Mexican labor reform seen as key for USMCA passage

Mexico's chief trade negotiator Jesús Seade signaled that US ratification of the Nafta-replacement agreement struck last year was predicated on Mexican lawmakers passing a labor reform initiative introduced Thursday.

That reform, which has the backing of President Andrés Manuel López Obrador (AMLO) and his Morena party, is designed to harmonize Mexico's labor laws to the agreements made in the new trilateral treaty, dubbed the USMCA in English and T-MEC in Spanish.

Speaking to the press on a trade visit to Washington DC, Seade said, "We bury the USMCA if we don't pass that legislation in Mexico, and that's why we are going to pass it," describing the legislation as "certainly the most advanced legislation in any developing country in Asia, Africa, the Middle East or Latin America."

The deputy foreign minister's comments echoed similar remarks Tuesday from US lower house leader Nancy Pelosi, "Unless you do this, we can't even consider it ... We have to see that [Mexico passes] the legislation."

Morena holds strong majorities in both houses of congress; however, opposition parties have already begun to signal concerns ahead of the floor debate in the house, which is expected sometime next week.

A revision to the rules-of-origin under the USMCA requires certain vehicle manufacturing expenditures to be "high-wage", meaning expenditures at facilities that pay at least US$16 per hour. For certain passenger vehicle expenditures, 40% must be high-wage, while for light and heavy trucks 45% of expenditures must be high-wage.

The proposed Mexican labor legislation adapts to these and other requirements, while also revising regulations for labor union freedoms and replacing the current arbitration committees with specialized tribunals.

Stress on supply chains

In a webcast Friday, Sergio Rodríguez, Fitch Ratings' senior director for LatAm corporate ratings, said the agency's baseline case continues to be that USMCA would be ratified in all three countries by the end of 2019.

Rodríguez underscored Fitch's view that the stability of Mexico's manufacturing industry is of paramount importance to regional competitiveness.

"We have been in the past years discussing that the Mexican industrial platform for the region is one of the key aspects to continue or to maintain competitiveness of the region," said Rodríguez, "Any threat to that would create disruptions in the North American region and would take an effect on consumers."

Fitch therefore sees the three countries ultimately overcoming any political obstacles in order to maintain the linkage between the supply chains, he said.

Trump noise

Rodríguez also addressed the current intensification of US President Donald Trump's rhetoric attacking Mexico for lax immigration enforcement, including threats of further steel tariffs and a border shutdown going beyond the slowdown he has forced in recent days.

As images emerge of long lines of tractor-trailers waiting at key US entry points, Rodríguez noted that some 70% of Mexican goods are shipped to the US by truck, and he warned that the current situation could negatively impact working capital and inventory levels at many companies.

"It can at least affect the timing of when goods are delivered," Rodríguez said. "I think this is something that can affect both sides of the border, Mexican companies but also some US companies and even consumers as well."