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.