Home Business-newBusiness Can Mexico leave the USMCA? 

Can Mexico leave the USMCA? 

by Yucatan Times
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Mexico can abandon the T-MEC if it does not suit its interests, but within an agreed period and with a minimum term to sustain the pact.

Upset, disjointed, and angry, AMLO moderated his threat by stating that Mexico would remain in the Trade Agreement with the United States and Canada (T-MEC). However, he hinted that if national sovereignty in energy matters is at risk, he would prefer not to access the U.S. market.

One of the closest precedents to López Obrador’s statement was made at the time by President Donald Trump. Then, because of what he considered an “unfair and unjust treaty” that was of little benefit to the U.S. economy, he proposed his country’s exit from the North American Free Trade Agreement (NAFTA), signed in 1994.

How viable is a possible exit of any of the three partners from the trade pact in the face of disputes of various kinds? Here are a few key factors.

According to the final provisions of the T-MEC, the treaty is valid for 16 years from the date it entered into force; in this case, the trade pact began on July 1, 2020.

In the sixth year of the entry into force of the T-MEC, a commission of the member countries will meet to review the operation of the agreement and, if necessary, make recommendations or adopt measures for its future implementation.

In this review, each party must notify in writing if it wishes to extend the agreement for another 16 years. Otherwise, if one of the countries decides not to continue with the trade pact, a review will be carried out every year until the current USMCA term expires.

The countries negotiated this validity and extension clause to keep the temporality of a trade agreement of this magnitude outside the politics of each country.

At the time, Donald Trump proposed the “sunrise clause,” which limited the term of the agreement to 5 years with the possibility of extending it for another cycle of the same duration. However, it was discarded by the negotiating committees.

Trump wanted the T-MEC to be terminated in 5 years, a sudden death every five years, which was unfeasible for companies and investments because no one would want to invest in 5 years and avoid decisions of that nature only for political reasons.

Will López Obrador announce the exit of the USMCA?

In recent weeks, there has been speculation that López Obrador will announce on September 16, when he will state his position regarding alleged violations of the Mexico-U.S.-Canada Trade Agreement. The United States and Canada have requested consultations regarding potential violations of the treaty. According to them, Mexico has failed to comply, favoring companies such as Pemex and CFE. López Obrador has responded: “Mexico was not going to give in on the issue of disputes, as it is a matter of sovereignty.”

What would happen if AMLO abruptly decided to leave

To begin with, it would mean that he agrees with the United States and Canada and that he indeed violated the treaty. Furthermore, he would confirm a violation; therefore, Mexico is subject to pay compensation that could implement through tariffs. If López Obrador received this ruling, his reputation would look even worse internationally. 

But what would Lopez Obrador be trying to do? He would be trying to be the one to control the narrative and not “the foreign powers that want to infringe on his autonomy and sovereignty.” There is a precedent: the cancellation of the new CDMX airport -NAIM. 

In terms of populism, Lopez Obrador’s electoral base would applaud the “defense of national sovereignty.” Mexico would respond if the U.S. and Canada imposed tariffs on Mexican exports.

In economic terms, in an almost immediate time, exports would not necessarily decrease significantly since there are contracts in force. Still, the increases would be paid by U.S. consumers, and exporters would reduce their profits. It should remember that in both cases, AMLO does not care because neither of them is part of his electoral base.

The immediate economic consequences would be capital outflows and a decrease in foreign direct investment. In a year, the aforementioned would begin to be felt, but since AMLO will be at the end of his administration, the political cost will be for whoever comes after him.

One thing is for sure: If there is a “Mexit,” we will feel it in our pockets, work, and consumption patterns.

For Times Media Mexico

The Yucatan Times

José E. Urioste

José E. Urioste is a Yucatecan businessman. A Research and Development expert, Business Intelligence professional with more than 25 years of experience. He is a member of several boards of directors. Over the past 20 years, he has collaborated in mass media, writing on business-related topics and as a radio host on political analysis. He is the author of 3 books.

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