For the past twenty or so years, Mexico has been active in the international trade arena.
The past couple are an example of this activity, especially in light of the push for achieving the Trans-Pacific Partnership Agreement, the varied and consistent increase in Chinese imports, including steel overcapacity; and, recently, the presidential election in the United States.
KEY WORDS: Anti-dumping, Free Trade, Foreign Trade, International Trade, Investment, Mexico, NAFTA, TPP, Trade Remedies, WTO.
1. Legislative Amendments
1.1 Regulations to the Foreign Trade Law
The Foreign Trade Law (FTL), which is the legislative act that governs Mexican international trade2, including trade remedies, was last amended in 2006 as a result of a couple of WTO cases decided against Mexico3; while the Regulations to the FTL, enacted by the Executive to further explain and provide for the application and interpretation of the provisions of the FTL, were amended as recently as 22 May 2014.
Of importance, are the amendments to the Regulations that are related to: (a) making the Foreign Trade Commission more robust; (b) dumping margin calculations (i.e., course of trade); (c) shortening response periods for parties; and (d) access to the confidential record.4
1.2 Internal Regulations and Organizational Law of the Administrative Justice Court
In congruity with the times and the need to have a specialised judiciary for trade and customs matters, the Internal Regulations of the Tax and Administrative Justice Court were amended on 19 June 2015 to provide for the creation and operation of several chambers of the court devoted solely to these matters. However, this amendment was not without controversy, as matters related to determination (as opposed to application) of anti-dumping and countervailing measures is left to the Superior Chamber of this tribunal, and not vested on the specialised chambers.
Regardless, on 18 July 2016, the name of the tribunal formerly known as the Tax and Administrative Justice Court changed to the current Administrative Justice Court as a result of a legislative decree that derogates the Organizational Law of the Tax and Administrative Justice Court. This amendment is the result of a strengthening of the attributions of the tribunal which now deals not only with tax and administrative matters, but also adjudicates on government performance and corruption.
1.3 Free Trade Zones
On 31 May 2016, the Law on Special Economic Zones was enacted. This law and the additional legislation that derives from it seeks to generate greater growth and productivity in areas of the country that are less developed, as well as to create nearly 120,000 jobs.
The three SEZs originally planned are Puerto Chiapas (near the Guatemala border), Puerto Lázaro Cárdenas (in the State of Michoacán) and the Coatzacoalcos-Salina Cruz Corridor on the Tehuantepec Isthmus (States of Veracruz and Oaxaca). All three are located in the South of Mexico, and look forward to major investments in infrastructure, energy and telecommunications.
Companies doing business in these SEZs will benefit from medium and long term tax and social security incentives; a sole window for customs and tax procedures; the support of the local, state and federal governments; a long term economic and development program specially tailored for the region and the business sought, as well as a master plan for industrial development. These benefits shall apply generally and, thus, be available to companies that do business through the SEZs, thereby facilitating even further processes that are already streamlined.
2. Trade Treaties
Despite being a country that is traditionally very proactive in the international trade arena, prone to entering into bilateral and regional trade agreements5, it was not until 2012 when Mexico expressed its interest in participating in the negotiations that led to the execution of the Trans-Pacific Partnership Agreement, or TPP.
According to estimates provided by the Mexican Government, joining TPP signifies access to over 150,000 million dollars' worth of exports to party countries, other than the U.S. and Canada, as well as a steady rise in domestic exports within the five years following the entry into force of the treaty.
Particularly, the benefits for Mexico for being a part of TPP are: (i) preferential access to 11 of the most important economies worldwide (40% of all international trade); (ii) origin accumulation and reciprocity of member states for the purpose of origin determination; (iii) market diversification; (iv) increased exposure as a foreign direct investment destination; (v) possibility of placing Mexican products worth 150 thousand million dollars in various key export sectors; and (vi) possibility of exporting finished goods, especially given that 90% of imports from the Asia-Pacific region are mostly intermediate and capital goods.
Of course, in order for TPP to come into effect, it must be adopted by at least six of the twelve signatory countries6 within the two years following the date it was signed (6 January 2016); and, according to article 30.5 of the treaty, these six countries must represent at least 85% of the GDP of all member countries.7
Given the open opposition of President-Elect Trump to TPP, the possibility of its entry into force is bleak. However, Mexico intends to insist on opening its trade to the Asia-Pacific region and, therefore, will continue to seek approval of TPP, consolidation of the bilateral and regional agreements it currently has with TPP member countries, as well as new FTAs in the region.
3. Trade Remedies and Dispute Settlement
China is the most frequent target of Mexico's unfair trade practice investigations. During 2015, Mexico initiated nine anti-dumping investigations; five of which were against China. During 2016, only one anti-dumping investigation has been initiated, albeit not against China.
Moreover, four of the five investigations against China initiated during 2015 involve steel or steel-related products, and in all cases an anti-dumping duty was imposed8. In fact, between 2014 and 2016, twenty three investigations were initiated, eleven of which were against China, and eight of them related to steel products and by-products.
This means that China is the target of 43% of all measures imposed to date by the Mexican Government; while the steel industry accounts for 61% of all investigations initiated. With this in mind, even as negotiations take place within the OECD framework to address China's steel overcapacity, something that is worth pondering is what the Mexican Government intends to do once the 15 year period following China's accession to the WTO expires. Will Mexico afford China market economy status? Or, will it continue to apply surrogate country values? Can the OECD address the concerns of its members? No official position has been announced as at 18 November 2016.
Regardless of domestic investigations, during the period covered by this paper Mexico has also been a party to trade disputes under the WTO framework and NAFTA.
Although the most recent WTO trade remedies cases to which Mexico was a party are not recent, there were two significant trade disputes where Mexico was a complainant, and prevailed, namely, US – COOL (Article 21.5 – Canada and Mexico) and US – Tuna II (Article 21.5 – Mexico).9 Both involve compliance with Appellate Body reports.
On the NAFTA front, two cases have been initiated under Chapter XIX involving monobutyl ether of ethylene glycol from the United States (request of 30 June 2016) and ammonium sulphate from the United States and China (request of 6 November 2015) with no results as of the date of this paper.
4. The Road Ahead
Globalization aside, Mexico's economy is highly dependent on the U.S. Whatever happens there reflects here.
Actions announced by President-Elect Donald Trump during the presidential campaign could have serious consequences for businesses on both sides of the border, should they ever come to fruition, so it is worth taking a quick look at what could happen and how.
Mr. Trump has said that he could withdraw from the World Trade Organization (WTO) (the consequences of which are not the subject of this article), and the North American Free Trade Agreement (NAFTA). Both are legally possible.
NAFTA Article 2205 provides that any party may withdraw from the agreement provided six months prior notice is given to the other parties. However, in this case Mexico is not left without options, since both the U.S. and Mexico are members to the WTO, whose agreements would continue to apply to trade between them. By the same token, Canada and the U.S. would be able to reinstate their previous Free Trade Agreement, suspended since NAFTA came into force.
Notwithstanding, there are a few undesirable effects for Mexico if the U.S. withdraws (as opposed to re-negotiates) from NAFTA. For instance, the investor state dispute settlement provisions contained in NAFTA Chapter XI would be lost, thereby precluding investors from bringing, for instance, expropriation claims before a neutral arbitration tribunal. This scenario, although apparently desirable for the U.S. given that country's current sentiment against Investor State Dispute Settlement (or ISDS), would mean losing the possibility of arbitrating investment issues; a process that has been beneficial to U.S. investors, and reinstating local administrative proceedings, which have produced mixed results for both Mexican and U.S. interests.
The same fate would be suffered by the Chapter XIX antidumping dispute settlement mechanism; thereby leaving the WTO and local remedies as alternatives.
Yet, regardless of how robust and tested the WTO system is, leaving it as the sole option for governing international trade relations between the U.S. and Mexico is not without additional loss. For example, the elimination of free trade would necessarily signify the renewed application of tariffs according to WTO rules (i.e., Most Favoured Nation or MFN); which, in turn, would demand that both countries assess the tariff rates they maintain with third-party countries in order to ensure WTO compliance and an un-interrupted trade flow both between them and with other countries.
Of course, if the intention of President-Elect Trump's campaign promises is to avoid U.S. companies from moving offshore, WTO and NAFTA withdrawal are not the only options. The U.S. can (and probably will) continue to adopt protectionist measures, especially against China, that are sector-specific, either based on technical, sanitary or other regulations, or simply as temporary trade restrictive measures, i.e., tuna, poultry, tomato, sugar, etc. However, even these measures could be contested at the WTO.
In addition to NAFTA and WTO, there are other potential U.S. actions that could have an adverse impact on Mexico's trade and economy, including Mr. Trump's pledge to impose tariffs or taxes on U.S. companies that choose to end manufacturing in the United States by taking such activity offshore.
Although at this time there is uncertainty as to legal authority required to impose such taxes or tariffs, and whether such action would survive a legal challenge, the fact remains that the threat of punishing U.S. investment in Mexico may have a chilling effect on future investments.10
Regardless, officials in the U.S. and Mexico should be especially vigilant of the level of integration and co-dependency of our countries' economies in order to avoid harming the nearly billion dollars in bilateral trade that currently exists between the United States and Mexico which, given the close ties and intertwined businesses of both countries, supports several million jobs on both sides of the border.
In sum, because the U.S. is moving towards a more antagonistic relationship with China, abandoning entirely the TPP11, and re-negotiating NAFTA, this dynamic could work to the advantage of the U.S. – Mexico trade relationship. For instance, if the negotiations that take place for NAFTA re-negotiation address most of the provisions already addressed in the context of the TPP12, the NAFTA region will come out strengthened and reinvigorated. However, this scenario is purely speculative, since we have yet to see what occurs.
- Horacio A. López-Portillo is a partner at Vázquez Tercero & Zepeda, a boutique-like Mexican law firm devoted mostly to international trade, customs, regulatory and trade-related business law. Webpage: www.vtz.mx LinkedIn: https://mx.linkedin.com/in/horacio-a-lopez-portillo-024a3616 Twitter: @hlopezpo
- By the same token, customs matters are dealt with in the Customs Law; and, both the Customs Law and the FTL rely on the Federal Tax Code (Código Fiscal de la Federación) as primary source legislation.
- Including, Appellate Body Report Mexico — Definitive Anti-Dumping Measures on Beef and Rice – Complaint with respect to Rice, WT/DS295/AB/R, adopted 20 December 2005.
- See, “Mexico” in Folkert Graafsma, Joris Cornelis and Konstantinos Adamtopoulos (eds) The International Trade Law Review (Law Business Research, 2015) 74.
- In addition to TPP, Mexico has executed 10 free trade agreements with 45 countries, 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries, 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). See: http://www.promexico.gob.mx/en/mx/tratados-comerciales (accessed 16 November 2016).
- Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, Vietnam.
- Which means that both Japan and the U.S. must adopt TPP.
- The other case, involving ceramic tiles, also provided for the application of anti-dumping duties, although their application is suspended for those companies that are a part to a Suspension Agreement negotiated with the Mexican Ministry of Economy.
- Appellate Body report, US – Certain Country of Origin Labeling (COOL) Requirements – Recourse to Article 21.5 if DSU by Canada and Mexico, WT/DS384/RW, WT/DS386/RW, adopted 29 May 2015 (US – COOL (Article 21.5 – Canada and Mexico)); and Appellate Body report, US – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products – Recourse to Article 21.5 if DSU by Mexico, WT/DS381/RW, adopted 3 December 2015 (US – Tuna II (Article 21.5 – Mexico)).
- As recently as 15 November 2016 a high-level meeting was held with the participation of U.S. and Mexican businessmen to address this issue.
- As of 21 November 2016, Vietnam has suspended its ratification process; Japan’s Diet approved ratification; Mexico is on the path to ratification by year end; and, yet, President-Elect Trump announced his First 100 Day plan, including a pledge to withdraw from TPP.
- Such as enforceable labour protections, provisions on state-owned enterprises, environmental protections, electronic commerce, regulatory coherence and improved investor state dispute settlement.