Skilled Human Resources are Critical to the Growth of Mexican Maquiladoras.

In the last three decades, Mexico has evolved from what was a mostly centrally-controlled and public sector driven economy to one that today is among the world’s most free market and export driven.  During these thirty years, the Mexican maquiladoras have been a large part of making the country the fourth largest exporter of products in the world after Germany, Japan, and South Korea.  The country now has one of the most sophisticated productive sectors in Latin America.  Mexican maquiladoras are leading the way.

For most of their existence, the Mexican maquiladoras have functioned as manufacturing plants that have been occupied in the simple assembly of foreign-made and supplied inputs into items that were shipped to foreign markets.   Although there is much room to grow in sophistication, increasingly Mexico moves up in the value chain. Mexican maquiladoras now manufacture advanced items for many industries.  Included among them are the food industry, aerospace, plastics, mechatronics, automotive, and industrial robotics.

Because of the measurable growth and increasing complexity of the nation’s industry, Mexico is becoming seen globally as a producer of advanced products.  In 2015, in excess of fifteen billion dollars’ worth of advanced manufactured products had Mexico as their nation of origin.  Items produced that are in this category include optical components,  medical devices, advanced electronics, mechanical goods,  advanced manufactured items for the aerospace industry, and biotechnological items.

One of the most important concerns of the Mexican maquiladoras at present is adequately educating the Mexico’s workers to boosts its ability to meet the requirements of positions in emerging advanced industries.  A key way by which this is being accomplished is by building a tight linkage between private sector firms and institutions of higher learning.  Mexico is working diligently in this area.  Among the organizations working to strengthen business-academics connections are the Ministry of Finance and Public Credit (SCHP), the Secretariat of Public Education (SEP), the Ministry of Economy (SE), and the National Council of Science and Technology (Conacyt).  In Mexico, at present, there are sixty-three engineering degree programs being taught at Mexican technical institutes and universities. These academic programs have been designed to respond to the demands of the Mexican maquiladoras.  Furthermore, there is a Center for Advanced Technology (CIATEQ) in Mexico with its headquarters located in the state of Queretaro.  The Center for Advanced Technology is part of an organization of Centers focused on advanced manufacturing that, in addition to its headquarters, has a presence in 8 states in the Republic of Mexico.  CIATEQ’s services are divided into several specialty areas. Among them are:

• IT, Electronics and Control
• Mechanical systems
• Measurement systems
• Engineering and construction of plants
• Plastics and advanced materials
• Virtual Engineering and manufacturing

Additionally, CIATEQ offers technical services in the service areas of:

• Characterization of plastics and materials
• Destructive and non-destructive testing
• Metrology

Additionally, the Center for Advanced Technology also offers MAs and PhDs in advanced manufacturing.

One advanced industry that is steadily establishing a strong global presence in Mexico is aerospace. Just 13 years ago, there were only 100 companies from the US and Europe manufacturing in this sector.  As of now, however, that number has grown to a sizable 330 firms.   To continue to expand further into the future aerospace Mexican maquiladoras will require many trained laborers in areas such as metrology, casting, forging, CNC machining, heat treating, and other highly skilled positions.

Mexican maquiladoras in the automotive sector will also increasingly require well-trained workers in the future.  According to the executive director of the Mexican Association for the Automotive Industry (AMIA), Eduardo Solis, the country will be obliged to increase the knowledge and skill of its employees to address the demands of an industry which is continually innovating and bettering it produces. He urges that companies not only to think of Mexico as a source of inexpensive labor but also as a source of labor that has the capacity to confront the challenges that that are a part of a modern, productive sector.

A state in Mexico that has recently seen a significant rate of growth in advanced manufacturing recent years is Jalisco.  In the last five calendar years, the state has recorded an expansion in this area of more than 6%, which includes companies in robotics, metal mechanics automotive, aerospace, and software industries.  In terms of the cumulative growth of the economy, Jalisco ranks 4^th in Mexico behind Queretaro, Monterrey and Mexico City.  Francisco Castaneda, director of Jalisco’s robotics cluster,  asserts that it is of fundamental importance that workers are adequately trained and educated to take advantage of employment opportunities that are now emerging.   According to him, a deficiency of required skills will not only slow the growth of Jalisco’s economy but also that of the Mexican Republic as a whole.

Emerging Industries will Require a Trained Mexican Workforce

As Mexico Mexico’s industrial base continues to grow and develop, finding the appropriate individuals to fill increasingly demanding and numerous positions will become more of a challenge. This is particularly true in sectors that are gaining momentum in Mexico.  More specifically, medical device, energy, aerospace, and telecommunications companies will have to increase and improve their talent acquisition capabilities in order to access trained employees.  The country will have to make growing a workforce with the ability to capitalize on future job requirements and challenges the Mexican workforce a priority.   It is prognosticated that, in the coming years, the Mexico will be in need of approximately 500,000 trained workers.

According to Hays, a global talent acquisition form, among the posts that industries in new jobs in the Mexican workforce will be numerous in the following areas:

• Engineering plant managers
• HR generalists
• Sales managers/directors
• Quality managers
• Senior managers

Four growing industries: Energy, Telecommunications, Medical Devices, and Aerospace.

The provision of energy is one of the areas in Mexico that will grow at a healthy pace. The industry was opened to private investment in 2013, after mostly in government hands since 1930.   Deregulation resulted in the lifting of strict federal government power over the gas, electricity, and oil sectors. Recently, these activities have become the recipients of both private foreign direct and private investment.  There is a hope that the opening of the energy industry to outside investment will attract the trained Mexican workforce required to fully exploit the country’s deep-water and shale oil deposits.

Another Mexican industry that is thriving is telecommunications.  This is, in great part, because in 2014 the government of Mexico undertook significant reforms in the sector. Over the course of that year, the Federal Telecommunications Institute (IFT) took measures to stimulate and create competition in what was an industry characterized by monopoly.  Due to these reforms, in 2016 the IFT reported that telecommunications industry enjoyed growth of 8.5%.  This rate of expansion was the highest among all sectors of the of Mexico’s economy. Importantly, the telecom sector growth was more than three times higher than that of the Mexican economy in its entirety.  The Mexican gross domestic product (GDP) grew at a rate of two and one-half percent in 2016.

More jobs for the Mexican workforce in the Mexican telecommunications industry will materialize for as a result of massive investment that has recently been made in the sector. According to the Federal Telecommunications Institute in excess of thirteen billion US dollars has poured into the industry over the last three years.  Government sources project that the sector will gain another $US 7 billion to further build the Mexico’s telecom network.  This growth will require a trained  Mexican workforce with the skills that the modern telecommunication industry demands.

In addition to the telecommunications and energy industries in Mexico, another sector of future growth will take place in the medical device manufacturing industry.  Today, the country is host to some of the sector’s most well-known names.  Among the firms with a strong presence in Mexico are  Becton Dickinson,  Johnson & Johnson, Cardinal Healthcare, Stryker,  Tyco, Siemens, GE, Medtronic, Boston Scientific, Kimberly Clark and others. Mexico has this impressive amount of activity in the medical device sector due to the fact that, over the years, its workforce has become increasingly better trained and has become increasingly adept at producing these sophisticated products.  A combination of factors such as its workforce and its preferential access to the world’s largest market will be what propels the industry’s future growth. According to Mexico’s National Institute of Statistics and Geography (INEGI), the value of Mexican production of medical devices is projected to be over US$ 15 billion by 2020.  As is the case with both the telecommunication industry and energy, healthy growth in the medical devices industry will require greater numbers of the Mexican workforce.

Aerospace is the fourth of the country’s industries to have benefited from a high rate of growth over the last decade.  Although the aerospace industry is relatively new to Mexico, it has impressive clusters of production in places like Baja California, the western state of Sonora, and the state of Queretaro, in recent years, the Mexican government has initiated a number programs to create aerospace employment opportunities for the Mexican workforce.  These include workforce training programs, business incentives, and the founding of universities and technical institutes to support the industry’s growth.  The aerospace industry is an excellent example of foreign investment attraction, growth, and job creation.  Beyond employing 63,000 in 2016, the aerospace industry in Mexico logged an average yearly growth in exports of 20% over the years 2013-2015.  As one of the industries in Mexico that is experiencing significant levels of growth, the aerospace industry will increasingly more trained individuals in the Mexican workforce.

We recommend reviewing our Blog at Tecma.com for continuing information on this subject.

The NAFTA was implemented in 1994

While much of the recent discussions examining the positives and negatives related to NAFTA focus on the United States, it is also important to examine the effects of the North American Free Trade Agreement on Mexico.

The NAFTA came online in 1994 as a result of an intensive period of negotiations between the three signatory nations to the accord (Mexico, United States, and Canada).   During the discussions that were engaged in before the time of the treaty’s implementation, the Mexico’s citizenry was told that the effects of the North American Free Trade Agreement on Mexico would include greater economic growth and increased prosperity, and, thus, more opportunities for the nation’s working class.  Now, 23 years since the signing of the NAFTA into law by the three partners, results, from the perspective of Mexico, have been mixed.

The central purpose of the NAFTA was to eliminate all tariffs on trade conducted between the US, Mexico, and Canada.  After a ten-year period, all such tariffs were removed from traded goods.  From a broad-based point of view, considering the quantity of trade between the US, Canada, and Mexico, NAFTA has been successful.  The commercial interaction between the North American partners has increased by 400% since 1994. From the Mexican standpoint, the agreement created one of the world’s most open economies.  Prior to the agreement is was among the world’s most closed.  With the opening of the Mexican economy came both the positive and negative.

The Effects of the North American Free Trade Agreement on Mexico from the Point of View of the Automotive Industry

Seen from a manufacturing perspective the effects of the NAFTA on Mexico can, for the most part, be viewed in a positive light.  After the ratification of the treaty, many foreign firms in the manufacturing sector initiated operations within the nation’s borders.  As a consequence of this, manufactured goods for export, as a percentage of the Mexico’s GDP, increased from 8.56 % in 1993 to 36.95% in 2013.  Although the North American Free Trade Agreement is cited as the cause for the loss of 44,000 domestic manufacturing jobs in the United States since its beginnings, the nation has added in excess of 500,000+ jobs due to the influx of significant foreign capital.   Despite the gain in manufacturing jobs, salaries of direct labor factory workers have been almost the same since 1994, although upper and middle management posts which were once filled mostly by foreigners are now held by Mexican citizens.  The wages of this type of worker are almost the same for comparable jobs in the United States.  In 2016, the motor vehicle sector accounted for 3.1& of Mexico’s GDP.

Although growth of the macroeconomy has run at only a mediocre t average of 2% annual growth since the implementation of the NAFTA, one area that clearly gained in size and importance since 1994 is the motor vehicle industry.  Mexico has enjoyed an inflow of large foreign investments by global automotive producers and has taken the place of being the fourth largest exporter of automobiles in the world.  Only Germany, South Korea, and Japan send more units to external consumers.

The Effects of the North American Free Trade Agreement on Mexico: A View from the Agricultural Sector

Although, on the balance, NAFTA has been a gain for the export productive sector of the economy, the effect of North American Free Trade Agreement on Mexico has been less than positive in other respects.  The most evident example of this can be found in the condition of the rural portion of the nation’s economy.  As levies were reduced and eliminated on products grown on Mexican farms, the United States was able to send an increasingly larger portion of its agricultural goods across the border to its neighbor to the south.  It is estimated that almost two million small farmers left the countryside as a result.  Mexican growers of maize, in particular, were negatively affected by lower-priced imports from the US.  While most of these rural agricultural workers were forced to join the non-formal sector of Mexico’s economy, a large number made the decision to migrate to the United States in search of work on American farms.   In addition to this, because the details of the North American Free Trade Agreement made it easier to sell land, at present sizable multinational firms such as Lala, Sigma, Maseca, Bimbo, Cargill, Nestle, Monsanto, Bachoco, PilgrimsPride, Tyson and others control the bulk of Mexico’s cultivatable lands.  This concentration of ownership by large farming interests also played a significant role in the mass departure of farmers from the rural countryside.

In general terms, the average Mexican believes the NAFTA has complied with the promises made by those leaders that ratified the accord more than two decades ago.  As a member of the North American trading bloc, the economy of Mexico in its entirety has not expanded at the rate that was anticipated.  Although certain manufacturing industries such as the auto sector, have made significant gains since the signing NAFTA, others, such as Mexican agriculture, have been negatively impacted by inexpensive imported products sent by the US.  While, in general terms, it might be possible to say that, Mexico’s industrial North has benefited from the NAFTA, it’s rural south has been left behind.

Background of the Protection of Intellectual Property in Mexico

The first efforts made at the protection of intellectual property in Mexico (IP) began in 1832 with the “Law of Property Rights for Inventors”.  During that period, the mandate was put into effect as a measure to safeguard certain kinds of ideas and innovations.  It was implemented as a derivative of Spanish law.  In 1889, it was superseded was by the “Law of Manufacturing Trademarks.”  This statue was patterned after French codes for the protection of intellectual property in Mexico and was enacted while Porfirio Diaz served as Mexico’s president.

In the  20^th  century, the protection of intellectual property in Mexico was heavily impacted by transnational accords and foreign laws such as the Brussels Review (1900), the Washington Review (1911), the Hague Review (1925), and the Convention of Paris (1934).  In addition to this, the Mexican Law of Industrial Property of 1943 was heavily affected by statutes implemented by France in order to protect intellectual property within its borders. This code was updated on several occasions and was utilized as the basis for the “Law of Inventions and Trademarks”, which the Mexican government implemented in 1976. The purpose of the law was to protect intellectual property in Mexico.  It was enforced until 1991 when the “New Law of Industrial Property” was codified.

Mexico’s “New Law of Industrial Property,” or as it is called in Spanish “Ley de Propiedad Industrial,” was updated in 1994 so that it conformed with North American Free Trade Agreement (NAFTA) standards.  Under the reworked law, “the author or the person who creates an invention, utility model or an industrial design has the right to exclusively exploit it for his benefit himself or by another duly authorized individual.”  In accord with the NAFTA agreements on the subject of the protection of intellectual property in Mexico, the United States, and Canada if one of the signatory countries to the NAFTA is unable to give the minimum guarantees to an investor, that person or group can take their case to an arbitration court.  “The arbitration court will defend the interests of the investor, without taking into account the national legislation of the defendant country.”

How Intellectual Property in Mexico is Classified

In Mexico, IP is classified into two categories: Industrial Property (Inventions and registrations), and copyright (literary, musical, artistic and photographic works, among others).  Mexico’s Ministry of Economy, through the country’s Institute of Industrial Property (IMPI) has the jurisdiction to administer systems for the protection of intellectual property in Mexico at the national level.

The items protected by the IMPI are:

• Industrial Designs such as Industrial Model, Industrial Drawing, Brand, Commercial Notice, Commercial Name and Denomination of Origin;
• Patent, which is the product or process that proves to be new at the transnational level;
• Utility model, which are those changes to existing inventions and innovations, tools and machinery to improve their performance.

The safeguarding of industrial property is executed in order to prevent any illegal usage of patents, utility models, and industrial designs.  Therefore, the Institute (IMPI) is governed by three characteristics of industrial property rights:

• Exclusivity, where the owner is the only one authorized to exploit commercially what he has protected;
• Temporality, which is the stipulated time during which the protected can be exploited commercially.
• Territoriality, which are the rights granted within the national territory and is independent of those granted in other countries.

At present, the governing rules for the protection of intellectual property in Mexico are under close examination.  As the renegotiation of the NAFTA continues over the next months, representatives of the Mexico, the US, and Canada are in agreement that intellectual property rights need to be better protected in order to preserve the North America’s global competitiveness.  The negotiators for Mexico, Canada, and the United States are certain of the fact that many of the North American Free Trade Agreement’s intellectual property provisions are dated or are inadequately enforced.   It is believed that the misuse of patent rights and intellectual property theft costs American consumers and businesses approximately $300 billion each year.

Protection of intellectual property in Mexico is of special importance to the US economy.  IP-driven manufacturing supports the positions of approximately 1 in 5 American workers, while the value that such industry adds to the economy of the United States is a hefty six trillion dollars of its GDP.

In Mexico, the governmental organ with the legal mandate to enforce the laws that ensure the protection of intellectual property in Mexico is the “Instituto Mexicano de Propriedad Industrial,” or the Mexican Institute of Industrial Property (IMPI).  The IMPI was formed by government action in 1993 to provide professional and technical support to the country’s Economics Ministry. It is charged with:

• Granting intellectual property protection in Mexico using patents, utility model registrations, and industrial designs;
• Promoting international cooperation through the exchange of information with institutions responsible for protecting intellectual properties in other countries;
• Promoting invention, innovation and the transfer of technologies in order to make the Mexican economy competitive on a global scale;
• Preventing and combat acts that violate intellectual property rights and promote unfair competition.

Renegotiating NAFTA with Elections Looming May Prove to be a Difficult Task

As 2017 comes to an end, there is much speculation as to how the Renegotiating NAFTA with elections taking will affect Mexico and the United States during the coming year.  Politicians and international commerce experts alike both agree that it will very difficult to conduct effective talks for renegotiating the NAFTA with election season in full gear.Antonio Garza an attorney of the law firm White and Case in Mexico City, believes it is not likely that the Canadian, Mexican and US negotiators will reach an agreement on a renegotiated version of the North American Free Trade Agreement in advance of the upcoming election season.  Luis Videgaray, Mexico’s Secretary of Foreign Relations, is also of the opinion that it will difficult at best to come up with a solid and well-made trade agreement should negotiations carry over into the political seasons of the Mexico and the US.  The mid-terms in the US will take place next year during the month of November, while the Mexican presidential election will take place prior to that on July 1.

Manuel Lopez Obrador Speaks

Populist, nationalist, left-wing political candidate, leader of the National Regeneration (MORENA) party, former mayor of Mexico City, and current leader for the election to the Mexican presidency Manuel Lopez Obrador, or AMLO, as he is also known, believes that NAFTA negotiations and elections cannot effectively take place at the same time.  He is of the opinion that, under these circumstances, to produce an outcome that will be beneficial for each of the three nations  renegotiating NAFTA with elections in process will not be a possibility.  He also believes that, due to the unpopularity and lack of mandate of the current administration led by Enrique Pena Nieto of Mexico’s PRI party, any accord reached before election season begins in his country will have been negotiated from a position of weakness rather than of strength. Although he was against the agreement in the past, Lopez Obrador has stated recently that he is now in favor of the NAFTA, but would like to renegotiate it with his own team should he be the victor in July’s presidential race.  The chapter on agriculture is the one in which he feels that changes must be made. The interest of many of Mexico’s farmers were adversely affected by the trade deal.

Additionally, members of AMLO’s MORENA, or National Regeneration party would like to see the NAFTA renegotiation addressed in a popular referendum.  Norma Rocio Nahle Garcia, a MORENA party legislator, believes that the Mexican economy is now “too open”, and that the citizenry’s opinion should be expressed through a popular vote. The negotiators from the Mexico, the US and Canada also speculate that NAFTA renegotiation talks could become a “political punching” bag should they carry over into the July and November elections.  Although US officials would like to see to it that NAFTA renegotiations and elections do not come into conflict, they also believe that it is highly improbable that anything concrete will be accomplished by the end of the current year.  In public they have expressed their desire that a renegotiated pact can be firmed up by the end of the first quarter of 2018.

Speed May be of the Essence

During the November round of negotiations and during talks to be held during the first three months of the coming year, the administration of Donald J. Trump will be in a hurry to make measurable progress.   In comments made in public, members of Trump’s negotiating team “have made it abundantly clear that they would rather deal with NAFTA before Lopez Obrador starts delivering his nationalist and populist message every day on the campaign stump.” Additionally, any negotiations post-Mexican election would also take place during the five month lame-duck period in Mexico prior to the newly elected government taking office This would make the process even more difficult to make.  Furthermore, the US mid-term elections, which would take place during the aforementioned lame-duck period, would result in making the process even more difficult to navigate.

Those that are experts in international trade generally believe that, no matter what the time frame is, the North American Free Trade Agreement (NAFTA) will be successfully renegotiated.   Despite the fact Trump has heavily criticized the NAFTA and has blamed it for a sixty-two billion dollar commercial deficit with Mexico, the agreement has been the impetus responsible for the tripling of trade between the NAFTA countries since coming online in the early 1990s.   Most of the United States’ trade deficit with its southern neighbor resides in the automotive industry.  The United States’ farm economy has a trade surplus with its NAFTA partner.

We are confident that the Trump administration will persist in renegotiating the NAFTA with elections looking, even though regular threats to pull out of the treaty have been expressed.  Although Trump points the finger at the North American Free Trade Agreement for the shuttering of production facilities located throughout the United States, he also concedes the fact that the commercial accord has been good for the nation’s farmers.  These rural voters supported his campaign for the post, and now support his presidency.

In all likelihood, a deal will be made that specifies updated rules of origin requirements for vehicles made in the US, Canada and Mexico.   It is the belief of the Trump administration the current figure of 62.5% is not high enough.  The US negotiating team is pushing for eighty-five percent.  At the end of renegotiations, however, it is probable that the negotiators from the three nations will split the difference and implement rules of origin for the automotive sector that are somewhere in the 70% – 75% range.

Renegotiating NAFTA with Elections Around the Corner

Because NAFTA renegotiating NAFTA with elections looming is a difficult proposition,  we believe that the talks will be totally wrapped up at some time during 2019.  Although there will be a degree of uncertainty during the period prior to complete renegotiation, companies will still make the choice to site manufacturing facilities in Mexico due to the large differential in the wages between American and Mexican workers.

Mexican vehicle exports and the well-developed industry that generates them are central to the country’s economy.

At the end of 2015, the Mexican automotive industry was the source of almost 900,000 salaried positions.  Trucks and vehicles were manufactured by ten percent of these employees, while the remaining workers produced the remainder in auto parts.  Mexico has assumed the position of the seventh largest producer of vehicles in North America, and is, by far, Latin America’s leading producer of cars and trucks. In terms of export sales, Mexico is the world’s fourth-largest seller of vehicles.  Germany, Japan, and South Korea export more.  Seventy percent of Mexican vehicle exports are absorbed by buyers in the United States.  This makes the country the 2nd largest supplier of cars and trucks to the US market.  Only Canada sells the US more.

Even though the US has made some major announcements lately as to the growth of the automotive industry inside of its borders, Mexico has won nine out of twelve new automotive sector projects in the industry that have been announced since 2011.

Automotive industry manufacturers in Mexico exported a total value of US $55 billion in motor vehicles during 2016, This is a number that accounted for fifteen percent of the country’s overseas sales.  Since the signing of the NAFTA in 1996, Mexican vehicle export sales have multiplied eleven times, and have grown by a median of eleven percent annually. In 2016, Mexico exported 2.7 million cars in total to the Brazil, Canada, Europe, Colombia, Argentina, Asia, Chile, and the United States.

The top markets for Mexican automotive exports to the United States are comprised of eight entities.  These include: Texas, California, Alaska, Arizona, Connecticut Utah, New Mexico, and Rhode Island. The southernmost NAFTA partner is also the second largest exporter of auto parts and motor vehicles to twenty-six other jurisdictions in the US.

In 2016, the principal producers of Mexican vehicle exports were: Volkswagen, Ford Motor, General Motors, Nissan, and Fiat Chrysler.

During the first six months of this year Mexico produced 1.9 million vehicles, 1.5 of which were exported.

Higher Prices for Consumers

Regrettably, in the current North American Free Trade Agreement renegotiation environment, Mexico’s auto exports are at risk. The price of Mexican vehicle exports may be affected by the demands being made by the United States’ parties to the talks.   Because most of Mexico’s 2016 US $52 billion trade surplus with the United States is made up of Mexican vehicle exports, the Trump administration is seeking to alter the guidelines under which the North American auto manufacturers operate.  At present, the rules of origin for the automotive industry in North America specify that to be considered as being “originating,” 62.5% of the value of a car or truck must be manufactured of parts made in the US, Canada and Mexico.  The Trump administration is looking to have this number raised to 85%.  The administration of Donald J. Trump believes that, in addition to lowering the trade deficit, the US will add much needed automotive industry jobs to its economy.  However, it is just about for certain that raising the percentage threshold for rules of origin will result in elevated manufacturing costs.  This will result in a higher price for buyers, as well as will make Mexican vehicle exports less competitive vis a vis competition from the Far East.

The parties to the NAFTA have announced that talks will continue into next year, given the fact that no agreement has been reached at the close of the recently ended fourth round of talks.

It is important to note that twenty percent of cars produced in the NAFTA zone are assembled in Mexico. Pickup trucks, like the Chevrolet Silverado and some versions of Fiat Chrysler’s Ram and are two of the largest selling Mexican vehicle exports to the US. In this regard, the possibility of raising the US import tariff from zero to thirty-five translates into a significant risk to sales in the United States’ domestic market. The thirty-five percent duty figure is that which has been established by the World Trade Organization as a part of its Most Favored Nation (MFN) program.

The proposed United States requirement to raise the North American Free Trade Agreement (NAFTA) zone content for trucks, cars and accompanying engines to eighty-five percent from the current 62.5 percent, represents a serious challenge for Mexico. The price of cars and trucks would inevitably increase because Mexico does not yet possess the domestic capability or tools to manufacturer many types of auto parts in country. Furthermore, in the mid-term, the negative effect of raised tariffs and reduced exports would limit the number of new foreign investments and job generation in the automotive sector.

Mexican vehicle exports will be a topic of Mexico Now’s Automotive Summit

Mexican vehicle exports, as well as other automotive industry topics, will be the focus of a yearly event this coming December 6-7, 2017 in Leon, Guanajuato.  The Mexico Auto Industry Summit, organized by Mexico Now Magazine, will be held at the Poliforum in that city.

Attendees at the event will:

• Objectively analyze business conditions of Mexico’s auto and auto parts industries;
• Interact with Mexico’s OEM representatives and auto part producers’ plant managers;
• Develop an itemized pro-forma of a potential near-shore manufacturing project in Mexico;
• Obtain detailed and privileged information on Mexico’s automotive industry;
• Interact with Mexico’s OEM representatives and auto part producers’ plant managers;
• Hear from industry experts about the opportunities to participate in the Mexican automotive industry panel discussions.

Additionally, Mexico Now’s Automotive Summit will provide:

• An examination of the business dynamics of the country’s main OEMs and auto parts manufacturers, as well as a demand forecast;
• Manufacturing options, structures, and detailed costs;
• A look at Mexican automotive exports markets;
• A review of labor productivity and competitiveness benchmarks;
• Current and future regional auto clusters;
• A comparison of Mexico’s automotive industry with that of those found in the US & China;
• Legal and tax aspects of the auto industry in Mexico.

NAFTA Negotiations will Continue into Next Year

At the end of the fourth round of negotiations, the three countries involved in the NAFTA negotiations talks released a joint statement that their efforts to modernize the accord will in all likelihood extend into the first four months of 2018.  The goal that they have set for themselves is to finish their deliberation prior to the Mexican presidential election, which will occur at the beginning of July.

NAFTA Negotiations and the Auto Industry

Despite the fact that there are some complicated issues that are now being examined by trade officials from the three countries, the US is not moving to exit from the NAFTA.  Among the biggest issues that confront Mexico, the US, and Canada deals with the rules of origin for the three countries’ automotive industry.  At present, to be categorized as “originating” in the NAFTA region 62.5% of the total value of a vehicle must be made up of components manufactured in the three countries.  In the NAFTA negotiations, the lead US negotiator, Robert Lighthizer, has communicated that the Donald Trump’s administration would like this number to increase to 85%.  Some NAFTA watchers, however, believe that upping content requirements be harmful to the industry.  Today, forty-percent of the value of vehicles produced within the NAFTA bloc is in United States supplied content and the United States is aiming for fifty percent.

A COLLAPSE OF THE NAFTA TRADE TALKS WOULD RESULT IN JOB LOSS

The American Automotive Policy Council, it has been concluded in a recent study that “The Trump administration’s push to change the automobile rules in North America will lead job loss and higher costs for manufacturers.”  In the opinion of experts at the Motor Equipment Manufacturers Association, jacked up costs resulting from new tariffs will “lower demand for costly technology and safety features.”  Changing the NAFTA rules of origin for the automotive industry, according to the Boston Consulting Group could have a negative effect on up to twenty-four thousand jobs.  Also, Impactecon, another American research firm, has concluded studies that predict even greater job losses if the NAFTA accord is not successfully renegotiated.  According to the Impactecon, “the United States would lose 256,000 net jobs,” and the “most severe impact” would be on lower rungs of employment.  Additionally, “Mexico would lose 953,000 net jobs, and Canada would lose 120,000.”  Since the beginning of the NAFTA, however, the automobile has benefited from efficiencies through the building of intricate international supply chains.  Because of this, most experts on the subject of the NAFTA negotiations talks believe that the US, Canada, and Mexico will resolve their disagreements and that the pact will remain in place.

NAFTA Negotiations and Agribusiness

American farmers are watching the NAFTA negotiations talks with great interest.  This is the case because Canada and Mexico are two of the largest consumers of the United States’ agricultural products.  A case in point is that Mexico is the number one foreign buyer of US produced soybeans and corn.  Prior to the dawn of the NAFTA, the Mexican market was completely closed to American growers of the former.

The NAFTA has broadened access to the Canadian and Mexican markets for other farm products, as well has resulted in a boost of the export of beef produced in the US to Mexico.  Overall, the NAFTA has produced good results for the US agricultural sector.  The US ran a healthy twenty-billion-dollar trade surplus in agricultural products with Mexico in 2016.    If the NAFTA agreement is nullified many key commodities would see trade limiting tariffs imposed on their import into Mexico.  Among these are pork carcasses would face a duty of twenty percent, and smoked pork bellies would see a duty of ten percent levied.  Also, wheat would have 15 percent tariff charged, beef would fall into a twenty-five percent rate, and potatoes and chicken and both would be charged a hefty seventy-five percent duty.

Farmers are worried that a demise of the NAFTA trade talks would do damage as regards to the profitable new markets for their exports that the North American Free Trade Agreement has produced.

After The NAFTA?

Negotiators from Mexico, the United States and Canada assert that they hope that the accord will be “mended” and not broken.  Since the first year of the NAFTA in 1004, United States trade with Mexico and Canada has grown by a factor of three.  Commerce between the United States’ and its two North American trading partners has multiplied at a greater pace than trade with the remainder of the world.  At the conclusion of the fourth round of NAFTA negotiations, however, trade officials attest that there are “significant conceptual gaps” in the bargaining strategies of each country.  Given the amount of uncertainty created by the continuing negotiations, interested parties are conjecturing what a post-North American Free Trade Agreement world would look like.

A post-NAFTA period would be characterized by an increase in the cost of goods purchased from Mexico for consumers.  The median tariff rate for imports into the United States will be 2.7%, while the average applicable rate for Mexico of duty for goods entering Mexico will average 4.6% with some products going as high as 35%.  Items entering into Canadian territory would be hit with an average 2.4 percent import tax.   If the free trade talks fail, duties will be those that have been determined by the World Trade Organization’s (WTO) Most Favored Nation (MFN) rules.  Despite the fact that these taxes may appear to be modest, the effect that they would have on the supply chains in some industries, most notably automotive, would be significant.

Although the Trump administration has spoken negatively about the NAFTA since before the inauguration, it not likely that the agreement will be cancelled.   A full break from the trade accord would result in adverse consequences in many sectors, most notably in the automotive and agricultural.

Officials in Canada and Mexico view the Trump’s NAFTA rhetoric more as a tactic for negotiation and effort to gain leverage than a serious move to leave a trade scheme that has broad support in agricultural states and other parts of Trump’s base of voters.

For a continuing series of information on NAFTA subjects the reader is invited to review the blog at our parent company, http://tecma.com.

The Mexican Federal Labor Law (Ley Federal de Trabajo) and the Mexican Social Security Law (Ley de Seguro Social) provide the legal framework that governs Mexican labor rules in accord with Article 123 of the Republic of Mexico’s Constitution.

Mexican Labor Rules and Mexico’s Federal Labor Law

Mexican labor rules are governed by its Federal Labor Law.  The law spells out the rules and regulations related to the role and function of labor courts, workers’ unions, and conditions of employment of individuals. The rules and regulations of the law also contain a table of regional minimum wages that are paid for different types of employment that is performed in the country’s various economic regions.

“At will” employment does not exist in Mexico.  In order to terminate a worker, the company for which an individual is employed must have “just cause” for doing so.

Among the causes that are deemed “just” according to Mexican labor rules are:

• Depletion of the resource in an extractive industry;
• Company bankruptcy;
• Worker mental or physical disability;
• Mutual consent between company officials and worker;
• Death of the worker or the employer;
• Completion of contractually defined work.

The right to have a case heard in labor court exists for workers that believe that they have been let go without “just cause.”   As a result of labor court proceedings an individual may be resume work at his or her job or may receive a financial award.

Also, Mexico’s Federal Labor Law defines other features that are not present in US labor law.  These include a variety of issues having to do with:

• Vacation premiums;
• Severance pay;
• Profit sharing;

It is specified that, according to Labor Relations in Mexico, work contracts be in a written format, and are made between employers in Mexico and collectives (unions) and/or individual workers.   The four types of labor contracts in Mexico include:

• Indefinite-term contracts – Indefinite term agreements are the most common type of contracts in Mexico. They must be implemented when an individual is going to work for an employer for a period of more than 180 days.  These contracts can be preceded by a month-long training contract.  Unless otherwise stated it is presumed that an employee that works for a month for an employer is presumed to be a permanent employee.  It is also important to remember that the training period agreement can be extended for up to 180 days.
• Seasonal employment -This type of contract is used in situations in which work is discontinuous, or when the required services are for a specifically defined period and duration.
• Training/trial period contracts -This class of agreement is used when contracting a worker for an initial training period. Under such an agreement, a worker gives his or her consent to be given an opportunity to acquire the skills that would lead to subsequent full-time employment.  Under Mexican labor relations, training contracts can last up to a period of thirty days.
• Measurable contracts –This type of contract is used to govern labor relations in Mexico for individuals that a hired for a specific period, or who are hired to deliver certain finite services.

Mexican labor rules  also call for one day of rest weekly be provided to workers.  Typically, this day is Sunday.  If a laborer works on Sunday, however, he or she will receive a bonus of twenty-five percent of the day’s customary salary.  In Mexico, the work week is forty-eight hours, but employees are paid for fifty-six.  This includes remuneration for unworked hours on Sunday.

Mexican labor rules as spelled out in the Ley Federal de Trabajo include provisions related to employee vacations.  Under the law, each worker is entitled to:

• A bonus of twenty-five percent of weekly salary;
• Six days of paid vacation after one year of work;
• An additional two days annually for every year of service until the end of the workers fourth year with the employer;
• Two days of paid vacation for every additional five years with a company.

Companies are also required to pay Christmas bonuses to their staff, under the rules that are found in labor relations in Mexico.  Additional, “special” bonuses are also paid.  Among them are extra pay for productivity, punctuality and perfect attendance.

Mexican Labor Rules and Mexican Social Security Law

The Social Security Law, or Ley de Seguro Social, also applies to Mexican labor relations.   IMMS, Mexico’s Social Security Institute is the largest government social security organization in Latin America.  IMSS was founded in 1943, and is split into five units that deliver services and benefits to Mexican workers.  Among them are benefits related to:

• disability and life insurance;
• retirement;
• unemployment;
• employment related risk;
• illness and maternity.

For additional information on labor relations and such legal issues in Mexico the reader is encouraged to view our blog at http://tecma.com and review Tecma’s Shelter Services that discuss specifics of how companies foreign to Mexico are operating factories successfully in Mexico.

One of the top priorities of the Trump administration regarding the negotiation of an updated North American Free Trade Agreement between the United States, Canada, and Mexico concerns the formulation of more restrictive North American Free Trade Agreement rules of origin.

NORTH AMERICAN FREE TRADE AGREEMENT RULES OF ORIGIN: WHAT ARE THEY?

“North American Free Trade Agreement rules of origin are guidelines that delineate the regional value share and/or transformation that occur to assure that the items that are imported from Mexico and Canada are actually are products of the countries that signatories to the treaty.

THE IMPORTANCE OF THE NAFTA RULES OF ORIGIN

Although the current position of the US government is that the NAFTA rules of origin require a renegotiation and tightening in order to restrict duty-free benefits in trade to commerce between the three nations, some argue, however, that this change will inevitably result in higher costs for producers and an inflation of product prices for consumers. They assert that, to the contrary, a relaxing the provisions of the treaty that govern content would promote greater global economic efficiencies, and would have the opposite effect.  Others contend that a stricter imposition of the rules “transfers protection of the final product onto the manufactured inputs that are used to produce it.” They argue that tightening of the North American Free Trade Agreement rules of origin would be to exercise protectionism.  Furthermore, stricter rules of origin are often enacted to shield some industries and result in economic and product distortions.

Presently, the rules of origin are defined out on a product-specific basis in the more than 300 pages of Chapter 401 of the NAFTA.  Trade professionals contend that they are voluminous and complicated.  They also believe that a positive reform and retooling of the North American Free Trade Agreement rules of origin should create a single, “lower regional value content threshold that can be applied uniformly across products”.  This would have the effect of lowering costs for consumers and producers of items imported and exported in the NAFTA region, and would also reduce costs associated with the administration that are required to document origin.

It is important that the NAFTA rules of origin that are currently in place are the product of negotiations that took place in the early 1990s, and, according to US Secretary of Commerce, Wilbur Ross, need tightening.  He asserts that this is so “because there are holes in them by which countries that are not a party to the agreement benefit.”  He also explained that the “loose” NAFTA Rules of Origin have had the effect of causing job loss in the US automotive sector.

WILL MORE INVESTMENT IN MEXICO BE THE RESULT OF STRICTER NAFTA RULES OF ORIGIN?

In Mexico, there are those, including Francisco de Rosenzweig, of the law firm White & Case, that believe that tighter rules of origin for the automotive industry will result in the migration of more of the supply chain to Mexico. Auto suppliers that establish new facilities south of the border will the beneficiaries of both duty-free treatment of their products within the North American Free Trade Agreement region, as well as lower costs of labor.

The NAFTA rules of origin are critical to the functioning of the NAFTA as negotiated by the three parties to the agreement.  They have been put into place to make sure that items traded on a duty-free basis within the block of are products of the United States, Canada, and Mexico.   The position taken by the United States as articulated by Secretary of Commerce, Wilbur Ross, is that rules should be made stricter.  He argues that doing so will limit the ability of manufacturers that are foreign to the NAFTA zone to benefit from the treaty.  They also opine that a tighter set of origin rules will protect US jobs and domestic automotive industry investment.

THE AUTOMOTIVE INDUSTRY AND THE NAFTA RULES OF ORIGIN

The most visible area in which the United States negotiators wish to address the issue of tightening the NAFTA rules of origin is the automotive sector.  Currently, it is mandated that, in order to be deemed a North America originating product, sixty-two and a half percent of a vehicle’s value must be the result of NAFTA country inputs. According to a United States Department of Commerce analysis, since the early days of the NAFTA in 1995, automotive value-added content from non-NAFTA countries has increased from 13.2% to 29.5%.  “United States Secretary of Commerce, Wilbur Ross, has frequently stated that the NAFTA rules of origin are a “back door” for Chinese auto parts to enter the United States through Mexico and Canada and that the trade pact’s benefits need to be enjoyed only by its members.”

While officials such as the United States Secretary of Commerce see the NAFTA rules as they are defined at present as a negative, others point to the recent growth in the country’s automotive industry as proof that they should be kept intact as they are.  Statistics demonstrate that in 2016, 1000 more vehicles were manufactured in the United States than were produced in the year preceding the implementation of the North American Free Trade Agreement.  Also, since the beginning of the North American Free Trade Agreement, the US has doubled its auto industry exports, while construction of new plants has taken place in five separate states.  Additionally, plant expansions have recently taken place in Indiana, Kansas, Kentucky, Michigan, Missouri, and Ohio.  Furthermore, within the last 30 days, both Mazda and Toyota have announced that they will construct a US assembly plant, while Honda, Ford, BMW, Mercedes-Benz, and Volvo have announced US expansions.  Also, over the course of the past year, GM has invested $US 3 million in domestic production centers, while Fiat-Chrysler has recently made commitments for US $9.6 billion in future investments.  Some industry watchers believe that a change in the North American Free Trade Agreement rules of origin to a percentage of higher than the current 62.5% for the automotive industry could prove to be deleterious to future further investment and job creation in the nation’s industry.

Opponents to the imposition of new and tighter NAFTA rules of origin of the belief that making content requirements more onerous will result in higher costs of production of goods.  These costs will ultimately be passed down to consumers.  Global economic distortions and inefficiencies will be the result.