Washington Insider-- Wednesday

Redoing NAFTA Isn't Popular in Mexico

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Obama Administration Sets Panel to Look at China WTO Compliance

China's compliance with its World Trade Organization (WTO) obligations will be the subject of a hearing in Oct. by the interagency Trade Policy Staff Committee, according to a notice published Aug. 16 in the Federal Register.

The Committee will convene the Oct. 5 hearing to help the Office of the US Trade Rep (USTR) prepare its annual report to Congress on China's compliance with the multilateral and bilateral commitments it made to the U.S. in connection with accession to the WTO.

USTR is asking for comments on trading rights, import regulations, export regulations, internal policies affecting trade, intellectual property rights, services and rule of law issues. The notice said those who wish to testify at the hearing must provide written notification by Sept. 21. Written comments are due the same day.

The Obama administration previously indicated it was gathering information on domestic supports provided to certain Chinese industries, including agriculture and steel.

Tougher Truck Emissions, Fuel Efficiency Standards Finalized by EPA

Makers of heavy trucks, trailers, buses and other large vehicles will have to cut their products' carbon emissions by up to 25% and increase their fuel efficiency under the EPA's new standards for models 2018 and beyond, finalized Tuesday.

The standards for medium- and heavy-duty vehicles crafted jointly by the EPA, the Transportation Department and the California Air Resources Board are expected to significantly reduce US fuel consumption and bolster efforts to combat human-caused climate change.

The standards apply to heavy-duty pickup trucks, semi-trucks, trailers, vans, buses and other large vehicles. The transportation sector overall is the second largest source of domestic carbon emissions after the utility sector.

The Obama administration estimates that the program will reduce greenhouse gas emissions from medium- and heavy-duty vehicles by around 1.1 billion metric tons, the equivalent of taking nearly all the cars in the US off the road for a year. And the move will cut oil consumption by up to 2 billion barrels over the lifetime of the vehicles.

The updated standards could save owners roughly $170 billion in fuel costs over those lifetimes, according to a White House fact sheet. Truck owners, the agency said, would be able to recover the extra cost of associated with making the vehicles more efficient and less polluting in less than two years through savings on fuel costs.

Those conclusions will be the focus of the new standards as several industries, including agriculture, assess the potential for these new rules to affect their operations down the road.

Washington Insider: Redoing NAFTA Isn't Popular in Mexico

Bloomberg is reporting this week that it surveyed a number of trade officials, sector leaders and others about the assertion that Mexico could be enticed to redo NAFTA in a new administration. Bloomberg's findings were not much of a surprise to trade experts, but appears to counter claims made by both campaigns.

What is certain, Bloomberg says, is that "Mexico would resist any attempt to renegotiate NAFTA." Several former trade officials and sector leaders predicted that pulling the plug on that deal would be a "short-sighted move and would wreak havoc with the auto industry on both sides of the border and likely spark a trade war," they said.

Moises Kalach, president of the Mexican business coalition for the Trans-Pacific Partnership (TPP) told Bloomberg, "NAFTA is 21 years old, but it still works pretty well and benefits both sides of the border. We are not willing to give that up."

The flow of commerce between the U.S. and Mexico—valued at more than $500 billion per year, and responsible for supporting more than 6 million U.S. jobs is at play. The two candidates also have expressed concerns about the Trans-Pacific Partnership, a trade agreement among 12 Pacific Rim countries, including Mexico and the U.S.

Donald Trump has argued that both the NAFTA agreement and the TPP create manufacturing job losses and made rejection of TPP central to his campaign. Hillary Clinton hasn't been so adamant, but she also called for a renegotiation of NAFTA as part of her campaign strategy to protect US jobs.

Dismissing the US-Mexico trade relationship as one that hurts the U.S. economy is short-sighted, several Mexican trade analysts responded. They pointed to both the high volume of trade between the two countries, the jobs they have created in both economies, as well as the high level of integration in both countries' supply chains.

"Mexico is the second-largest export market for the U.S. It buys 16% of total U.S. exports, while Canada buys another 20%," Beatriz Leycegui, a former undersecretary for foreign trade in the administration of former President Felipe Calderon told Bloomberg. He was president from 2006 to 2012, and a partner with SAI Consulting, a trade consulting firm. "And for each dollar the U.S. buys of Mexico's goods, 40 cents [worth] have US content, compared with 4 cents for goods imported from China."

Such highly integrated supply chains—used in North American manufacturing of cars and electrical goods—have become an integral part of worldwide trade, Leycegui said. "Mr. Donald Trump threatens to undo this integration by having the US withdraw from NAFTA," Leycegui said. "Perhaps he should take a closer look at the numbers."

"You get the impression from listening to Trump that what he is basically saying is that we want duties on Mexican products into the US, so we will do this by getting out of NAFTA," said Luis de la Calle, a former undersecretary for international business negotiations from 2000 to 2002 in the Vicente Fox administration and partner with De la Calle, Madrazo & Mancera, a trade consulting firm. "The problem is that duties for Mexican industrial goods are already quite low in the WTO—about 1.9%. At 1.9%, no industrial plant will go back to the U.S."

"The Mexican auto sector would be hurt, but so would U.S. companies" Oviedo said. "They produce the inputs and bring those to Mexico, and then send the car back to the US You would hurt the whole industry on both sides of the border."

Worse yet, a unilateral move by Trump to impose tariffs could lead to a trade war with Mexico, according to Arturo Sarukhan, a former Mexican ambassador to the U.S. in the Calderon administration.

"Mexico would retaliate. And NAFTA means $1.4 billion per day of trade flowing in both directions," Sarukhan said. "Do you really want to undermine that and score a goal against 6 million U.S. jobs that depend on trade with Mexico—and goods flowing to the second largest U.S. export market in the world?"

Obama's presidency, and his growing enthusiasm for trade once in office, points to the economic realities that U.S. leaders face in the vital role of trade to economic growth, according to Christopher Wilson, assistant director of the Wilson Center's Mexico Institute. "Obama talked about renegotiating NAFTA and was skeptical of trade, saying it benefited Wall Street over Main Street," Wilson said. "Over time, he became a strong advocate of new agreements and pushing trade policy into the next era."

As the Mexican government waits for the U.S. election to play itself out, the commitment of Mexican industry to expanding the business relationship seems unshakable. "Protectionism does not help us," Guillermo Rosales, assistant director general of the Mexican Automobile Distributors Association, said. "Our priority for Mexico and the auto sector is to deepen the integration of North America by making the TPP a success."

Now the administration is pushing hard on its proposal to approve the TPP, and the President says he has the better argument. Bloomberg seems to say that is the case, but the fight will continue to be complex and intense, and should be watched closely by producers as it proceeds, Washington Insider believes.

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