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.