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Post-COVID Resilient Supply Chains in North America: The Role of Mexico

mexico

Post-COVID Resilient Supply Chains in North America: The Role of Mexico

If we’ve learned anything after surviving 2020, it’s that no industry will return to its affairs as if the pandemic simply did not happen.

Regarding the post-pandemic supply-chain transformation in North America (Mexico, the United States, and Canada), we at Foley & Lardner have received the same message from both the U.S. President[1] and our clients[2]: resilient supply chains are the new name of the game, and they are to be secure, redundant and diverse; also, they will be more transparent regarding purchaser’s needs and the supplier´s ability to fulfill them, will favor provider adaptability over lean inventories, and preapprove alternate purveyors over a race to the bottom.

With the aforementioned in mind, we should begin by laying out the known truths by which Mexico has historically contributed to strengthening the North American supply chains:  (i) the country provides quality manufacturing at the lowest costs in the region, (ii) it benefits from free trade agreement provisions with more than 60% of the world´s Gross Domestic Product (52 countries); (iii) almost all of the favorable factors when considering near-shoring, are present in Mexico, (iv) 25+ years of NAFTA experience created a skilled workforce whose numbers will grow as Mexico´s population ages, (v) intellectual property rights are duly protected, and (vi) trade promotion programs (i.e. IMMEX) are well known and have been running smoothly for years.

Said truths, however, could be hampered by a number of matters that we should keep a close eye upon, namely:

I. COVID-19 Vaccination

Both the Mexican federal government and individual States have concurrent jurisdiction regarding mandatory health measures, including vaccinations.

In December 2020, the federal government´s National Vaccination Policy set the goal to immunize the entire population within 18 months, firstly with frontline health care workers, followed by those 60 and older, those in their 50s, 40s, and lastly, 18 and older. Largely to scarce vaccine supplies and a rocky organizational start, progress to date casts doubt upon whether the 18-months goal is achievable.

In January 2021, the Mexican Ministry of Health issued high-level guidelines for individual Mexican states and private entities to acquire and administer vaccines, as long as they follow the National Vaccination Policy; operational details are still needed.

Furthermore, compliance with fluid COVID-related health and labor regulations in manufacturing facilities is still a major issue, both in terms of being able to continue production, as well as preventing lawsuits due to real or imaginary risk of exposure.

II. Outsourcing & Insourcing Ban

Due to his Political Party´s (MORENA) control of both Houses of the Mexican Congress, the President´s initiative to ban the current practice of outsourcing and insourcing will likely enter into effect on May 2021 (with an apparent 3-month vacatio legis).

But for “specialized services”, meaning those that are not part of the economic activity of the intended beneficiary, all workers will have to be in the payroll of the employer, which will entitle them to profit sharing provisions.  Simulating receiving specialized services would constitute elements of proof towards the commission of criminal tax fraud.

Since most manufacturing operations in Mexico currently rely on outsourcing operations, incoming law will force reassessing and restructuring a number of labor, corporate and tax present-day structures.

III. VAT-Certified IMMEX Benefits Diluted

Mexican IMMEX (aka Maquila) companies operate under a governmental authorization that includes preferential conditions, both operational and fiscal.

The highest degree of preferential treatment conditions is granted to companies that are VAT (Value Added Tax)-certified, which allows them to avoid paying otherwise applicable VAT upon the importation of goods used in their manufacturing operations.

Such preferential treatment will automatically be diminished as soon as each VAT certification is renewed by individual IMMEX companies, which should occur every one to three years depending on their current authorization.

Upon VAT certification renewal, companies will, most importantly: (i) operate under a reduced time frame to utilize most temporarily imported goods (from 36 months to 18 months), although longer periods apply to products such as containers, machinery and equipment; (ii) no longer will be automatically enrolled in Sectorial import programs which allow for reduced duty imports on steel, textiles, others; (iii) have to file weekly import documents, instead of monthly; (iv) will not be able to temporarily import products without declaring serial numbers; (v) and will no longer have the ability to obtain expedited 16% VAT refunds on their operational balance (capacity to continue temporarily importing without paying VAT remains, however).

IV. Mandatory Technical Standards (NOMs) No Longer to be Exempted

Prior to October 2020, importation of certain materials, i.e. those to be utilized in production processes, were permitted to enter Mexico under “exemption letters” that would allow them to be imported without proof of NOMs compliance (note that not all imports are subject to NOM compliance, in accordance to their relevant Harmonized Tariff Schedule classification).

Even though little is still known in the importing community, importers are no longer allowed to use such exemption letters and, upon bringing goods into the country, are obliged to demonstrate compliance with relevant NOMs, either prior to the importation process or afterward.

In addition to evolving administrative application criteria, a number of procedural rules must be pursued for each of the aforementioned venues.

V. Labor Enforcement of USMCA (United States-Mexico-Canada Agreement) Obligations

As was required in USMCA, Mexico has already amended its labor laws to guarantee the basic rights of freedom of association and collective bargaining (with the non-stated objective of increasing wages in the country).

In accordance with such amendments, (i) effective immediately, existing collective labor contracts shall be free of “interference” from employers (this is, under their dominance or control), and (ii) in the medium term, labor contracts need to be “legitimized” by May 1, 2023 at the latest, in accordance with the July 2019 process issued by the Mexican Labor Secretary.

Due to the foregoing, there will be real, working unions, and current collective contracts signed with employer-friendly unions (commonly known as “protection” contracts or contracts with “white unions”) will soon be eliminated; it is probable that this will bring new leadership and more than one union to a company.

As per USMCA, determination of denial of freedom of association and collective bargaining rights may be made by a Facility-Specific Rapid Response Labor Mechanism; if such a determination is made, the covered facility´s goods or services could face a suspension of preferential tariff treatment or the imposition of penalties.

One thing is certain: labor relations in Mexico are changing rapidly, and now is the time for employers to preventively look into these issues.

VI. Tax Rules Regarding Permanent Establishment

Recent tax reforms have expanded the scope of permanent establishment rules in Mexico. As it is known, if a foreign company is deemed to have a permanent establishment for tax purposes in the country, it shall be subject to levies with respect to the relevant revenue of said establishment.

Thus, companies already doing business, or that are considering setting up operations in the country, should evaluate these recent changes to assess potential risks of being considered to have a local taxable presence.

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Alejandro Nemo Gomez Strozzi, a partner at Foley & Larder, focuses his practice on providing advisory and consulting services related to international trade compliance, antidumping, customs, foreign trade and Mexican administrative law. As a top international trade lawyer, he has advised major multinational companies in the automotive, steel and consumer products sectors.

Fernando Camarena Cardona, a partner at Foley & Lardner, is a senior business and legal advisor on international and domestic tax issues in Mexico, providing both tax counseling and assistance with litigation. He represents small companies to Fortune 500, FTSE 100 and other global and brand name corporations in the energy, manufacturing, nutritional supplement, insurance and other industries. 

Marco Najera Martinez, a partner at Foley & Lardner, is a recognized go-to transactional and regulatory lawyer representing global companies doing business in Mexico. With particular experience in the Mexico antitrust laws, he represents Fortune 500 corporations, as well as Mexico companies, in this highly specialized area. 

North America

Out of Asia: Promise from Pandemic of a Manufacturing Renaissance in North America (Part 3)

In their first two installments (which you can view here and here), George Y. Gonzalez and Jesus Alcocer respond to the gaps exposed in the supply chain by the pandemic by proposing a shift away from overreliance on China and a shift towards reshoring manufacturing closer to home. In their final installment, they will explore how the potential cost of reshoring out of Asia to North America could be lessened if capacity is relocated to Mexico, a natural alternative. Wrapping up their discussion, they will also examine how Houston may serve as a central hub for cross-national manufacturing and trade.

Mexico Has Also Been a Beneficiary of This Shift Out of China

Mexico has benefited from this rearrangement almost as much as Vietnam. According to A.T. Kearney, manufacturing imports from Mexico rose $13 billion to $20 billion in 2019. Thanks to this climb, the U.S. now imports 42 cents from Mexico for every dollar it purchased from LCAs, up from 37 cents during the past seven years. This pattern has also extended into 2020. In the first quarter of this year, imports in maintenance and repair, construction, and insurance sectors all grew in the triple digits, while imports of information and communications technology products (“ICT”) grew 20% year-on-year.

The trade relationship between the two North American countries has developed in spite of political obstacles. The Trump Administration imposed tariffs on Mexico-produced steel in 2018 but removed those barriers in May 2019. Likewise, Andres Manuel Lopez Obrador, Mexico’s president since 2018, was widely regarded as a nationalist suspicious of international trade. According to the Congressional Research Service, “in the area of foreign policy, President-elect López Obrador generally has maintained that the best foreign policy is a strong domestic policy.… Some observers feared that López Obrador might roll back Mexico’s market-friendly reforms and adopt a more isolationist foreign policy.” Against these inauspicious circumstances, bilateral trade has grown steadily since 2016. Mexico surpassed Canada as the U.S.’s largest trade partner in 2019. In 2013, Canada exported 8.3% more to the United States than Mexico. Now the order has reversed, with Mexico exporting .5% more than Canada into the U.S.

Growing imports can be partly explained by a hike in U.S. FDI in Mexico, which grew approximately 5.2% between 2018 and 2019 to $100.89 billion. Investment in primary and prefabricated metals manufacturing close to doubled from 2015 to 2019 to close to $2.27 billion, while FDI in machinery manufacturing grew about 25% during that same period. These are some of the industries where U.S. FDI in China has dropped most sharply, as explained above. Rising FDI stock was driven by waves of U.S. companies establishing a base or increasing their footprint in Mexico, following the market-oriented reforms in that country in the last decade. According to A.T. Kearney, by 2016 more than half of U.S. companies with manufacturing operations in Mexico had relocated production therefrom places such as China to supply the U.S. market.

Moreover, according to the Boston Consulting Group, some major Chinese consumer electronics manufactures have been adding capacity in Mexico to serve demand in Latin America. This broadly corresponds to the Chamber survey referenced above, which indicates that while LACs are still the top relocation choice for U.S. firms, North America is an increasingly popular option. Close to 17% of the firms dislocating their operations from China in 2020 indicated they would move that capacity to Mexico or Canada, up from 10% in 2019. An additional 22% reported they would move it to the U.S., up from 17% in 2019.

Mexico as a Natural Alternative

Mexico is already the U.S.’s largest trading partner, as well as the manufacturing base for a substantial part of its products. Last year, Mexico traded $614 billion with the U.S. – surpassing Canada ($612 billion) and China ($558 billion). “Merchandise trade between the two countries in 2018 was six times higher (in nominal terms) than in 1993, the year NAFTA entered into force,” according to the Congressional Research Service. Among the leading U.S. exports to Mexico are “petroleum and coal products ($28.8 billion or 11% of exports to Mexico), motor vehicle parts ($20.2 billion or 8% of exports), computer equipment ($17.4 billion or 7% of exports), and semiconductors and other electronic components ($13.1 billion or 5% of exports).” On the other hand, the top U.S. imports from Mexico in 2018 included “motor vehicles ($64.5 billion or 19% of imports from Mexico), motor vehicle parts ($49.8 billion or 14% of imports), computer equipment ($26.6 billion or 8% of imports), oil and gas ($14.5 billion or 4% of imports), and electrical equipment ($11.9 billion or 3% of imports).”

Increasing the cross-border manufacturing prompted by NAFTA may be the most practical way for the U.S. to eliminate its cost gap with China. “Many economists credit NAFTA with helping U.S. manufacturing industries, especially the U.S. auto industry, become more globally competitive through the development of supply chains in North America. A significant portion of merchandise trade between the U.S. and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods.” Mexico’s wage growth is on par with Vietnam’s, but Mexico’s productivity is about 5.2 times higher. Mexico’s combination of low labor costs and relatively high productivity result in production costs that are 20-30% lower than in the U.S. (including transportation and associated fees).

Mexico also has an important advantage vis-à-vis China with respect to transportation costs, which account for a significant portion of costs in industries like metals and automotive parts. Shipping a 40-foot container loaded with automotive parts from Shanghai to Los Angeles cost an average of $1,374.03 – $1,518.66 (before taxes and duties) in July 2020. Shipping that same container from Veracruz, in the Gulf of Mexico, to New York, cost $1,102.24 – $1,218.27. Sending that same container by truck from northern Tamaulipas, where a large portion of the country’s manufacturing base is located, to Houston cost an average of $304.11 – $336.12 – four to five times less than shipping it from China. Mexico also maintains a clear edge in delivery time. It takes 75% less time to transport goods to the customer from Mexico than from Asia. Proximity is an essential advantage in industries that are shifting towards highly personalized products, including electronics, automotive, and clothing. The short distance can also be exploited to combine the countries’ supply chains across the border, one of the main drivers of economic growth under NAFTA.

According to the Center for Car Research, between 80 and 90% of U.S. automotive trade is intra-industry, and parts produced in Mexico and the U.S. cross the border up to eight times along the manufacturing process before they are delivered to consumers. In fact, on average, close to 40% of the content of a vehicle produced in Mexico was initially imported from the United States. This tight integration was only achieved after the NAFTA, which allowed producers to spread their supply chain across the border. Before 1993, for example, the vehicles produced in Mexico contained only 5% of parts produced in the U.S

The Effect of the USMCA

NAFTA completely changed the landscape of North America by driving unprecedented integration in the region and generating a dramatic increase in trade and cross-border investment. NAFTA also had an essential role in promoting Mexico’s privatization, where state-owned enterprises represented a substantial part of production until at least 1988. Between 1988 and 1994, 390 Mexican businesses were privatized – close to 63% of large corporations in the country. Telling of Mexico’s explosive development in this era is that before 1988 there was only one billionaire family in Mexico: Monterrey’s Garza Sada, who made their fortune selling beer and steel. In 1994, however, Forbes’s ranks included 24 Mexican billionaires. Between 1993 and 1994 alone, the number of multimillionaires in the country rose by 85%.

The USMCA, which consists of 34 chapters, four annexes, and 14 side letters, will further encourage growth by maintaining the most important aspects of NAFTA: a legal framework with protections for foreign investors and a free-market zone between the three nations. It will also maintain investor-state dispute settlement (ISDS) “between the United States and Mexico for claimants regarding government contracts in the oil, natural gas, power generation, infrastructure, and telecommunications sectors; and maintains U.S.-Mexico ISDS in other sectors provided the claimant exhausts national remedies first.” According to the Congressional Research Service, ratification of the treaty was expected to remove some investors’ unease about domestic policy uncertainty and the international economy. “Longer-term prospects for export-oriented manufacturing, as well as oil production, appear positive,” according to that report. After the elimination of steel tariffs on Mexico and Canada in May of last year,  the International Monetary Fund (IMF) estimates that the USMCA will increase trade between the three North American countries by approximately $15 billion.

Among the most significant achievements of the USMCA is that it will accelerate the integration of energy [utilization] on both sides of the U.S.-Mexico border. The treaty maintains NAFTA’s zero tariffs for energy products,   which have made Mexico “the No. 1 export market for U.S. natural gas and refined products and the No. 4 export market for upstream oil and gas equipment.” It also locked in Mexico’s historic 2013 energy reform, which allowed foreign investment in oil and gas.  Previously, state-owned Pemex was the only company allowed to invest in Mexico’s energy sector, a state of affairs that NAFTA explicitly acknowledged. The USMCA also facilitates the transport of energy products. For example, it allows “hydrocarbons transported through pipelines to qualify as originating, provided that any diluent, regardless of origin, does not constitute more than 40% of the volume of the good.”  Lastly, it maintains the automatic export approvals for U.S. liquified natural gas (LNG) that is exported to Mexico or Canada.

Another key feature of the treaty is the customs administration chapter. This section mandates streamlined procedures that lower the time, complexity, and cost of exporting and importing many goods. According to the IMG, “most of the benefits of USMCA would come from trade facilitation measures that modernize and integrate customs procedures to reduce trade costs and border inefficiencies further.” The international organizations indicate these new procedures could lead to “one-tenth of a percent reduction in regional merchandise trade cost.” This section will also boost the trade of low-value products because it raises the value-thresholds for products eligible for tax-free, duty-free, streamlined customs, treatment. Mexico’s $50 limit for tax-free entry has remained the same, but products up to US $117 can now enter duty-free entry through a simplified customs processes. The IMF expects these modifications to benefit small and medium businesses, as well as online retailers.  They may also have an impact on manufacturing processes where the value of parts that cross the border is low.

The treaty also strengthens IP protections. Intellectual property is one of the U.S.’s most significant exports, and IP-intensive industries generate 45 million jobs in the U.S., as well as close to $6 trillion dollars per year (38% of the GDP). This is also one of the sectors where the U.S. has enjoyed a significant and consistent trade surplus. According to the Congressional Research Service, “IP-intensive goods and services are an important part of U.S. trade with Canada and Mexico.” Chapter 20 of the USMCA established a committee on IP rights, which will deal with concerns related to trade secrets and patent litigation, as well as a mediator in some IP disputes. The USMCA also extended minimum copyright protection to 70 years, up from 50 years under NAFTA, and retains a minimum of 20 years for patent protections. Moreover, it empowers copyright possessors to “expeditiously” enforce their rights in online settings. Law enforcement officers are also entitled  to “stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party.” Lastly, many violations of copyright and trade secrets, now carry criminal sanctions under the treaty, including cyber theft — even if the perpetrator is a state-owned entity.

The USMCA’s strong IP protection contrasts with the perceived weaknesses of China’s IP regime. In 2018, a U.S. Trade Representative’s investigation indicated that the U.S. government would take actions to curve China’s “forced technology transfer requirements, cyber-theft of U.S. trade secrets, discriminatory licensing requirements, and attempts to acquire U.S. technology to advance its industrial policies.”  For instance, U.S. Customs and Border Protection reported stopped $1.2 billion of IP-infringing goods at coming into the U.S., with China being the largest source.

The onset of the COVID-19 pandemic has revamped reported IP violations of Chinese entities in the pharmaceutical industry. The Wuhan Institute of Virology recently applied for a patent of a compound based on Gilead Sciences -produced Remdesivir, which has been hailed as a potential medication for COVID-19 patients. China-based BrightGene Bio-Medical Technology Co. is also in the process of manufacturing a Remdesivir generic. It is worth noting “that Gilead’s patent application in China for Remdesivir use in coronaviruses has been pending since 2016.” The Chinese government has also found a potent tool to promote technology transfer through its antitrust law. “China has required technology transfer in antitrust reviews of foreign firms in China 2025 sectors,” according to the Congressional Research Service.

Finally, the treaty includes new rules that will require Mexico to increase the wages of some of its workers in the automotive industry and to source a larger part of its manufacturing materials within North America. Vehicles must now contain at least 75% of content sourced in North America to be eligible for tariff exemptions. Likewise, it dictates that at least 70% of a producer’s steel and aluminum purchases must originate in North America to be eligible for exemptions and eliminates several loopholes that allowed for transshipments under NAFTA. These sections were aimed in part at encouraging member states to displace Asia as the source of steel, aluminum, and electronic components, according to a professor at the business school of the Tecnológico de Monterrey.

The Mexican government has been in talks with a host of Asian steel producers, including South Korea’s POSCO, Japan’s Nippon Steel Corp, and Mitsubishi Corp, about the possibility of manufacturing steel for the auto sector in Mexico, in order to take advantage of the local content rule, according to Reuters. The news agency also reported that Andres Manuel Lopez Obrador’s administration is enticing Apple to set up manufacturing bases in the country. “These phones don’t have to be produced in China … there is an enormous opportunity to produce them” in Mexico, Economy Minister Graciela Marquez told Reuters.

The  Mexico Texas Relationship

The relationship of Mexico with Texas is historical and current. The Lone Star State was part of Mexico until 1836. Today, people of Mexican ancestry account for close to 36.6% of Texas’s residents, and Spanish is spoken in the homes of close to 30% of Texans, according to data from the U.S. Census Bureau. Their economic ties are as strong as their cultural and ethnic ones. Texas accounts for 44.41% of the U.S.’s trade with Mexico, followed by California – which accounts for 11.6%. Mexico is also Texas’s largest foreign trading partner, representing 43.79% of its exports and 35.15% of its imports. China, in contrast, makes up for 8.7% of Texas’s exports, and 14.6% of its imports  Texas also carries approximately 72% of all imports by value coming from Mexico to the U.S. Laredo, which received $132 billion in imports from Mexico by truck last year, itself accounts for about 40% of all truck cargo from Mexico into the U.S., according to data from the Department of Transportation.

Mexico and Texas’s heavy trade in oil products and vehicles underscore the robustness of their trade relationship. Oil and bitumen substances corresponded to 21.8% of Texas’s total exports to Mexico in 2017. Texas also accounted for 61.5% of propane and 40.9% natural gas Mexico purchased from the U.S. Likewise, oil represented close to 10% of Mexico’s exports to Texas, which is about 69% of all oil Mexico exports to the U.S. The USMCA, by maintaining zero tariffs in energy products and reinforcing Mexico’s energy reform, will potentiate trade in this area. Mexico exported approximately $5.3 billion worth of vehicles to Texas in 2018, close to 23% of the total value of the vehicles it exported to the U.S. that year. An important part of this trade takes place within the automotive manufacturing process, where energy cost is a critical component.

Can Houston Become North America’s Hong Kong?

Houston is well-positioned to serve as a hub for the growing trade cross-national manufacturing base in the U.S.-Mexico border. Houston serves as a gateway for a substantial portion of foreign trade in the U.S. and is ranked as one of the easiest places to do business in North America. Texas’s ports receive more cargo than any other state at 573 million tons – which accounted for approximately 23% of all waterborne cargo in the U.S. in 2018. Neighboring Louisiana is the second largest with 569 million tons. California, in contrast, carried 249 million tonnes – less than half of Texas’s amount, according to data from the U.S. Army Corps of Engineers.

Houston itself was the largest carrier of international cargo in 2018, at 191 million tons (up 10% year on year). The port of Houston, however, is not the only one in the metropolitan area. The ports of Texas City, Beaumont, Port Artur, and Lake Charles (Louisiana) together account for approximately 508 million tons of water cargo, including 336 million in foreign cargo. This is equivalent to about 20% of the total tonnage of the largest 150 ports of the U.S., as well as 22% of foreign cargo.

In terms of shipping, the city of Houston plays a similar role as Hong Kong does within the China ecosystem. Hong Kong’s port handled 19.6 million TEU in 2018, while China processed approximately 245.6 million TEU, according to the World Bank. Based on this data, Hong Kong accounted for about 8% of container shipping by TEU in China, while the port of Houston accounted for about 10% of U.S. sea cargo by weight. Similarly, when conflated with the nearby ports of Shenzhen and Guangzhou, Hong Kong constitutes about 28% of container trade in China. Houston, along with nearby ports and the Port of Southern Louisiana, accounted for close to 31% of the total cargo by weight in the U.S.

Houston’s role in the U.S.’s overall economy is also similar to Hong Kong’s role in China. The Houston metro area generated approximately $478 billion in 2018 or close to 2.2% of the country’s total. This is analogous to the proportion that Hong Kong contributed to China in 2019. Last year, China’s GDP by purchasing power parity (PPP) was approximately $21.4 trillion ($14.3 trillion in current dollars), while Hong Kong’s stood at $467 billion that same year  ($366 billion in current dollars). Hong Kong, therefore, accounted for approximately 2.5% of China’s GDP.

usmca

NAFTA to USMCA: A Brief Overview of Significant Changes

The United States-Mexico-Canada Agreement (USMCA) became effective on July 1, 2020, 26 years after its predecessor, the North America Free Trade Agreement (NAFTA). While NAFTA was originally conceived during the 1980s, the free-trade block did not materialize until the early 1990s, in part as a result of the perceived need to counterbalance the effects of the then–recently created European Union (1993). Mexico was experiencing unprecedented economic growth under the administration of President Salinas de Gortari (1988-1994), an economist and the first non-lawyer elected into the Mexican presidency since 1958, while President Bill Clinton (1993-2001) was driving sustained economy growth in the United States that ultimately led to a US federal budget surplus from 1998 to 2001. Canada, on the other hand, had just elected Prime Minister Jean Chrétien (1993-2003), who had run, at least partly, on a promise to renegotiate NAFTA within six months, as he believed that the new free trade agreement negotiated by then–Prime Minister Brian Mulroney (1984-1993) made too many concessions to the Mexicans and Americans.

In contrast, the USMCA comes into effect in what undoubtedly are unprecedented times in modern history. Although there existed a consensus among member states that the tri-lateral agreement needed an update, no one could have predicted that its successor would be greeted by an economic downturn caused (or accelerated) by a crippling pandemic that has forced an almost complete shutdown of the Mexican and United States economies.

In addition, while the US-Mexico relationship appears relatively strong, the US relationship with Canada has been more strained, marked by intermittent friction between the two countries on a variety of trade-related issues, such as steel tariffs in the United States and dairy tariffs in Canada. Given this backdrop, it is hard to predict how smooth the implementation of the USMCA will be. For example, in late-July hearings in the US House, both parties’ lawmakers exacted promises from the US Trade Representative’s office that it would quickly and aggressively use the USMCA’s enforcement mechanisms, with those representatives revealing that some cases were “ready to go” and would be on file by this autumn.

The general consensus is that the USMCA achieves some notable changes and a number of incremental improvements. A full description of these changes is beyond the scope of this discussion, but the changes that will likely have the greatest impact relate to a few, select industries, and certain procedural changes, including the following:

Domestic Content Rules for Automobiles

Auto content rules were a major issue throughout the USMCA negotiations. The USMCA includes two significant changes to how cars will be made and when they can be declared as made in the United States. First, the USMCA increases to 75% (from 62.5%) the percentage of a vehicle’s parts that must be manufactured in North America. Although the 75% number has garnered most of the attention, the USMCA (as did NAFTA) actually includes different rules: Part content is divided into core, principal, and complementary parts with content requirements of 75%, 65%, and 60%, respectively. The content calculations will also be subject to the USMCA’s rules of origin, which do away with NAFTA’s tracing scheme as well as the concept of “deemed originating.” These changes will affect the automotive supply chain. For example, the USMCA introduces a new rule requiring that 70% of the total steel and aluminum used in an automobile must be sourced from North American suppliers. Combined with the elimination of the tariff shift rules for stamped products, this will require supply chain changes for a number of auto producers.

While there are broader labor rules incorporated into the USMCA, the primary focus is on the agreement’s new requirements that workers earning at least $16 per hour make 40% to 45% of a vehicle’s components.

In keeping with the findings of Section 232 of the Trade Expansion Act of 1962 relating to automobiles, the USMCA incorporates quotas for Canadian and Mexican auto imports. Although the quota is well above current rates, this provision likely will morph into an issue in future years.

Labor Laws

The USMCA includes an array of labor-focused provisions. One example is a requirement that the countries adopt and enforce labor laws consistent with the International Labor Organization. The signatories also agreed to effectively enforce labor laws, and not to waive or derogate from them. The USMCA also requires the countries to: (1) take measures to prohibit the importation of goods produced by forced labor; (2) address violence against workers exercising their labor rights; (3) address sex-based discrimination in the workplace; and (4) ensure that migrant workers are protected under labor laws.

The USMCA also includes an Annex on Worker Representation in Collective Bargaining in Mexico, under which Mexico commits to specific legislative actions to provide for the effective recognition of the right to collectively bargain. To fulfill this commitment, Mexico enacted historic labor reforms on May 1, 2019, and is implementing transformational changes to its labor regime, including new independent institutions for registering unions and collective bargaining agreements and new and impartial labor courts to adjudicate disputes.

The agreement also requires all businesses in Mexico to ensure that they are in compliance with all aspects of the USMCA, including the collective bargaining provisions. The United States and Mexico have established a Facility-Specific, Rapid Response Labor Mechanism (Labor Mechanism) to enforce the collective bargaining obligations through the imposition of remedies, which may include the suspension of the preferential tariff on goods manufactured by a breaching facility. The countries have already begun their appointments to these dispute-resolution bodies, and the US Trade Representative has testified that cases are already being identified for action in the fall of 2020.

Other Notable Changes

While NAFTA had no provisions relating to dairy, the USMCA increases the opportunity for dairy exports to Canada, long a contentious issue between the two countries, making the US Dairy industry a winner in the deal. As Alan Ross of Canadian law firm Borden Ladner Gervais LLP states “Under the new agreement, US dairy farmers receive access to about 3.5% of Canada’s $16 billion annual domestic dairy market. Operationally, Canada will provide new tariff rate quotas exclusively for the United States and eliminate certain milk price classes, changes which have proven unpopular with the Canadian dairy industry.”

Also, the USMCA (1) includes environmental obligations to, among other things, combat wildlife trafficking, address air and marine quality, and protect marine life and, as part of its environmental efforts, the USMCA provides funds for monitoring these environmental efforts; and (2) prohibits customs duties on digital products (i.e., products that are transmitted electronically, such as computer programs, videos, or music). This last issue alone merits further analysis and consideration, as digital taxes become de rigueur in Europe and elsewhere. Finally yet importantly, unlike NAFTA, the USMCA includes a sunset clause. The countries settled on a 16-year term for the deal, with a review to identify and fix problems and a chance to extend the deal after six years.

Monitoring and Enforcement

The signatories countries are to make every endeavor to arrive at a mutually satisfactory resolution of all disputes arising out of the USMCA.  However, if they are not able to reach a resolution, Chapter 31 of the USMCA provides the framework for dispute settlement. In it, the parties will first consult with technical experts in the hopes of resolving the dispute. Should that fail, a ministerial panel will review the dispute and submit a final report. If the final report finds that (1) the measure is inconsistent with a party’s obligation; (2) a party has failed to carry out its obligations under the USMCA; or (3) the measure is causing nullification or impairment of the scope, the disputing parties must try to agree on the proper resolution for the dispute within 45 days. If the disputing parties are unable to resolve the dispute within 45 days, the complaining party can suspend the responding party’s benefits of equivalent effect to the dispute.

The USMCA retains the binational panel reviews of unfair trade law matters. These include customs determinations, antidumping and countervailing duty determinations, government procurement, breach of the most-favored-nation treatment for investors (noting that Canada has opted out of the investment provision of the USMCA), and disputes involving public telecommunications services, digital trade, intellectual property, labor rights, and environmental obligations.

In a significant change from NAFTA, the investment chapter (Chapter 14) of the USMCA (1) only applies to the US and Mexico (given Canada’s withdrawal from investor-state dispute settlement regime – ISDS), and (2) narrows the circumstances under which cross-border investors can bring actions under the general rules of ISDS. For instance, the USMCA prevents many US and Mexican investors from asserting claims under the “fair and equitable treatment” standard, which is included in most international investment treaties and is a frequent basis for such claims. Exactly how this will impact cross-border activities remains to be seen.

Generally speaking, Chapter 14 provides access to international arbitration for general investments and covered government contracts subject to satisfaction of certain pre-arbitration conditions and limitations (including the exhaustion of local remedies and certain statutes of limitation). Investors (post—established investment) may seek protection for breach of national treatment and most-favored-nation treatment under the general investments protections. Further, under the government-covered contracts protections, investors in oil and gas production, telecommunications, transportation, certain infrastructure, and power generation may also be entitled to protection under the USMCA. Lastly, it should be noted that (1) the participation of Mexico and Canada in the Trans-Pacific Partnership (otherwise known as the CPTPP) will force all investors to take a fresh look at their options when seeking relief from wrongdoing by another state, and (2) the consent by Canada to ISDS for legacy investment claims will elapse three years after NAFTA’s termination.

As mentioned above, the USMCA also created the Labor Mechanism as a way to deal with labor disputes. In particular, the Labor Mechanism enables the United States and Canada to bring a dispute against a facility in Mexico that they believe is not in compliance with Mexico’s new labor laws. The Labor Mechanism permits the suspension of the preferential tariff as a remedy, the imposition of penalties on goods or services from the violating facility, or the denial of entry of goods from the violating facility.

* * *

While we remain confident that member states are invested in the growth of the North America region as a whole, and the consensus is that the USMCA does address some of the most relevant concerns of the parties to the tri-lateral agreements during the NAFTA years, it will be hard to really measure the USMCA’s true effects (whether positive or adverse) in the short and possibly mid-term given, among other things, the political and economic turmoil that has seen it take its first steps.

trade

Free Trade Agreements: Is There a Trade Lane Left Without One?

Since the first Free Trade Agreement (FTA) in 1860, a lot has happened. A solid 160 years will do that for you. On the FTA front specifically, the focus has also shifted: what used to be an opportunity for significant duty reduction and, therefore, a more competitive position in the FTA partner’s home market has turned into a tool for faster access to the market and control of a trading relationship. With the applied, weighted, mean duty rates globally down to 2.59% from 8.57% in 1994 (Source: macrotrends.net based on World Trade Organization (WTO) data), the importance of duty rate reduction has been marginalized—so why is there still such a strong movement towards adding more FTAs to an already considerable total worldwide?

Some Recent Developments

Trade agreements are not only about duty rates anymore; the collaboration and facilitation part is just as, if not more, important. That means trading partners make efforts to reduce the paperwork on the trade lane, give priority to incoming shipments, and collaborate on data exchange and simplification of procedures. In today’s economies, these elements are just as crucial as a few duty points. In addition to the facilitation, environmental clauses are included in new FTAs. Got to start somewhere. Customs unions (like the EU) take it one step further—they usually allow for goods to move freely between member states and have a single common tariff for the outside world.

In a similar fashion, the FTA accounts for financial and administrative arrangements that are not limited to duty rates and import documents. In a broader scope, abolishing of export subsidies, transparency with added value calculations, investigative cooperations, etc. are part of the package and simplify the use and verification of FTA claims.

Perhaps not a trend (yet?), but the Pan-Euro-Mediterranean is loosening its Rules of Origin (likely in effect in 2021). Rules of Origin set forth the requirements that need to be met to benefit from FTA arrangements (i.e., qualify for preferential treatment). Typically, Rules of Origin encompass a required tariff shift (i.e., a substantial transformation needs to take place) and/or a value-added component (i.e., the value add of locally sourced parts, materials, labor, etc. needs to exceed a specific threshold). The value-added thresholds have historically been relatively high (60% and up) and loosening those requirements will simply allow more products to qualify, which will give developing countries especially more opportunities to qualify their exports for preferential treatment.

Per the WTO, over 300 Regional Trade Agreements (RTA) are currently in force. This number only reflects agreements that include preferential duty rate schemes, as agreements such as bilateral investment treaties or Joint Commissions would increase this number two- or three-fold. The RTA number includes bilateral/local agreements as well as ‘monster trade pacts’ such as the EU, USMCA or ASEAN – China agreements. It has been a steady growth of FTAs since the 1990s, with a peak in the action between 2003 and 2011. And (see below) there is no end in sight.

What’s Next?

Go big or go home is what the EU is thinking. Agreements are in place with around 40 countries, ratification in progress for agreements with around 30 countries, and agreements with another 20 countries are waiting to be signed. For any countries left behind, it seems that there are ongoing negotiations (e.g., Australia, New Zealand) or plans to negotiate. Don’t despair.

Never-ending speculation on a Trans Atlantic agreement (US – EU) or a Trans-Pacific Partnership (TPP) including the US will not be put to rest until actually completed and in force (the US withdrew from the TPP in 2017). The US currently has 14 FTAs with 20 countries, re-did the USMCA in 2020, and negotiations with Kenya and Taiwan seem to be in the works.

Lastly, with Brexit in its final stages, the UK is also breaking off FTA relationships with EU partners. That means the UK will have to create separate FTAs with these countries. Practically, not all of the EU FTAs will have a UK equivalent by January 1, 2021, and some may never be in place. This means regular (Most Favored Nations – MFN) rates will apply come January 1 unless another preferential program (like the Generalized System of Preferences) applies. But with the UK exit comes an opportunity for Britain to conclude agreements the EU has not been able to pull off. Perhaps a US – UK FTA is nearer than thought. Let’s check the odds on that!

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Anne van de Heetkamp is VP of Product Management and Global Trade Content at Descartes and is an international trade expert with 20+ years of industry experience. Previously he served as Director for global trade compliance/management company, TradeBeam.

corruption

TACKLING CORRUPTION IN THE TRADING SYSTEM THROUGH A CULTURE OF INTEGRITY

No Disagreement Here

For decades, economists have extolled the virtues of the rule of law as a critical factor in leveling the playing field through a framework of rules and regulations that are easy to understand and evenly, logically and fairly applied to all participants in an economic system. This central premise is reflected in the principle of “predictability through transparency,” one of three pillars of the World Trade Organization (WTO) and the global trading system. At the heart of this focus has been an emphasis on reducing the role that corruption can play in the administration of laws, function of government, conduct of business, and protection of citizen rights.

Back in an October 1996 address to the Board of Governors at the Annual Meetings of the World Bank and the International Monetary Fund, then World Bank President James Wolfensohn gave a groundbreaking speech in which he described corruption as a cancer and committed the Bank to strengthen its internal controls and supporting the international fight against corruption.

“…corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures, and deters foreign investors…it erodes the constituency for aid programs and humanitarian relief.”

– James Wolfensohn, President of the World Bank, October 1996

The Heavy Toll of Corruption

Significant attention has been paid to the goal of reducing corruption, particularly for emerging economies. The World Economic Forum calculates the global cost of corruption is at least $2.6 trillion, or roughly 5 percent of global GDP. For emerging economies alone, the UN estimates that corruption costs these countries some $1.2 trillion annually through bribery, theft and tax evasion.

Cost of Corruption

It is also widely recognized that global corruption can undermine the benefits of agreements negotiated to introduce predictability and transparency into the trading system. Former WTO Director-General Pascal Lamy described corruption in the international trading system as tantamount to “a hidden increase of the cost of trade.” Within the UN Sustainable Development Goals, the global community identified the promotion of the rule of law as a key priority for development through Goal 16, which is dedicated to promote just, peaceful and inclusive societies, and to achieve this goal by 2030.

Given the consensus among stakeholders within the international trade community, the question is: how to effectively combat corruption to achieve our shared goals of rules and laws that are applied objectively, consistently and equitably to all?

Since the time of Wolfensohn’s catalyzing speech, governments, the business community, civil society and international institutions have rallied around global efforts to create initiatives and mechanisms to mitigate the scourge of corruption. Member states and international organizations drafted and signed anti-corruption conventions through the Organization for Economic Cooperation and Development (OECD) and the United Nations (UN), and established regional conventions and working groups in Africa, the Americas and Asia.

Corruption Agreements Table

A Comprehensive Approach to Dismantling Corruption

In spite of the proliferation of anti-corruption instruments in regional and international organizations, the issue of corruption persists as a challenge. Punitive measures only go so far in achieving anti-corruption aims. A more comprehensive approach to dismantling corruption centers on enhancing integrity and ethics in an effort to affect the cultural practices and norms that perpetuate corruption.

This change was reflected in the 2017 OECD Recommendation of the Council on Public Integrity that reframed the anti-corruption strategy to focus on promoting the essential societal pillar of integrity as a sustainable response to the global problem of corruption. The adoption of these recommendations was part of a deliberate shift to go beyond ad hoc efforts toward a more comprehensive and strategic approach to promoting integrity through systems, culture, and accountability.

Defining Public Integrity

The OECD defines the term public integrity as “a consistent alignment of, and adherence to, shared ethical values, principles and norms for upholding and prioritizing the public interest.” Consistent with describing public integrity as an aspirational goal (versus the punitive connotation of combatting corruption), this definition grounds the work of promoting integrity in global efforts to make government functions more effective, economies more accountable, and societies more inclusive by involving all stakeholders in the effort to improve governance and strengthen the rule of law.

In May, the OECD took the next step in publishing the OECD Public Integrity Handbook. The handbook details best practices, principles and concrete actions for promoting a culture of integrity in government functions with an emphasis on generating dialogue between business, government and civil society to promote greater stakeholder collaboration in upholding public integrity values. The report expands on the 13 public integrity recommendations articulated in 2017 and goes a step further by translating those principles into practical measures governments can implement to institute change.

The OECD describes the handbook as a roadmap to help governments identify what integrity looks like and why it is important to take a whole-of-society approach in building public trust. The handbook can thus be viewed as a toolkit that helps anti-corruption advocates undertake the hard work of creating the ‘right relationship’ between government, citizens, business, and civil society.

Public Integrity

Public Integrity is Important to Trade and Investment Flows

International organizations and governments are not the only institutions concerned about combatting corruption, creating a culture of integrity, and strengthening the rule of law.

These issues are equally significant for the private sector in an increasingly globalized world as they are determinant of the business environment. This is why trade agreements have been grounded in rule of law principles, and have incorporated transparency and anti-corruption components to instill investors with greater confidence they can compete and operate in global markets. As noted by The World Justice Project, “uneven enforcement of regulations, corruption, insecure property rights, and ineffective means to settle disputes undermine legitimate business and deter both domestic and foreign investment.”

Companies make trade and investment decisions based on where they have confidence in the integrity of public and private institutions and where there is fairness, enforcement and proper adjudication of the law. In a 2017 Business Pulse Survey conducted by the U.S. Chamber of Commerce and the Association of American Chambers of Commerce in Latin America and the Caribbean, 31 percent of respondents described the rule of law as the “most important” issue to address for business, while 45 percent of executives characterized strengthening the rule of law and fighting corruption as the most important issues to be addressed to enhance economic growth in the region.

Corruption Quote

It is this emphasis on promoting public integrity that underpinned the inclusion of an anti-corruption chapter in the United States-Mexico-Canada Agreement (USMCA) that entered into force on July 1, 2020, representing one of the first times governments have formally committed to combat bribery and corruption in a trade agreement. The private sector has also prioritized an anti-corruption component in the bilateral trade negotiations now underway between Brazil and the United States.

Given the private sector’s interest in eliminating corruption from global trade, the U.S. Chamber recently co-hosted a public forum with the OECD entitled “The Role of Public Integrity in Promoting the Rule of Law” to examine the importance of the public integrity movement for global commerce. Julio Bacio Terracino, Acting Head of the OECD’s Public Sector Integrity Division, joined government officials, senior executives and the U.S. Chamber for a dialogue to review the OECD recommendations, discuss practical considerations outlined in the new handbook, and examine how tools like this are helpful in creating trade and investment conditions that enable business success.

Public Integrity through the Private Sector Prism

There are a number of public-private interactions the OECD has flagged as vulnerable to corruption or solicitation of bribes, notably in customs clearance and trade facilitation, public procurement, licensing and permitting processes, and public infrastructure contracting. During the forum, executives highlighted the critical role that governments play in creating the conditions for trade and investment by leveling the playing field for all actors, creating certainty, operating transparently, upholding the sanctity of contracts, and enabling access to justice.

Through its Coalition for the Rule of Law in Global Markets, the U.S. Chamber defines the concept of the rule of law through the prism of the private sector by articulating the five factors that determine the ability of any business to make good investment and operating decisions. These elements are transparency, predictability, stability, accountability and due process — each of which requires adherence to the shared ethical values, principles and norms that define public integrity.

The whole-of-society focus of the OECD Public Integrity Handbook recognizes the private sector’s role as a co-creator of the rule of law and acknowledges that all facets of society must commit and contribute to building a culture of integrity. This approach aligns with the Coalition’s vision of business working in concert with governments, civil society, and international organizations to promote remedies that will advance the rule of law.

Fostering a culture of integrity in the global trading system that enables inclusive economic growth requires all actors to take concrete steps to maintain open, transparent and meritocratic environments where there is proper enforcement and adjudication of the law. These actions include addressing structural obstacles to trade and investment, simplifying regulatory frameworks, harnessing technology to increase transparency in public functions like procurement, permitting and licensing processes, supporting trade facilitation efforts that strengthen and make customs regimes more efficient, and extending legal investment protections. It is only through this collaborative action and partnership among all stakeholders that a world where corruption is vanquished and a culture of integrity thrives can truly be possible.

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Kendra Gaither

Kendra Gaither is the Executive Director of the Coalition for the Rule of Law in Global Markets at the U.S. Chamber of Commerce. Over her career spanning two decades, Kendra has specialized in international trade and investment as a career diplomat with the State Department focused working in Sub-Saharan Africa and the Americas, and global public policy innovation through strategic partnerships at Carnegie Mellon University.

This article originally appeared on TradeVistas.org. Republished with permission.

heirloom tomato

ALL THE WORLD TREASURES AN HEIRLOOM – TOMATO, THAT IS

Everyone Can Enjoy an Heirloom

Spring weather heralds the start of weekend farmers markets offering colorful fruits and vegetables, artisanal cheeses, and home-made baked goods. Along the east coast, tomatoes play a starring role at the local farmers markets. Green, yellow, orange, brown, grape tomatoes, cherry tomatoes, large, small – the variety seems endless.

Farmers markets are a great way to shop fresh and seasonal, but if you can’t get there, you can still find an increasingly impressive selection of tomatoes at your local grocery store. Are the tomatoes in the organic corner market the same tomatoes you get from the farmer? Unlikely. For the most part local farmers cannot sustain supply to large grocery chains where consumers are demand tomatoes year round. To meet that demand, the business of the heirloom tomato has grown global.

Pimp my Tomato

Italians made tomatoes a kitchen staple, but the tomato didn’t originate in Europe. Researchers have traced its origin to the “pimp,” a pea-sized red fruit that grows naturally in Peru and Southern Ecuador. As with so many foods we love, the Mexicans domesticated the tomato and Spanish explorers brought it home, where locals created a sweeter and tastier, but also more vulnerable, tomato.

Whether due to the preferences of grocers or their shoppers, the market overwhelmingly demands that growers focus on the few breeds of tomatoes that dominate our grocery shelves today. Producers worked to change the characteristics of tomatoes through cross-pollination in order to increase yield, to produce uniform shapes and sizes with smooth skin, and to render the tomatoes hardier for transport. Tomatoes are picked while green and artificially ripened with ethylene gas, sacrificing better taste for better looks (the flavor comes from the sugars that develop as the tomato ripens naturally).

partial-dg-pimp-tomato-graphic-for-web

Photo: The pimp fruit by David Griffen, Smithsonian.com

The New (Old) Tomato

The strict definition of heirloom tomato is a variety of tomato that has been openly pollinated for more than 50 years. Today, most experts would consider heirlooms as any non-hybrid tomato. Unlike heirlooms, many hybrid vegetables and fruits, while resilient and uniform, produce seeds that cannot reproduce. Therefore, the open pollination principle for heirlooms is key. As a result, it is the seed savers and gardeners with a flair for history that helped propel heirloom tomatoes to their elite status.

In the last decade, consumers started going back to the tomato’s heirloom roots. Top restaurants, prominent chefs, cooking magazines, the farm-to-table movement, and the proliferation of farmers markets have all put heirloom tomato flavor on display. Americans have become more tomato-curious than ever.

Regional is the New Local

Generally speaking, the entire world loves a tomato. As the most consumed vegetable in the world, we devour 130 million tons of tomatoes every year, of which 88 million are sold fresh. The remaining 42 million tons are destined for processing into tomato sauce and other products. China, the European Union, India, the United States, and Turkey are the world’s top producers.

Trade in tomatoes tends to be regional. Asia, Europe, and Africa represent 45 percent, 22 percent, and 12 percent, respectively, of global production, and much of what’s grown in one region is traded there. France, for example, is the fifth largest producer of tomatoes in Europe, exporting one quarter of its production across the European continent, primarily to Germany.

North American Tomato Trade – A Tasty NAFTA Product

About half of fresh tomatoes consumed in the United States are imported. The government applies tariffs to fresh tomatoes from countries we don’t have a free trade agreement with, and the tariffs fluctuate based on the timing of the U.S. growing season. From March 1 to July 14 (when Florida’s volume is highest and California and southeastern producing states begin to ship commercial tomatoes), it’s 3.9 cents per kilogram. Between July 15 until August 31, it goes down to 2.8 cents per kilogram (availability of locally grown tomatoes is highest). September 1 to November 14, it goes up again to 3.9 cents per kilogram. For the remainder of our winter, November 15 until March 1, it goes back down to 2.8 cents per kilogram.

Nearly all of fresh tomatoes we import into the United States come from Mexico (89 percent) and Canada (10 percent) duty-free under NAFTA. NAFTA partners are also the primary destinations for exported American tomatoes, with 77 percent of our exports going to Canada and 20 percent to Mexico. (The United States manufactures 96 percent of the tomatoes it uses in processing.)

Even though they enter the United States duty-free, tomatoes from Mexico are subject to minimum prices that vary based on the season; the price floor for winter tomatoes ranges from 31 cents to 59 cents, while summer tomato prices vary between 24.6 to 46.8 cents, depending on the tomato category. This is because Mexico has gotten very efficient at producing tomatoes year-round, which concerns some segments of American growers, particularly in Florida.

Florida growers are seeking changes to U.S. antidumping and countervailing duty proceedings in the current renegotiations of NAFTA to allow them to pursue dumping cases based on pricing in one specific season versus relying on three years of data, as is currently required. This proposal has created rifts among U.S. growers – primarily Southeast growers who support it and Western growers who fear its consequences. Mexico has also expressed strong opposition. American producers of other fruits and vegetables have also publicly opposed the proposal. They worry Mexico could use the same approach against American exporters of perishable produce.

Global, Regional, Local – It’s All Good

Our love for tomatoes will not recede any time soon. Improvements in technology are helping farmers increase their yields while maintaining or even reducing the acreage they are devoting to tomatoes. But even as trade routes for tomatoes are increasing and broadening, the allure and specialness of a locally-grown fresh tomato remains.

Tomatoes are the most popular plant for amateur home gardeners like myself. And with spring in full bloom, it’s only a matter of time before local tomatoes explode onto the scene in our neighborhood farmers market, exhibiting their versatility and flavor. The heirloom tomato has once again returned to prominence – just sprinkle a little salt on it, and take a satisfying bite. Trust me, you won’t regret it.

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Ayelet Haran

Ayelet Haran is a contributor to TradeVistas. She is a government affairs and policy executive in the life sciences industry. She holds a Master’s of Public Administration degree in International Economic Policy from Columbia University.

This article originally appeared on TradeVistas.org. Republished with permission.

tomatoes

IMPORTED TOMATOES FROM MEXICO HAVE SOME U.S. GROWERS SEEING RED

Tomato Trade Tensions Simmering Again

Nothing says “summer” like a fresh tomato. And thanks to trade, tomatoes aren’t just a seasonal treat for Americans. A trade policy battle, however, over our favorite little red vegetable that had simmered on the back burner for decades recently heated up again and might have threatened our ability to enjoy tomatoes year round.

While NAFTA – now replaced by the U.S.-Mexico-Canada Agreement (USMCA) – eliminated trade barriers for most agricultural exports, trade in tomatoes between the United States and Mexico remains complicated to this day. U.S. growers have made a fresh push for the Administration to protect domestic tomato production against imports of increasingly competitive Mexican produce.

Seasons of Discontent

The United States is the second largest producer of tomatoes in the world, but with each American eating an average of more than 20 pounds of tomatoes a year, we import them to satisfy high demand. Mexico is the largest exporter in the world and the United States’ top international supplier. Of the $2.4 billion worth of tomatoes the United States imported in 2019, $2.1 billion came from Mexico, representing 87.5 percent of total U.S. tomato imports.

MX imports of tomoatoes

Although Mexico exports a wide variety of seasonal produce to the United States ranging from bell peppers to blueberries, it’s trade in tomatoes that has been a consistent source of tension. That’s because tomatoes are one of the highest valued fresh vegetable crops in the United States and Mexican tomatoes directly compete with tomatoes grown in the state of Florida during the winter and early summer.

Over the last two decades, U.S. tomato production has declined substantially while Mexican imports increased. And while Florida is still the top tomato state in the nation, production there has declined steadily since 2000. Florida once had 300 tomato growers, but now has fewer than 50. Labor is one major reason for this change. Fresh tomatoes are largely picked by hand – and farm workers are increasingly hard to find and expensive.

MX v FLA

Animated Suspension

Throughout this downward trend, the American tomato industry has complained that Mexican growers have an unfair advantage. The Mexican tomato industry has significantly ramped up production not just thanks to lower labor costs, but also extensive support from the Mexican government in the form of capital for producers, investment in infrastructure and technology to modernize the industry, and other subsidies throughout the supply chain.

The American tomato industry first filed a case with U.S. trade agencies back in the 1970s seeking relief from competition from low priced tomatoes from Mexico, which they alleged were being sold at less than fair market value in the United States (or “dumped”). The antidumping case was ultimately dropped, but after NAFTA was enacted, Florida tomato growers renewed their complaint, claiming Mexican tomatoes were a threat to the domestic industry. The U.S. International Trade Commission found in favor of U.S. growers. Facing potential antidumping tariffs on their exports, Mexican growers in 1996 entered into what’s known as a “suspension agreement.”

By law, the Commerce Department can suspend an antidumping duty or countervailing duty investigation when the parties in the case reach an agreement that meets certain statutory and policy criteria. Under the tomato suspension agreement, the Mexican industry agreed to reduce production and meet a minimum price floor for fresh tomatoes. Suspension agreements require ongoing monitoring to ensure compliance through a process that is completely separate from NAFTA or USMCA. The tomato suspension agreement of 1996 has been updated and expanded three times: in 2002, 2008 and 2013.

To-may-to, To-mah-to, Let’s Call the Whole Thing Off

The suspension agreements were intended to prevent further dumping and injury to the U.S. tomato industry. However, growers in the U.S. southeast have said the agreements were not successful in achieving that goal because provisions were either unenforceable or subject to loopholes. With those concerns in mind, the Florida Tomato Exchange submitted a request to the Commerce Department in November 2018 to terminate the 2013 suspension agreement.

In February 2019, the Commerce Department notified the Mexican government of its intention to withdraw. On May 7, the U.S. government officially terminated the 2013 suspension agreement and enacted a 17.56 percent duty on imported Mexican tomatoes. Some expressed concern the move would stir up a trade war between the two countries, leading to higher prices for consumers and a reduction in the winter tomato supply as Mexican growers shifted their acreage to other crops, though the Administration stated its willingness to resolve the dispute even as its antidumping investigation continued.

Then, in September 2019, the Administration announced a new suspension agreement had been reached with Mexican exporters, effectively putting an end to the investigation. The new agreement is meant to protect U.S. producers from being undercut on prices. It includes audits and border inspections to prevent imports of low-quality tomatoes that could have a similar effect of depressing prices.

USMCA’s Rotten Tomatoes

At the same time that the antidumping investigation was playing out, USMCA was picking up steam on Capitol Hill. After receiving bipartisan support in the House and Senate, USMCA was signed into law on January 29, 2020 and entered into force on July 1, 2020, officially replacing NAFTA. It is easy to see why most American farmers and ranchers rallied support for USMCA. Canada is the top market for U.S. farm products, with Mexico following in the number two spot. U.S. agricultural exports to both countries totaled $44 billion in 2018.

However, one vocal segment of the U.S. agriculture industry was not entirely happy with the USMCA provisions. Fresh produce growers in the U.S. southeast expressed concern that Mexico continued to undercut their prices, dumping cheap fruits and vegetables in the market during their peak harvest time. Farmers from states including Georgia and Florida argued they had watched NAFTA erode their share of the U.S. market and that USMCA was an opportunity to provide a remedy.

American growers from the southern region pushed for new protections in USMCA through antidumping and countervailing duty provisions as a way to even the playing field from what they see as unfair subsidies, labor and environmental practices by Mexico that make U.S.-grown specialty crops like tomatoes and blueberries less competitive.

To create some leverage in the USMCA negotiations, lawmakers from the southeast region introduced legislation, the Defending Domestic Produce Production Act, designed to make it easier for seasonal growers to petition the Commerce Department and the U.S. International Trade Commission to investigate Mexico’s subsidies and dumping of cheap produce. This change would measure injury to industries with short harvest windows (like tomatoes and strawberries) on a seasonal basis rather than having to prove nation-wide, year-round harm.

Congressional letter on tomatoes

Hybrid Views in the Produce Industry

But the U.S. produce industry is not unified in its criticism of seasonal produce imports from Mexico or in its support for a trade remedy to the problem. Growers and distributors in western states like California and Arizona argued against including changes in USMCA because many of those companies work in both the United States and Mexico to ensure fresh produce is available year round. They also worried that Mexico would use the same approach against American produce like apples and grapes. Industry groups in Nogales, Arizona opposed the changes as well, citing a negative ripple effect on their economy if the produce from Mexico that passes through gateway communities were significantly reduced.

Twenty-three Senators and U.S. House members from Arizona, Texas, and California sent a letter to the U.S. Trade Representative opposing attempts to insert seasonal antidumping language into USMCA. The lawmakers wrote: “using USMCA as a vehicle for pursuing seasonal agriculture trade remedies risks pitting different regions of the country against each other.”

While the Trump Administration initially seemed sympathetic to the southeastern growers’ complaints, the provisions ultimately did not make it into USMCA given the concerns of other producers in the sector who would be potential targets for retaliation from Mexico. But the Administration committed to continue an investigation into the issue.

Is the Dispute Ripening Again?

In August 2020, USTR, the U.S. Department of Agriculture, and U.S. Department of Commerce held two hearings to collect feedback about whether trade policies are harming American seasonal produce growers. The hearings are part of an effort promised by the Administration to respond to any trade distorting practices within two months of USCMA going into effect.

At the listening sessions, lawmakers and growers from southeastern states spoke out about how their sector is impacted by subsidies and other practices by Mexico that they believe are hurting American agriculture. Senator Marco Rubio (R-FL) asked the Administration to use Section 301 authority to investigate and potentially take retaliatory action against Mexico.

Following the hearings, U.S. Trade Representative Robert Lighthizer said he is working with USDA Secretary Sonny Perdue and Commerce Secretary Wilbur Ross to come up with a plan to address the growers’ concerns by September 1. What action the Administration may take to protect American producers – notably located in states like Florida that may be key for the president’s re-election bid – remains to be seen.

What we do know is that southeastern produce growers seem cautiously optimistic that the new suspension agreement for tomatoes will be more effective than past iterations. And while most Americans are likely unaware of the ongoing tomato trade tension between the U.S. and Mexico, shoppers undoubtedly benefit from year-round access to affordable fresh produce.

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Sarah Hubbart provides communications strategy, content creation, and social media management for TradeVistas. A native of rural Northern California, Sarah has melded communications and policy throughout her career in Washington, D.C., serving in government affairs, issues management, and coalition building roles in the agricultural sector. She is an alum of California State University, Chico and George Washington University.

This article originally appeared on TradeVistas.org. Republished with permission.

trump

Trump Signs USMCA Into Law But Not Everyone is Cheering

President Donald Trump signed the United States-Mexico-Canada Agreement (USMCA) into law at a Jan. 29 White House ceremony, officially canceling the North America Free Trade Agreement (NAFTA). “The USMCA is the largest, most significant, modern, and balanced trade agreement in history,” Trump told admirers and the press. “All of our countries will benefit greatly.”

“Thanks to the unyielding dedication of President Trump, the United States will now have a fair and reciprocal trade agreement with Mexico and Canada,” reacted U.S. Secretary of Labor Eugene Scalia. “USMCA will bring jobs, increased trade and stronger economic growth to our already record-setting economy, growing GDP by as much as $235 billion and adding as many as 500,000 new jobs.

“President Trump has delivered on a promise,” Scalia continued. “This historic agreement will level the playing field for American workers, preparing American businesses for the demands of a 21st Century economy. The Department of Labor stands ready to fully implement USMCA to the benefit of American workers.”

An independent report by trade credit insurer Atradius found the USMCA “has reduced trade policy uncertainty in North America, shielding Mexico and Canada from any global tariffs on cars the U.S. might impose on national security grounds.”

But not everyone was cheering. “USMCA is only marginally better than previous trade deals and doesn’t do nearly enough to create American jobs, increase workers’ wages, or protect workers and the environment,” states Groundwork Collaborative, an initiative dedicated to advancing a coherent, persuasive progressive economic worldview and narrative. “Trade is like every other economic issue: It is only really working when it is working for ALL people, not just the wealthy and well-connected. USMCA doesn’t meet that standard and is a major missed opportunity.

global trade

Global Trade: 2019 Wrap-Up and 2020 Forecast

Looking back at this year, 2019 saw a multitude of global economic growth disruptors from the escalation of the trade war between the U.S. and China, to Germany’s manufacturing and automotive decline and Brexit.

Consequentially, global trade growth has almost come to a standstill, and while it’s not quite at recession levels, nearly every market and sector, as well as businesses within those sectors, have felt the impact of policies and decision making.

Even with the possibility that trade growth could rebound in 2020 to a modest 1.5%, economic policy uncertainty remains high and if it abates, it is likely only to do so to a limited extent into 2020. What factors are at play? Let’s take a look.

Trade war with China. Despite the recent conclusion of ‘phase one’ of a U.S.-China trade deal, uncertainty remains high. The underlying reason for the trade war is not resolved and is unlikely to be resolved soon either: it regards fundamental issues such as the influence of China on the global economy and theft of intellectual property. Although tensions may temporarily soften, as they seem to do now, we see no end in sight for the trade war with China and with the current administration in the White House for one more year, another rocky year is forecasted. The trade war alone is affecting no more than almost 3% of global trade — currently approximately $550 billion of goods — but it is sending a ripple effect around the globe from business investment to value chains and trade flows. If it expands to other economies in Asia and Europe, which is very possible, we could see an even more pronounced slowing in trade.

Brexit. The self-imposed economic hardship has caused much uncertainty and plummeting fixed investments in the business sector. With Boris Johnson elected to Prime Minister in the December election and Brexit a certainty come January 31, policy uncertainty has been lessened, but some will remain until a new trade relationship with the EU is shaped. While the clout of those favoring a no-deal Brexit has been diminished, a no-deal Brexit is still possible. If this occurs, it would throw chaos into supply chains across Europe.

Business insolvencies and market pressure. The U.S. is expected to lead the number of business insolvencies with a 3.9% increase in 2020, far above the global average of 2.6% expected next year. This is due to the fact that there’s been lower business investment, lower external demand (especially from China), and higher import and labor costs. Those sectors feeling the most pressure include steel, which is dealing with an overcapacity issue, automotive, and businesses dealing in aircraft, which have seen a 20% market share loss. U.S. businesses dealing in vegetable and animal products and agriculture won’t see any relief soon either, and all U.S. businesses that have typically relied on imports from China (as well as businesses in China relying on imports from the U.S.) are now facing higher costs, which are resulting in insolvencies.

Despite all the economic doom and gloom, there are a few bright spots. Indeed, the ‘phase one’ agreement between the U.S. and China provides at least hope. Moreover, the U.S. signed trade agreements with Japan, Canada, and Mexico, and a few countries, like India and China, which are pulling their weight with a 6% GDP growth rate, are providing some positive impact on the global figure as they continue to grow at rapid pace, that is to say above 5% per annum.

Further, the consumer outlook looks positive with household consumption in both North America and Europe ending on a high note, thanks to low unemployment. Unfortunately, this alone cannot support economic growth. Low-interest rates and the amount of money floating around the U.S. as well as Europe could give rise to turmoil in the markets and the economy – both pillars of global growth – and any detriment to consumer confidence could put the economy in a downward spiral, reversing the modest growth expectations set for 2020.

There is much at stake and a low likelihood of that changing for 2020. If economic and political developments continue to sour, economic growth could be hampered even more than it already is.

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John Lorié is Chief Economist at Atradius Credit Insurance, having joined the company in April 2011. He is also affiliated to the University of Amsterdam as a researcher. Previously, he was Senior Vice President at ABN AMRO, where he worked for more than 20 years in a variety of roles. He started his career in the Dutch Ministry of Foreign Affairs. John holds a PHD in international economics, masters’ degrees in economics (honours) and tax economics as well as a bachelor’s degree in marketing.

USMCA

A Vote on USMCA is a Vote for Predictability

For all their legal nuance, trade agreements are written to make commerce more predictable. The rules are meant to increase business confidence, boost investment and spur job creation. It’s time for Congress to show bipartisan support for a more predictable North American market, and pass the United States-Mexico-Canada Agreement (USMCA).

USMCA is a much-needed upgrade of the North American Free Trade Agreement (NAFTA), a text that was largely copied over from the US-Canada bilateral trade agreement signed in 1988. To say that NAFTA is outdated is an understatement. Canada and Mexico have concluded trade deals with other countries that do things NAFTA could have never anticipated 25 years ago. USMCA is needed just to keep up.

Three chapters of USMCA deserve far more attention than they’ve received.

First, the chapter on health and safety standards is a must for US agriculture. The biggest threat to our ranchers and farmers is a lack of science-based import regimes abroad, not tariffs.

Tariffs are a tax on trade, whereas health and safety standards, applied in a non-scientific or in a discriminatory way, can act as a ban trade. US agricultural exporters have long demanded more science-based approaches to what are called sanitary and phytosanitary standards, and USMCA delivers on this. USMCA also puts forward a number of consultative mechanisms that will help prevent certain market access problems from arising in the first place.

US agriculture needs Chapter 9 of the USMCA.

Second, the chapter on technical barriers to trade is essential for US manufacturers. It covers the regulatory measures that impact over 90 percent of goods exports from the United States. This is fertile ground for protectionism. Governments can easily use regulatory measures, or ways of assessing conformity with them, that shield domestic producers from import competition. In fact, they can completely shut down trade with a few strokes of the legislative pen.

In USMCA, American manufacturers have more of a voice in the regulatory process in Canada and Mexico concerning their exports. Importantly, USMCA also calls on the three countries to recognize that, in setting technical specifications, performance, and not the provenance of the regulation, is what should matter. This is a longstanding US demand, and USMCA represents a tangible win for US exporters in this regard.

American manufacturing needs Chapter 10 of USMCA.

Third, the chapter on intellectual property is upgraded to reflect the needs of a building a creative economy. The list of international agreements that inform USMCA is striking; many didn’t exist in 1994, never mind in 1988. Copyright protections are modernized, as are those for biologics, a type of drug that could not have been imagined when NAFTA was negotiated. Whereas patents, alone, could help stimulate investment in small molecule drugs, they aren’t enough for the living systems that define biologics. USMCA brings Canada and Mexico closer to the US standard, and in this regard increases protection of American IP abroad.

Other IP provisions will assist a variety of America’s creative industries, from film to fashion to iPhones. These modernized rules, along with consultative mechanisms to ensure a level playing field, will provide the kind of protections that inventors need to bring their ideas to market. This is a win.

America’s creative industries need Chapter 20 of USMCA.

Still, there are some who, while recognizing the benefits of USMCA, worry that the deal cannot effectively enforce labor and environmental standards. They shouldn’t be. The provisions are as good as anything in the EU-Mexico trade agreement, for example, and Europe is renowned for having high expectations on both fronts, both domestically and internationally.

Polls show that, regardless of party, American voters are more supportive of free trade now than ever before. Democrats, Independents and Republicans converge around 80 percent in favor. Polls also show that USMCA has bipartisan backing.

The United States is part of a North American market that thrives on predictability. It’s time for Congress to unite behind USMCA and deliver predictability.

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Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at Georgetown University’s School of Foreign Service.