Mexico industry explores NAFTA changes to address Trump's objections

Mr. Trump has threatened to ditch NAFTA if he cannot rework it to the benefit of the US, arguing it has fueled a trade deficit with Mexico and cost thousands of US jobs.

First Look

Mexican industry is exploring revising trade rules to ensure United States workers benefit from a renegotiated North American Free Trade Agreement (NAFTA) to address head-on President Trump's biggest beef with the treaty.

With talks due to start next month between the US, Mexico, and Canada, Mexican officials have stressed the need to craft a new deal that would strengthen the region against competitors, particularly in Asia.

Mr. Trump has threatened to ditch NAFTA if he cannot rework it to the benefit of the US, arguing it has fueled a trade deficit with Mexico and cost thousands of US jobs.

Mexican officials say a revamped NAFTA must further integrate the region and are awaiting US negotiating objectives, due to be published on or around Sunday.

They point to sectors like autos, where US inputs make up some 40 percent of the value of products imported into the US from Mexico, while Chinese exports contain only 4 percent, according to the US Center for Automotive Research.

"If we integrate further and make Mexico more competitive versus China ... even if our exports rise, US jobs will rise, because when we export [to the United States], they're exporting too [via US content]," said Jaime Serra, a former trade minister who led the initial NAFTA negotiations for Mexico.

However, mindful that Trump needs to be able to claim a more obvious win from the shake-up, they are also looking at rules governing how much of a product is made in the region.

NAFTA rules of origin stipulate that to qualify for tariff-free access, some products need to be sourced to a certain degree regionally. Cars, a recurring point of attack for Trump, must meet a threshold of 62.5 percent.

Because raising that threshold would not automatically benefit US workers – firms could just expand capacity in Mexico – Trump's trade team want to have some national content rules within the regional framework, Mexican officials say.

A tricky issue

Moises Kalach, head of the international negotiating arm of Mexico's CCE business lobby, which is coordinating the private sector's role in the renegotiation, said they may explore domestic content rules on certain products.

"It'll be a tricky issue, and we'll have to see case by case," he said.

Mr. Kalach declined to say what goods might be eligible. In May, he said a revamped NAFTA might source more work for future product lines from the region.

The Mexican electronics industry wants to increase regional production of some components to reduce reliance on Asia, said Cesar Castro, vice president of electronics industry group Canieti.

About 70 percent of content in electronic goods exported by Mexico to the United States is sourced from Asia, he said, highlighting products that would have a big slice of Chinese content even if manufactured by US companies.

To boost North American output, Canieti is considering a proposal that could see regional content in certain products raised from 5 percent to 50 percent over 10 years, Mr. Castro said.

Bargaining chips

If Mexico's arguments fall flat, however, and Trump threatens to impose punitive tariffs on Mexican-made goods, the sizeable US surplus in services with Mexico could end up as a bargaining chip.

That could complement Mexican efforts to target the big US agricultural surplus with Mexico, which the Trump administration is already feeling pressure to preserve.

Mexico could insist companies such as Amazon.com Inc and Netflix Inc build servers in the country, said a former Mexican official familiar with discussions, speaking on condition of anonymity.

"As the US's second biggest market, it's clear we can hit back," said Andres Rozental, a former deputy foreign minister. "[Services are worth] more and more every day."