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The Uncertainty of NAFTA

MES-The-Uncertainty-of-NAFTA

MES Inc. decision to expand its operations in Mexico was related to our largest North American clients’ strategic approach to invest in the country. We have started shipments to Mexico in 2011 and by the winter of the same year we were already warehousing and serving our clients out of Monterrey.  We have been consolidating our presence in Mexico ever since and continue to add staff. About 20% of our business comes today from Mexico.

MES Inc., like most of our clients in Mexico, is worried, not so much about the actual change in the provisions of NAFTA or by the potential withdrawal of the US, but by the uncertainty surrounding the issue. Because there is no precedent in the history of modern trade relationships where US withdrew from a trade agreement, nobody knows what to expect or the timeframe to expect it within. This is disrupting our clients’ strategy for 2017 and consequently the calendar for new product introductions and procurement.

However, our clients have made heavy capital intensive investments in Mexico. Regardless of the faith of NAFTA, it is unlikely that they will decide to abandon the country. The introduction of the mediatized 35% tariff across the board is unrealistic and unlikely. Prior to NAFTA, the US tariffs on imports from Mexico were 2.5% on automobiles, and a trade-weighted average of 3.1% for automotive parts. Mexican tariffs on U.S. and Canadian automotive products were 20% on automobiles and light trucks, and 10%-20% on auto parts. Any reintroduction of tariffs will lead to an increase in the price of the products which will be transferred to the consumer.

The trade and supply chains are very intertwined. Cars assembled in the US cross the Canada-US -Mexico borders half a dozen times as they are being assembled into the final vehicle. Since trade agreements are based on a reciprocity principle, retaliation from Mexico or Canada can be expected in the form of tariffs for US exported goods. The already high costs of labor in the US combined with an appreciation of the dollar this year, would spell disaster for the US manufacturers. Also, because Mexico was unable to keep up with the foreign investments, there is a severe deficit of manufacturing capacity upstream. Mexico based OEMs are and will be seeking Asian input for production.

In the light of the possible mutation of trade relationships with Mexico, just as our clients, we are hoping for the best but preparing for the worst.