Uncertainty is a major threat for many countries around the world due to the Covid-19 pandemic, particularly in countries where the economy is reliant on trade and tourism. Mexico falls into this category. Its economic health is heavily determined by trade, remittances, and tourism which contribute to jobs, consumer spending, construction activity, and therefore, overall economic growth. While these factors have taken a hit on the Mexican economy over the course of 2020, a new trade agreement--the US Mexico Canada Agreement (USMCA)--provides a positive outlook for future economic growth.
On June 1, 2020, the USMCA replaced the North American Free Trade Agreement (NAFTA), which had been in place since 1994. This new agreement supports manufacturing and trade between North American countries, providing Mexico preferential access to the US and Canadian markets. Not only does this agreement boost trade, but it also strengthens foreign relationships by promoting cooperation between the countries.
Perhaps most importantly, the USMCA requires the implementation of consistent rules to regulate manufacturing in Mexico, creating more certainty and security, and thus, persuading foreign firms to make large, long-term investments in the market. In addition, the USMCA requires a greater percentage of products be produced within the free trade area, providing more motivation for foreign firms to invest in Mexico.
It is probable that foreign firms will take advantage of Mexico’s manufacturing sector and increase production in the country due to its affordability and full set of mid-range manufacturing activities. This is particularly true for the auto sector, which is well-established in part and full vehicle production.
While the USMCA will increase production, expand trade, and boost employment in Mexico, it will also make the country more dependent on the US. This relationship creates more stability for the US, but serves as a vulnerability for Mexico due to the great economic importance of its exports to the US.
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Sources: FCIA
Sources: https://www.greatamericaninsurancegroup.com/docs/default-source/gated/fcia-major-country-risk-developments/major-country_update.pdf
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