top of page

2021 – A Pivotal Moment for Mexico’s Role in Global Trade

Updated: Apr 19, 2022

When representatives from Mexico, Canada and the U.S. signed the United States-Mexico-Canada Agreement (USMCA) in November 2018, there was a sense of relief in Mexico City. The USMCA’s predecessor, NAFTA, had been a critical contributor to the country’s economic ascendency over more than a generation. Vanquishing free trade between the U.S. and Mexico would have meant the disintegration of continental value chains that have been a core component of the latter’s manufacturing sector.

Even with the USMCA full implementation as of July 1, 2020, those fears still remain to a certain extent. While free trade had been preserved, the content and labor rules for the auto sector in the new agreement reduce Mexico’s competitive advantage and fears of capital flight have set it. However, there remains cause for optimism in the overall dynamic between the U.S. and Mexico, as well as the role of Mexico’s manufacturing and agricultural sectors in North American trade.

The current dynamic between Washington and Mexico City is friendly, but the incoming U.S. administration of president-elect Joe Biden is anticipated to place intense scrutiny on Mexico’s labor practices. The Mexican government is already taking steps to demonstrate it is serious about living up to its labor-reform commitments. In December, Mexican president Andres Manuel Lopez Obrador (affectionately referred to by Mexicans as AMLO), introduced a new bill that would substantially reduce the ability for companies to use sub-contractors – a sub-sector of the economy that has witnessed meteoric growth in recent years. The move antagonized industry groups within the country but served to show good faith to the incoming administration in Washington.

Challenges Heading into 2021

Mexico is facing extraordinary challenges moving into 2021. Even before the pandemic began, the economy had briefly entered into recessionary territory and the pandemic has exacerbated the plight. In Q3 2020, the economy saw a much-needed resurgence after five consecutive quarters of contraction. Nevertheless, 2020 will represent the most significant economic withering since the Great Depression.

Political and economic observers suggest the situation is being exacerbated by tight fiscal constraints that have provided limited relief to consumers and businesses, and by industrial policy that is unfriendly to domestic investors.

Reshaping its Role in Global Value Chains

Despite the internal challenges and gloomy outlook, there are very real opportunities for Mexico to solidify its role in North American supply chains and broader global value chains (GVCs). There are forces taking shape around the world that provide the country with the prospect of capitalizing on its strategic geographic position and its liberalized trade environment. Mexico is party to more than 40 free trade agreements, including the USMCA and the Comprehensive & Progressive Agreement for Trans-Pacific Partnership (CPTPP), a multilateral trade deal involving 11 Pacific Rim countries. These agreements are complemented by a tax policy that exempts re-exported goods from the country’s 16% value-added tax (VAT). Combined, these initiatives serve to optimize Mexico’s potential to become an integral link in global value chains.

In 2021, many U.S.-based firms will be accelerating their ongoing re-evaluation of GVCs with the goal of reducing their risk exposure by shifting suppliers to new sourcing markets and/or by establishing redundancies to garner greater supply chain flexibility. Mexico has already been a direct beneficiary of the trend, which was initially catalyzed by the U.S.-China trade war. Exports of manufactured goods to the U.S. have been increasingly steadily since the trade war broke out in 2018, surging from $278 billion in 2017 to $320 billion in 2019. The shift is a direct result of production being nearshored from Asia to Mexico.

In addition, as Vietnam continues to absorb much of the capital flight out of China, Mexico’s participation in the CPTPP along with Vietnam (and numerous other production centers in Asia) strategically positions it to become a hub for the receipt of duty-free intermediate goods across the Pacific. This allows firms selling into the U.S. market to ship product inputs into Mexico at a much lower cost and incorporate them into final products that can later be transported into the U.S. without duty via the USMCA.

However, it also creates opportunity for relief amongst U.S. exporters, many of whom have been looking to diversify their markets in Asia in response to tariff barriers in China. In October 2020, numerous signatories of the CPTPP also signed onto the Regional Comprehensive Economic Partnership (RCEP), a 15-nation trade bloc in Asia that represents one-third of the world’s population. While American firms have struggled to make inroads in Asia due to high tariffs throughout the region, Mexico’s free trade relationship with dual CPTPP-RCEP members positions it to become a hub for duty-free imports of American goods into CPTPP countries via partial production in Mexico. Depending on RCEP’s final Rules of Origin, those U.S. exports to Asia through Mexico could later be transformed into final products and distributed to RCEP countries. In short, Mexico is strategically placed as a production hub for goods moving between the world’s interconnected blocs of liberalized trade.

The USMCA Factor

There is justified concern that the onerous content requirements and Rules of Origin for the automotive sector in the USMCA will result in an exodus of auto-sector production. Speculation is growing that original equipment manufacturers (OEMs) will simply forego the benefits of the USMCA – believing the cost savings to be insufficient to offset the compliance burden – and pay the 2.5% tariff on imports of passenger vehicles. But the tariff on light trucks and commercial vehicles is 25% and there is strong incentive to make use of the USMCA for those imports even in the face of compliance complexity. Moreover, given Mexico’s free-trade relationship with countries in Asia, OEMs will be able to source more product components that had previously been sourced from China through Mexico. Moreover, the onerous content requirements of the trade deal will force many of Mexico’s producers to turn toward domestic sources for raw materials while encouraging foreign suppliers to shift production to Mexico. For example, the USMCA mandates that by 2027, 70% of the steel being used in the production of automobiles must come from within North America. This will force at least some Asian steel producers to physically move to Mexico, or risk losing lucrative contracts. It will also incentivize Mexican producers of intermediate goods to source their steel inputs domestically.

Areas for Improvement

The establishment of Mexico as a global production hub will certainly not happen overnight. The COVID-19 pandemic has soured demand globally and eroded investor confidence. The ongoing animosity between Mexico’s government and private sector isn’t helping the situation. And the disrepair of Mexico’s infrastructure, particularly at border crossings, creates transport delays, which tend to scare away manufacturers with just-in-time supply chain models (although these could become increasingly scarce in the aftermath of the pandemic). This may be exacerbated by the government’s recent move to have the military take over administration of customs at border crossings. The initiative is designed to curb the trafficking of illegal goods but the absence of trained customs officials has the potential to create greater delays at the U.S.-Mexico border.

Of course, these obstacles are far from insurmountable. Moreover, the economic impact of the pandemic creates unprecedented incentive for Mexico’s policymakers to take the action required to capitalize on what may be a pivotal moment in the country’s economic future – and its relationship with key trading partners.

Rody Camacho holds extensive expertise in trade compliance, as well as import and export operations management and regulations in Mexico. He specializes in risk assessment and process improvements. In addition to Mexico, Rody has worked with clients in South America (Brazil and Argentina) on international transactions within their jurisdictional regulations.


6 views0 comments

Recent Posts

See All


bottom of page