Investor Column: USMCA trade deal’s anti-corruption rules will impact Mexico the most
After over two years of efforts by our government, which was originated by Donald Trump as a campaign promise for the 2016 presidential election, we are getting closer to a full three country sign-off on the United States, Mexico, and Canada Agreement (aka “NAFTA 2.0”). Timing is everything! The final agreement was met with bipartisan support in the U.S.House and Senate and was only recently criticized by Chuck Schumer for not addressing climate change properly.
The following are two changes to trade with Mexico and Canada: The details of the agreement cover areas such as eliminating the need for a foreign home office like having an Apple Canada home office vs. just having the U.S. based home office for all three countries. Also, a new rule that new cars being built will be required to have their materials meet a higher minimum percentage made in North America or will face stiff tariffs. Once you drill down into the agreement, you will see that there are quite a few new opportunities to build on our already strong trade relations.
It should not come as a surprise that in 2019 Mexico has ascended to the top trade partner with the U.S. Canada was our second-largest partner, followed by China. As I mentioned last year in one of my other Investor Column articles, Mexico represents a strong option for companies seeking a shift in production and product supply routes away from China and also the benefit of near-sourcing those goods to be able to keep up with Amazon’s recent next day and two day delivery themes. Wages remain lower in Mexico than the U.S., plus doing business in Mexico doesn’t come with the same issues such as IP theft and state subsidized business competition.
To protect all three countries, chapter 27 of the new trade agreement has been recognized as the most detailed anti-corruption agreement that the U.S. is currently a party in the world. Much of the framework comes from the TPP (Trans-Pacific Partnership Agreement) which the U.S. pulled out of in 2017. New laws may be required by the three countries to prevent corruption and crime and to target both businesses and individuals for punishment. The agreement requires each country to address the risks of corruption and promote a fair and supportive business environment.
Mexico, by far, is considered the country with the most perceived corruption. The United States and Canada already have substantial laws on the books that cover corruption, foreign bribery, and other internal controls provisions. So, for Mexico to live up to the agreement, expect them to create new laws to keep from violating their end of the agreement. One reason to be hopeful that Mexico will make these changes is the fact that Mexican President Andrés Manuel López Obrador made anti-corruption a key theme of his 2018 electoral campaign.
If Mexico makes the necessary effort to create new measures to stop corruption, expect an increase in corruption enforcement which should lead to greater trade opportunities due to an environment that fosters and protects foreign and domestic manufacturing.
Danny Wood is a principal and founder of SeaCoast Financial Partners. To learn more visit MySeaCoastfinancial.com. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.