Mexico changes its law and removes Chinese parts to stay in the North American Free Trade Pact

Mexico has recently been criticized for allegedly serving as a conduit for Chinese parts and products into North America, and officials there fear that re-elected Donald Trump or politically troubled Canadian Prime Minister Justin Trudeau could try to leave their country with the Free Trade Agreement between USA, Mexico and Canada.

Mexico’s ruling Morena party is so afraid of losing the trade deal that President Claudia Sheinbaum announced on Friday that the government has launched a campaign to persuade companies to replace Chinese parts with locally produced ones.

“We have a plan to replace imports coming from China and have most of them manufactured in Mexico by Mexican or mostly North American companies,” Sheinbaum said.

While Sheinbaum said Mexico has been working on these efforts since the 2021 global supply chain crisis — when factories around the world stalled due to a lack of parts and especially computer chips from Asia — it appears to be an uphill battle. fight. Even the United States has faced major challenges in bringing chip production home despite billions in subsidies and incentives.

Mexico gained tens of thousands of jobs when U.S. and foreign automakers moved their plants to Mexico as part of a free trade pact to take advantage of much lower wages. But the idea that Chinese parts – or even entire cars – could use the deal to further weaken the U.S. auto industry has enraged some people north of the border.

That’s why Mexico is fighting private companies to move parts production here.

“Next year, God willing, we will start producing microchips in Mexico,” Mexican Economy Secretary Marcelo Ebrard said on Thursday. “Of course, these are not the most advanced chips yet, but we intend to start producing them here.”

Mexico’s nationalist ruling party, which is usually very resistant to being seen as bowing to U.S. demands, is also fighting back in other ways.

The ruling party is in the process of dismantling several independent regulatory and control agencies that were established by former presidents. This applies to antitrust authorities responsible for transparency and regulating the energy sector. Combined with reforms that will force all judges to run for office in Mexico, this has sparked concern in the U.S. and Canada.

Under the agreement, countries are required to have independent agencies, in part to protect foreign investors. They could, for example, prevent the government from approving a monopoly for a state-owned enterprise, which could drive competitors out of the market.

So ruling party lawmakers are effectively rewriting the proposed rules to exactly mimic the minimum requirements adopted under the trade deal.

“What is being done is to create a reform that is almost exactly equal to what exists in the United States so that we can clarify that,” Ebrard said.

It’s all part of a highly legalistic defense of the trade deal signed in 2018 and approved in 2019. Mexico hopes the terms of the deal will prevent the United States or Canada from simply withdrawing when the trade pact goes up for review in 2026. Experts agree , stating that a complete departure from the agreement is unlikely.

Gabriela Siller, director of economic analysis at financial group Banco Base, notes that if the country is not satisfied with the trade deal during periodic reviews, as in 2026, there is a clause in the pact saying it can ask for review every year to work out a solution and continue to do so for ten years while the agreement remains in force.

“That means they won’t be able to get out until 2036,” Siller said. “I think they will play tough against Mexico in the 2026 review.”

As with any marriage, when the pact no longer works for one party, it may still drag on for years, but it is the death of a thousand cuts.

CJ Mahoney. who served as deputy U.S. trade representative in the first Trump administration, said in a September speech to the Texas-based Baker Institute that the U.S. would likely not terminate the trade deal. However, with increasingly loud criticism of the pact, its renewal may be delayed for years.

“The costs of not immediately renewing the contract are actually relatively low,” Mahoney said. “I think the tendency to kick the can down the road will be quite strong.”

Since many companies will not make large investments in manufacturing facilities without certainty, this could be a serious, if not fatal, blow to the pact.

How much does Mexico actually buy from China? Mexican officials say they import fewer Chinese parts and products than the United States. However, given the huge difference in the size of the two countries’ economies, this is a true but weak argument.

In July, the United States imposed tariffs on steel and aluminum shipped from Mexico that were produced elsewhere in an attempt to stop China from avoiding import taxes by routing goods through Mexico. It includes a 25% tariff on steel not melted or poured in Mexico and a 10% tariff on aluminum.

Senator Sherrod Brown, Democrat of Ohio, called for an end to imports of Mexican steel, saying that “the alarming increase in Chinese steel and aluminum entering the country through Mexico… is unsustainable and poses a threat to American jobs as well as our economy and national security.”

Ultimately, Mexico may be forced to crack down on Chinese imports, but it won’t be easy.

“Reducing dependence on Chinese imports cannot be achieved in the short or medium term,” said José María Ramos, a professor of public administration at the Colegio de la Frontera Norte in Tijuana.