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Friday, September 22 2017 @ 08:07 PM AST

Scotiabank: NAFTA revamped could be a positive for Mexico

There are a number of areas where we see NAFTA 2.0 as a potential positive for the Mexican economy, such as: 1) boosting efficiency and investment in the energy sector, 2) helping combat corruption & impunity—among the main obstacles to business in the country, 3) helping increase productivity in the Mexican economy by incorporating SMEs into regional supply chains and reducing informality, 4) improving access to financing for smaller firms. In addition, enhancing investor protection mechanisms, and including newly opened sectors (such as energy) into these protections should be positive for FDI flows into the country.

An area that would be positive for Mexico, but where we don’t see progress being made, is in using NAFTA to drive an overhaul of the country’s social security system to combat informality, and reduce Mexico’s “dual economy problem”. However, due to wide-apart views on social security between the three nations, and the fact that the topic is not even on the table, we don’t expect progress here. This, despite the fact that improving institutional frameworks and labour standards are stated priorities for all three countries.

There are a number of potential proposals that would cause Mexico to walk away from the table in our opinion, including: voluntary export restraints (VERs), proposals that set minimum US content requirements (as opposed to regional ones), as well as proposals that permit unilateral (rather than arbitrated) dispute resolution on trade issues.

If NAFTA finds its demise, one potential “surprise” could be a decision by Mexico to unilaterally cut WTO Most Favoured Nation (MFN) tariffs to increase the competitiveness of its exports (about 70%–80% of the country’s imports are intermediate goods).

Eduardo Suárez, VP, Latin America Economics, Scotiabank

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