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What Would Happen if Mexico Were to Leave the NAFTA?

What Would Happen if Mexico Were to Leave the NAFTA?

Contrary to what many may believe, there would be no economic disaster if Mexico were to leave the NAFTA.

It can be argued that, in terms of increased foreign trade, Mexico has been the country that has most benefited from the North American Free Trade Agreement. Since the accord went into effect in 1994, its trade with the United States has increased a total of 486%. At the end of 2017, trade between the Mexico and its neighbor to the north was valued at US $482 billion. Although there would be some less than positive developments if Mexico were to leave the NAFTA, there also would be some beneficial aspects that would accompany the change in the North American trade regime. Below are five things to consider:

1. If Mexico were to leave the NAFTA, it would continue to be the low-cost manufacturing venue of choice in North America. US businesses first began manufacturing in Mexico prior to the NAFTA in the late 1960s and will continue to do so in the future if Mexico were to leave the NAFTA. Companies would still be able to reduce their manufacturing costs by up to fifty percent. Additionally, in a post North American Free Trade Agreement world, commerce between the US and Mexico would operate under the World Trade Organization’s Most Favored Nation (MFN) regime. For example, under the MFN regime, the duty charged on automobiles sent from Mexico to the United States would be a modest 3.7%.

2. If Mexico were to leave the NAFTA, it is probable that it would enter into a mutually beneficial bilateral agreement with the United States. There are some international trade experts that believe, however, that in addition to a separate agreement with Mexico, the US would also enter into a second and similar two nation accord with Canada, as well. The Trump administration may be inclined to negotiate such agreements from scratch.

3. If Mexico were to leave the NAFTA, the possibility exists that employment in the United States would be affected. At present, just over one million jobs in the US depend upon the NAFTA. Since there are a large number of positions in the US economy that are linked to the current accord, lobbyists that represent US business interests would increase their activities to preserve their clients’ interests. This would be necessary to avoid the negative consequences of decreased trade.

4. If Mexico were to leave the NAFTA, it would be incentivized to work on a project to develop special economic zones. This would mean the creation of areas within Mexico that would have a special regulatory framework and incentives for doing business there. There would be specific efforts to establish special economic zones in places such as the states of Chiapas, Oaxaca, Michoacán, and Guerrero. These are areas that were marginalized from the benefits of the NAFTA that favors the northern and central states in Mexico.

5. If Mexico were to leave the NAFTA, it would most likely concentrate efforts on diversifying the markets for its exports, and, therefore, reducing its dependence on trade with the United States. To do this, Mexico would have to modernize many of the non-NAFTA trade agreements that it has with a myriad of other nations. At present, 80% of products that are shipped overseas by Mexico are consumed in the US.

In conclusion, if Mexico were to leave the NAFTA all would not be doom and gloom. The country would still be the preferred North American destination for manufacturing investment, would most likely enter into a bilateral trade agreement with the US, would work to establish special economic zones and would work on diversifying its export markets.

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This quarterly publication will be populated with content that is useful and relevant to readers that are contemplating Mexico investments, have operations already within the Republic, as well as to other individuals that have an interest in Mexico and its manufacturing sector.