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NEWS AND MARKETS wall. Trump has also repeatedly threatened to impose a sizeable 20 % or even more tax on Mexican imports, partly to pay for the border wall, but also as a way to compensate for the trade deficit that the US has been running with its southern neighbor for several years. Perhaps the most potentially damaging proposal by Trump so far, is to rip up the numerous multi-lateral trade agreements. He has already exited from the Trans-Pacific Partnership, and has also expressed to end the Nafta, even while renegotiations are under way. The Trump administration has its focus on reducing the trade deficit, tightening criteria for rules-of-origin, reforming the dispute resolution mechanism, and updating the pact to include digital services and intellectual property. Even as negotiations are underway, uncertainty about where the talks are headed is extremely high, as the ‘twitter’ President announced via his tweets, that United States would impose 25 % tariffs on imported steel and 10 % tariffs on aluminum. This protectionist stance from Trump has created chaos amongst America’s major trading partners including European Union, China and Japan along with Nafta partners. The EU even warned Donald Trump to expect similar retaliation against American exports to Europe, if he sparks a trade war by going ahead with punitive US tariffs. Reacting further to EU warning, Trump has fired back by targeting European automobile companies. On the last day of the Nafta negotiations, Trump then used the steel and aluminum tariff as a bargaining chip, when he stated “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” Talks on upgrading the pact are moving slowly, in part because Canada and Mexico are resisting America’s demands for major changes such as adding a sunset clause and increasing the criteria for rules of origin. More than any other industry, automotive has been the key focus. The US demands that 85 % of the individual parts of the automobile imports to the USA originate from the Nafta area, and that at least 50 % of the produced parts are from the USA. In other words, half of all components would have to be produced in the USA for an automobile of Mexican origin to be imported to the USA without tariffs. The industry is obviously opposed to this, as it would raise costs and disrupt the complex multinational supply chain that sees parts crisscrossing Nafta borders and has made North American car production competitive with Asia and Europe. Multinational corporations and global value chains The U.S does indeed run a trade deficit with both, Canada and Mexico. These deficits emanate from imbalances in goods traded and the relative position of the three countries in regional production networks, for example, Mexico’s position in the regional production network is that of a low cost manufacturing destination, whereas U.S is positioned as a high value service destination like design and engineering, R&D. Therefore Mexico has a surplus in manufacturing and U.S has surpluses in services. The gross trade figures report the full value of final assembled products exported from Canada and Mexico to the U.S, this obscures the high import content of intermediate goods manufactured by the U.S. The bulk of foreign investment in Nafta comes from multinational corporations in key global industries such as aerospace, automotive, chemicals, energy, telecommunications, etc. that are enlarging their business base in North America. The current localization requirement for duty-free access to the Nafta market is 62.5 %, this has incentivized foreign multinationals to boost value-added production at their North American subsidiaries. To meet the local content threshold, Japanese car manufacturers like Honda, Nissan, Toyota that first entered North America in the 1980s have upgraded their regional subsidiaries from simple assembly plants to engine manufacturing, R&D, and other high value added functions. As the North American market became more integrated, this gave rise to multinational value chains in advanced manufacturing, with extensive movement of raw materials, semi-processed goods, components, and finished products across national borders. Semifinished goods and intra-company transfers account for majority of trade between the US, Mexico, and Canada. In terms of semi-finished goods, U.S is heavily dependent on Canadian and Mexican imports: e.g. Michigan in automotive parts, Washington State in aerospace components and Texas in energy products. If Trump pulls out of Nafta If the U.S withdraws from Nafta, the customs rules of the World Trade Organization (WTO) would initially apply. Canada and Mexico would push ahead with multi-country trade agreements like Trans-Pacific Partnership, which would give them tariff-free access to several lucrative markets, including Japan. It is also important to note that the European Union has began upgrading its free trade agreements with both Mexico and Canada, this lowers tariffs on most products to zero, meaning that European companies may have an edge over American competitors in those markets. If the Nafta is terminated, it is difficult to quantify its impact for German companies producing in Mexico and German exporters. EU-Mexico trade deal The diversification of trade relations ranks high on the list of priorities for Mexico’s political agenda. Mexico has entered into free trade agreements with 46 countries, making it Latin America’s largest import and export nation, far ahead of Brazil. The plan to modernize the agreement between the EU and Mexico has gained momentum in 2018 with multiple panel discussions so far. Negotiations include topics such as market access, regulatory collaboration, inclusion of farm products, services, investment and government procurement, provisions on labor standards and environmental protection. Tarifffree trade of machinery and its components is already included in the current agreement. However, it is applicable only to mechanical engineering products where over 70 % of the production is carried out within the EU or Mexico. Most of the mechanical engineering companies no longer fulfill this quota as today’s businesses operate with multinational value chains. Modernizing the outdated rules of origin is therefore an urgent requirement. From German mechanical engineering federation’s (VDMA) point of view, the rules of origin should be updated to include an increase of the third country share to 50 %. In addition, VDMA supports the reduction of technical trade barriers. The idea is to implement the principle of one standard, one inspection procedure. Mexico’s economy secretary has recently stated, that at the meeting in Mexico City, all parties have agreed to chapters on technical barriers to trade, state-owned enterprises, subsidies, and services. Consensus still needs to be reached on specific issues in the chapters on rules of origin and intellectual property. The key challenges are how far to open each other’s markets to food and drink - such as tequila, chicken and asparagus from Mexico and dairy products from Europe - and the EU’s demand to recognize geographical indications. z 10 WORLD OF INDUSTRIES 2/2018


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