and trade, and SMEs. There is a detailed section on the WTO. The annexes include trade in 2020 and U.S. trade-related agreements and declarations.

We had also announced that Presidents Biden and Andres Manuel Lopez Obrador had a virtual meeting on March 1 – although not as “chummy” as the one between Biden and Premier Trudeau.  The White House did issue a statement on the meeting including the objectives discussed by the two Presidents.

Also attached here are regular Mexico reports by Monarch Global Strategies and Business Development Partners.

Katherine Tai, the President’s nominee for USTR, was confirmed on March 17 by the Senate on a 98-0 vote. As you saw in the news, there was already a heated meeting between Secretary of State Antony Blinken and National Security Adviser Jake Sullivan and China's most senior foreign policy official, Yang Jiechi, and foreign minister Wang Yi on March 18 in Anchorage. As USTR, Katherine Tai is likely to be involved in future meetings.