USMCA: Devil’s in the Details on Automotive Content

By Frank L. DuBois*

Automated manufacturing of cars

Automated car manufacturing/ Steve Jurvetson/ Flickr/ Creative Commons License

The automotive trade regime in the recently completed U.S.-Mexico-Canada Trade Agreement (USMCA) – “NAFTA 2.0” – will create headaches for many manufacturers but appears unlikely to deliver the big boost in jobs it promises. Much of the focus of the negotiations was on changing the automotive rules of origin (ROOs) to encourage more auto manufacturing in the United States and Canada and make it difficult for automakers to shift production from high-wage locations to low-wage factories in Mexico. Under the new rules, some manufacturers will see significant changes in operational strategies while others will be less impacted.

According to the agreement, a 2.5 percent tariff will be applied to the import value of cars (25 percent for light trucks) if the vehicles don’t meet the new ROOs:

  • 70 percent Regional Value Content (RVC) rather than 62.5 percent under the old rules.
  • 40 percent of the Labor Value Content (LVC) of vehicles (45 percent in the case of light trucks) must be made in plants that employ workers making at least $16 per hour.
  • 70 percent of the value of steel and aluminum used in the vehicle must be of regional origin.

The Kogod Made in America Auto Index (KMIAA), which I’ve been compiling for seven years, challenges assumptions used when calculating the U.S. content of a car, including some used as marketing strategies to portray products as being more “American” than what a buyer might think.

  • KMIAA results and rankings differ significantly from those indices that evaluate domestic content solely based on where a car is assembled, without taking into account the country of ownership of the brand. (Japanese, Korean and German car manufacturers are treated the same as U.S. manufacturers despite non-US R&D and profits that are repatriated back to the home country). Location of manufacture of engines and transmissions, which account for approximately 21 percent of vehicle value, may also not be addressed in other indices. Likewise, assembly labor accounts for around 6 percent of vehicle value.
  • The index reveals the complicated nature of content calculations. Toyota assembles only one vehicle at its plant in Tijuana – the Tacoma light truck with an engine of either U.S. or Japanese origin (depending on displacement) and a transmission of either U.S. or Thailand origin. Toyota has made the same truck in San Antonio, Texas, but recently announced that all of Tacoma production will be moving to the Mexican factory. Toyota is likely to reduce its non-North American sourcing (fewer engines and transmissions from Asia), and restructure supply chains to place a premium on U.S. parts and power train sourcing. Other manufacturers face greater shifts. The Audi Q5, for example, currently has 79 percent Mexican parts content and only 3 percent U.S. parts.

Producers’ operational responses are likely to run the gamut from full compliance to limited changes. Some automakers may simply pay the WTO tariff of 2.5 percent for access to the U.S. market. A separate requirement that at least 40 percent of the value of cars be made in plants with $16 per hour labor will be problematic given that wages in Mexican auto plants average $3 to $4 per hour. Producers will have to decide whether to raise wages in Mexican plants, shift sourcing to U.S. and Canadian plants, or attempt to develop ways to game the system by shifting some high-wage expenses into the labor value category. While the new rules may boost some manufacturing jobs in the U.S. and Canada, they will raise costs leading to lower auto sales, and have nowhere near the impact that their boosters have promised. Again, the devil is in the details.

March 5, 2020

* Frank L. DuBois is an Associate Professor of Information Technology and Analytics at American University’s Kogod School of Business. Data for the KMIAA comes from data automakers provide under the American Automotive Labeling Act (AALA) and from field visits to car lots in the DC metropolitan area.

New Western Hemisphere Trade Pacts Push Back Against Big Pharma

By Thomas Andrew O’Keefe*

Money_and_pills_in_three_colors

Attempts to limit competition from generics by pharmaceutical giants were called “TRIPS-plus” provisions in USMCA drafts/ Ragesoss/ Wikimedia Commons

Two major trade agreements affecting the Western Hemisphere have recently struck blows against the pharmaceutical industry’s efforts to keep drug prices high by limiting competition from generic medications. Big Pharma tried, but failed, to include provisions in the United States-Mexico-Canada Agreement (USMCA) and the EU-MERCOSUR Association Agreement that would go beyond those expressly permitted by the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

  • Those provisions would have made it extremely difficult for generic manufacturers to enter the market and contain costs. Unaffordable medicines are a large and growing global problem. Many people die of diseases today not because there is no cure, but because they cannot afford the medications.

In the version of USMCA approved by the U.S. Congress and to be signed by U.S. President Trump this week, the Democratic majority in the House of Representatives removed “TRIPS-plus” provisions that would have given “data exclusivity” for new uses of existing pharmaceutical products for up to three years and for so-called “biologics” for ten years. (Biologic drugs are produced from a living organism or contain components of a living organism, including a wide variety of products derived from humans, animals, or microorganisms by using biotechnology.)

  • Data exclusivity would have prevented generic manufacturers from utilizing the original trial results and other test data filed with regulatory health agencies concurrently with the patent application, demonstrating the medication’s safety, quality, and efficacy. Also removed from the USMCA was a provision that would have restricted competition from generic pharmaceutical manufacturers by delaying patent expirations to compensate for “unreasonable” bureaucratic delays in approving the patent. Furthermore, the USMCA now expressly allows generic manufacturers, as per Article 30 of the TRIPS Agreement, to utilize compounds used to make a patented drug in order to develop a generic version in anticipation of that drug’s patent expiration.

Similarly, the IPR chapter in last year’s EU-MERCOSUR agreement does not include TRIPS-plus provisions thanks, in part, to resistance from South American governments concerned about bankrupting their national health care systems because of increasing costs for new medications. The IPR chapter specifically supports World Health Assembly Resolutions on pandemic influenza preparedness and on a global strategy and plan of action on public health, innovation and intellectual property – both of which recognize that “intellectual property rights do not and should not prevent Member States from taking measures to protect public health.”

  • The IPR chapter is consistent with the Doha Declaration on the TRIPS Agreement and Public Health of November 2001. Furthermore, all the signatory states are required to implement articles of the TRIPS Agreement providing the legal basis for WTO members to grant compulsory licenses exclusively for the production and export of affordable generic medicines to other members that cannot domestically produce the needed medicines in sufficient quantities. (The only obligation is for the signatory states to make “best efforts” to adhere to the Patent Cooperation Treaty.)
  • The MERCOSUR countries resisted intense lobbying pressure from European pharmaceutical companies to accept provisions on data exclusivity and to compensate for bureaucratic delays by extending the monopoly on a patented medication beyond the 20-year maximum permitted by TRIPS. The fact that the United Kingdom, home to global pharmaceutical giants such as GlaxoSmithKline and AstraZeneca, was distracted by Brexit undoubtedly contributed to this outcome.

The successful pushback against attempts by the major pharmaceutical multinationals to extend their state-sanctioned monopolies to guarantee a steady flow of profits reflects public outrage over multiple scandals that have ensnared the industry in recent years. This includes not only the massive opioid addiction crisis in the U.S., but firms buying up patents that are about to expire and jacking up their prices in excess of 1000 percent. It makes the traditional industry argument of needing extended monopolies to incentivize innovation and the development of new drugs ring hollow as these speculators incur no research and development costs. As a result of the efforts of MERCOSUR and Democrats in the U.S. House of Representatives, the pharmaceutical industry may be facing a paradigm shift in which it will be forced to develop a new business model for pricing new treatments.

January 28, 2020

Thomas Andrew O’Keefe is the president of Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama and the Decline of U.S. Hegemony in the Western Hemisphere (Routledge, 2018).

Latin American Integration: No New Ideas

By Carlos Malamud*

Heads of state stand for a picture at the 14th ALBA Summit held in Caracas in 2017

Heads of state at the 14th ALBA Summit held in Caracas in 2017/ EneasMx/ Wikimedia Commons

Several proposals claiming to promote regional integration in Latin America, particularly South America, have received attention in recent months, but proponents’ continued reliance on the same political-ideological alignments as always leaves little hope of bridging the deep splits in the region. Coming in the wake of completion of the EU-Mercosur trade agreement, after arduous and complicated negotiations, the proposals appeared to be good news. But that has not been the case.

  • The new push follows the creation of PROSUR by right-leaning governments in March and, more recently, efforts to relaunch UNASUR by left-leaning groups such as the Grupo de Puebla (Progresivamente) – each claiming commitment to unify the region behind their political visions. Two of the main advocates, Chilean President Sebastián Piñera on the right and Argentine Presidential Candidate Alberto Fernández on the left, have taken the easy path of convoking like-minded supporters while rejecting opponents.
  • These groups appear to have learned nothing from the first decade of the 21st century, when Venezuelan President Hugo Chávez pushed his Bolivarian project. The three efforts emblematic of the period – ALBA, CELAC, and UNASUR – all eventually failed. The rise of neoliberal governments in various countries since then has produced an even more complex situation. The new governments have continued emphasizing ideological conformity, reducing prospects for unity. Last December, a “Conservative Summit of the Americas” inspired by Brazilian President Jair Bolsonaro and his son met in Foz de Iguazú to rally the most extreme elements of the region’s right, conditioning participation on total agreement with its tenets.

There are exceptions.  The Pacific Alliance – a trade accord launched by Chile, Colombia, Peru, and Mexico eight years ago – has remained inclusive despite changes of government in each country. MERCOSUR, with its solid foundation and intense commercial exchanges, has also resisted ideological temptation in its way, although dismissive insults between President Bolsonaro and Argentine candidate Fernández do not bode well (even if both know that they need each other in the long run). But the fear is that extreme ideologies will, once again, trump national interests.

The intense electoral cycle of the past three years, and the pending elections in Argentina, Bolivia, and Uruguay, further complicate the situation. As the “turn to the right” has not turned out as predicted, the results of these three races this month will make regional relations even more unstable. The lack of a new vision for promoting Latin American regional integration is aggravated by the growing sense among both extremes of the political spectrum that they have to dig trenches.

  • The need for a new vision is obvious as the growing attacks on multilateralism and the escalation of the U.S.-China trade war are going to force practically all international actors to take sides. Latin America will suffer potentially grave consequences if its governments and political leaders don’t grasp that inclusion, not exclusion, is the only way to advance unity and integration. Acceptance of differences, dialogue, and negotiation are what’s needed now, as is a creative imagination that can accept reality as it is, with all its problems and imbalances. The question is whether the existing leaders will be able to overcome this sad state of affairs.

October 1, 2019

*Carlos Malamud is Senior Analyst for Latin America at the Elcano Royal Institute, and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid. A version of this article originally was published in the Elcano Blog.

AMLO’s Foreign Policy: A Blast from the Past, or Abandoned Dream?

By Laura Macdonald*

AMLO Cabinet

López Obrador stands with members of his cabinet for an official photo in December 2018/ Prensa AMLO/ Wikimedia Commons/ https://commons.wikimedia.org/wiki/File:Andres_Manuel_Lopez_Obrador_2.jpg

 

Mexican President Andrés Manuel López Obrador (AMLO) took office last January with a pledge to focus almost exclusively on his country’s many internal challenges, but international affairs have intruded upon his wish to downplay foreign policy, forcing him to make difficult compromises.

  • AMLO rode into office with the slogan “la mejor política exterior es la política interior” (the best foreign policy is domestic policy). Mexico’s high levels of corruption, impunity, entrenched poverty, widespread violence, and human rights violations were his top priorities. He was elected with a mandate to clean up the political system and crack down on the “mafia of power,” which he and millions of Mexicans perceived as the source of most of their country’s problems. The unpopular foreign policy of his predecessor, PRI president Peña Nieto – who tried to curry favor with President Trump and his family despite the U.S. President’s repeated insults to Mexico and Mexicans – encouraged a more nationalist response as well.
  • In his inaugural speech in the Mexico City zócalo, he laid out an approach to foreign policy based on themes of self-determination, non-intervention, peaceful solution to disputes, development cooperation, defense of human rights, and the rights of migrants. This position is reminiscent of the deeply rooted policy of non-intervention known as the Estrada Doctrine adopted by the Partido Revolucionario Institucional (PRI), the long-time Mexican dominant party, in the 1930s. AMLO’s political roots are in that party and reflect that heritage – he has said he won’t travel outside of the country except to sign international agreements and he skipped the June G20 summit in Osaka, Japan.

Nevertheless, the world has intruded upon AMLO. Trump’s statements and actions have forced him to act and react, and Central America’s crises have thrust him into an overwhelmingly hostile regional context. He has had mixed results:

  • Despite his previous opposition to free trade, AMLO made a strategic decision to renegotiate NAFTA and to refrain from direct confrontation with the Trump administration. Mexico was forced to accept various measures that may harm its interests in the long term, including the rules for domestic origin and intellectual property rights.
  • He has continued Mexico’s traditional principles of non-intervention and self-determination – the Estrada Doctrine – and advocated for the recognition of existing regimes instead of meddling in their internal affairs. This position has led to a break with the position of the Lima Group, of which it is still a member, regarding Mexico’s position so far has been vindicated by the failure to date of the Lima Group’s advocacy of regime change and the bellicose position of the Trump administration, but Mexico has not been seen to be playing a leading role in orchestrating negotiations in response to the Venezuelan crisis, and is isolated from the position of the U.S., Canada, and most Latin American states.
  • Despite early statements in which the AMLO administration cast migration as not inherently problematic and called for policies to address the causes of Central American migration, it subsequently shifted its position under intense U.S. pressure and agreed to policies that would limit the numbers of migrants crossing into the United States from Mexico and create a growing humanitarian challenge within Mexico itself.
  • As part of AMLO’s law of “republican austerity,” he has closed trade and agricultural offices in embassiesand consulates around the world, and has eliminated the offices of ProMéxico, which promoted international trade and investment into Mexico. Diplomatic staff, untrained in commercial issues, are supposed to take over their responsibilities. This decision, framed as scaling back the swollen ranks of highly paid public officials, will affect the government’s ability to diversify trade and investment away from the U.S. market and reduce its ability to defend the country’s interests in ongoing trade negotiations.

The AMLO government faces the daunting prospect of trying to respond to Trump without risking economic disaster or losing all shreds of national dignity. In the context of an already globalized economy, Mexico cannot achieve its domestic priorities without a recognition of the importance of foreign policy and active international engagement, in tandem with progressive allies – other governments as well as domestic and international civil society. So far, he has been able to navigate these shoals and retains high levels of popularity at home, but his economic policies focused on re-activation of the domestic market and have not yet born fruit. A more active and progressive foreign policy could help shore up his domestic and international legitimacy as the economy lags.

September 5, 2019

* Laura Macdonald is a Professor in the Department of Political Science and the Institute of Political Economy at Carleton University in Ottawa.

EU-MERCOSUR: Does Their New Association Agreement Mean Much?

By Thomas Andrew O’Keefe*

29/06/2019 Coletiva de Imprensa UE-Mercosul

Press conference about the trade agreement between the Mercosur and the EU / Palácio do Planalto / Creative Commons

After nearly two decades of intermittent negotiations, the European Union and the four core MERCOSUR nations (Argentina, Brazil, Paraguay, and Uruguay) have finally inked a trade agreement, but its real impact won’t be felt for years, if ever. When the negotiations began in the mid-1990s, the EU was the largest trading partner of the MERCOSUR countries, and the United States was number two. Today China is in first place, the European Union is second, and the U.S. is fourth, behind intra-Latin American trade (EU investors, however, continue to have the largest stock of foreign direct investment assets in the MERCOSUR region). When ratified, the EU-MERCOSUR Association Agreement, signed in Brussels on June 28, will exempt a little more than 90 percent of two-way trade from tariffs.

  • About 93 percent of MERCOSUR exports will eventually obtain duty-free access into the EU market, the bulk as soon as the agreement comes into effect. Agricultural commodities such as beef, chicken, corn, eggs, ethanol, honey, pork, rice, and sugar only get reduced duties, with many also subject to quotas. Another 100 MERCOSUR agricultural items are completely excluded from any type of preferential treatment.
  • Some 91 percent of European exports will get duty-free access to MERCOSUR, but gradually as tariffs are reduced over a 10-year period. The phase-out is over 15 years in the case of European automobiles, furniture, and shoes. MERCOSUR tariffs on the remaining 9 percent of primarily EU manufactured goods will remain in place permanently.
  • The agreement offers service providers from any signatory country full access to the markets of all the other signatory states.

MERCOSUR showed greater flexibility with the EU on agricultural subsidies than it had with the United States, a position that contributed to ultimate rejection of the Free Trade Area of the Americas (FTAA). Subsidies in the EU-MERCOSUR agreement are permitted if “necessary to achieve a public policy objective.” The MERCOSUR countries also capitulated on the use of anti-dumping tariffs on intra-hemisphere trade. The new accord, however, does authorize governments to impose a duty that is less than the margin of dumping if it adequately removes injury to the affected domestic industry. It also includes provisions for ensuring that sanitary and phytosanitary (SPS) measures as well as technical norms are not abused and become disguised impediments to free trade, although it permits enforcement of the European “precautionary principle” notion to restrict the importation of genetically modified food, for example, where the risks to health are not scientifically conclusive.

The agreement – now being “legally scrubbed” and translated into the EU’s 23 official languages – faces an elaborate, multi-year ratification process in the EU, where individual countries and the European Parliament must approve it, as well as each MERCOSUR government. Agricultural forces are already lining up in many European countries in opposition. In the meantime, the accord’s greatest impact is a signal by Brazilian President Bolsonaro and Argentine President Macri that they’re making progress on their stated objective to return MERCOSUR to its original trade focus – in contrast to their predecessors – and to claim an economic “victory” when growth in both countries remains stagnant.

  • Despite the flexibility MERCOSUR showed on agricultural subsidies and anti-dumping, its main sticking points with the United States in the FTAA, a free trade agreement with the United States seems remote as the Trump administration – in contrast to the Europeans – is unlikely to offer meaningful concessions based on the lesser developed status of the MERCOSUR countries. Neither will the Association Agreement with the EU reverse or even slow the region’s shift toward trade with China and the rest of Asia.

August 6, 2019

* Thomas Andrew O’Keefe is the President of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere.

New Leadership in El Salvador: Breaking from the Past?

By Eric Hershberg*

U.S. Air Force Chief of Staff Gen. David L. Goldfein meets with El Salvador’s newly elected President Nayib Bukele

U.S. Air Force Chief of Staff Gen. David L. Goldfein meets with El Salvador’s newly elected President Nayib Bukele / Joint Base San Antonio / Public Domain

Salvadoran President Nayib Bukele’s stunning defeat of both of his country’s two dominant parties in February was propelled by promises of change and new approaches to challenges that vexed his predecessors. His initial six weeks in office have featured notable gestures toward fresh directions but also grounds for concern. The country’s problems are many and severe. Decades of paltry private investment has produced anemic economic growth, worsened in recent years by a devastating internal security situation. The limited economic growth that has occurred relies disproportionately on remittances from migrants – the value of which exceeds that of exports – but the circumstances of Salvadorans in the United States are growing more precarious, potentially eroding future transfers. In addition, plausible shifts in trade policy by an erratic U.S. administration could undermine the U.S.-CAFTA-DR trade agreement, threatening critical manufacturing jobs. Corruption, meanwhile, is perceived by the population as no less urgent a challenge as joblessness and impunity for the gangs whose extortion and violence torment much of the population.

Bukele’s winning campaign formula was to promise to turn things around with a new vision and new people. One important signal of change was the President’s order to immediately remove the big block letters “Monterrosa” from the barracks of the armed forces 3rd brigade, in San Miguel, and his hosting a dinner at the Presidential residence for family of the victims of the El Mozote massacre that Lt. Col. Monterrosa had overseen. A handful of initial cabinet appointments signaled an inclination toward meritocracy and gender balance. Yet Bukele has more recently appointed to key positions dodgy veterans of the administration of former President Tony Saca (2004-09), who split (and was later expelled from) his ARENA Party to form a new party, GANA. While Saca is serving a 10-year prison sentence for corruption, Bukele, who was expelled from the FMLN in 2017 and thus lacked a vehicle of his own with which to seek the presidency, opted to run on the vacant GANA ticket. The appearance of figures from Saca’s inner circle is thus not entirely a surprise, but it stands out given the degree that Bukele’s largely platform-less campaign highlighted the battle against corruption.

  • One of his pledges was to create a hybrid (national-international) anti-corruption commission – adapted from the experiences of CICIG in Guatemala and MACCIH in Honduras – to hold accountable political elites suspected of extraordinary levels of malfeasance. Yet both domestic and external constraints make such an effort less likely than Bukele might have imagined while on the campaign trail, and the Comisión Internacional contra la Impunidad en El Salvador (CICIES) seems to have been relegated to a back burner.
  • Equally striking is the new President’s doubling down on militarized responses to gang violence, departing from both his campaign rhetoric and his mode of governance as mayor of Nuevo Cuscatlán (2012-15) and San Salvador (2015-18). Whereas he had entered into pragmatic if unspoken accommodations with the gangs in order to secure governability at the municipal level, he’s now declaring all-out war against the maras, sending the military into gang-ridden communities and clamping down on communication from the prisons from which gang leaders continue to direct operations. During the first week of July – a month after assuming office – he asserted that repression was but the first phase of a comprehensive anti-gang strategy, promising a second phase, focused on social opportunity, that would address the structural factors that draw youth toward lives of criminal violence. But details remain thin, and whether funds will be appropriated by a legislature in which GANA has only a small minority of seats remains to be seen.

Bukele represents El Salvador’s first Instagram and Twitter president – with a penchant for announcing sweeping personnel changes without having informed affected staff in advance. His recourse to social media for proclaiming “you’re fired” aligns him with other western hemisphere presidents eschewing traditional channels of communication with public employees and the citizenry, but in El Salvador as elsewhere this justifies concern over how governance through a cacophony of tweets may affect the quality of democracy.

Meanwhile, the new president has wisely emphasized that cordial relations with the United States are an imperative for his government. More than a third of his compatriots reside there, and he has already taken steps to gain Washington’s blessing for his administration. At U.S. urging, he invited the representative of Venezuelan assembly president Juan Guaidó to his inaugural, and when a Salvadoran father and daughter drowned in the Rio Grande, Bukele exonerated President Trump’s border policies, saying “La culpa es nuestra.” Nonethelesss, he has been critical not only of Venezuelan dictators who Washington abhors but also Honduran ones who the Americans enable. Meanwhile, observers in San Salvador opine that, contrary to Washington’s wishes, he will not reverse his FMLN predecessor’s decision to deepen relations with China – he needs Chinese investment and recent history offers little reason for expecting analogous resources to arrive from the U.S. Finding the money needed to provide jobs, security and social welfare to the vast majority of Salvadorans who have lacked them may prove as vexing for the outsider president as it was for leaders of the dominant parties of the post-war period.

July 16, 2019

* Eric Hershberg is Professor of Government and Director of CLALS at American University. He took part in a delegation of AU experts for a weeklong visit to El Salvador in June, during which they met with political leaders across the political spectrum, as well as leading journalists, scholars, NGO leaders, policymakers and diplomats.

Mexico: Has AMLO Compromised on Human Dignity?

By Alexandra Délano*

Mexican Foreign Secretary Marcelo Ebrard speaks during a meeting in 2018, during which U.S. Secretary Mike Pompeo was present

Mexican Foreign Secretary- designate Marcelo Ebrard participates in a bilateral meeting with U.S. Secretary of State Michael R. Pompeo in Mexico City on October 19, 2018. State Department photo/ Wikimedia Commons

Mexico has always negotiated with the United States from a position of weakness – it depends on its northern neighbor economically and politically more than the other way around – but the recent negotiations, compromising its commitment to human dignity in exchange for avoiding tariffs, may be among the worst outcomes. Tariffs on Mexican products would surely be costly for Washington, as business leaders and Republican legislators have stated recently, but the much greater economic threat is to Mexico. As a result, Mexico has consistently sought to keep the issue of migration separate from trade and other priorities – a delinking that both countries have accepted for the sake of advancing economic integration.

  • Trump has destabilized that tacit agreement by asserting that maintaining the status quo in commercial relations will depend on new steps by Mexico to support expansion of barriers on its northern border, to better control its southern border, and to stop the flow of migrants from Central America. In addition to imposing the tariffs, Trump threatened to abandon the newly negotiated North American Trade Agreement (“USMCA”) and even to close the U.S.-Mexico border.
  • President Andrés Manuel López Obrador (AMLO) has opted for a strategy of minimizing confrontation with Trump. This has implied concessions such as accepting the return of persons awaiting asylum hearings in U.S. courts. Even though this policy, called the Migrant Protection Protocols (or Quédate en México), is not in an official agreement, and even though it does not go to the extreme of establishing Mexico as a “safe third country” – which would obligate migrants to claim asylum in Mexico instead of having the option of continuing their journey to the United States – it is an attempt to appease Trump and maintain the fragile balance in the relationship.
  • AMLO has taken other steps to placate Trump. For example, Mexico and the UN’s Economic Commission for Latin America and the Caribbean (ECLAC or CEPAL) recently announced a development plan for Central America that, although limited in scope and without apparent funding, is an important step towards addressing root causes of migration in the region.

AMLO’s government negotiated to increase its control of the southern border and to continue to host asylum-seekers awaiting a court hearing in the United States. It did so in the absence of an integrated migration strategy, and without a commitment to invest resources, at a time when the budget of the Mexican Commission for Refugee Assistance (COMAR) was just cut 20 percent. The Instituto Nacional de Migración (INM) is also ill-positioned to assume a greater role without addressing its need for the resources and measures necessary to root out corruption and reduce its over-reliance on detention and deportation. Officials from these organizations were not even included in the negotiations – further reflecting the lack of vision and interagency coordination on the migration challenges. Not surprisingly, the INM Commissioner resigned days after the agreement was announced.

  • Mexico’s policies also appear to neglect the need to strengthen multilateral mechanisms to compensate for its weakness in the face of U.S. pressure. Mexico has traditionally been one of the most active promoters of multilateral agreements on cooperation on migration issues, including the Global Compact on Migration approved last year, but it appears unable to build on these accomplishments to either counterbalance Trump’s pressures or guide an internal policy on what to do. It has also failed to build support among G20 allies, including Canada – its second most important trading partner and a player in the extractive activities implicated in driving emigration and internal displacement in Central America and Mexico.

Mexico’s migration policy at this point is very far from the ideals laid out by López Obrador. His primary concern has been to pursue the impossible goal of containing Trump without harming other interests. Above nationalist posturing – claims that Mexico will never negotiate away its dignity – is the need to protect the dignity of persons. A migration policy that prioritizes migration control and that is based on the mood swings of the United States’ government does not meet this basic criterion. It leaves Mexico in the same weak, isolated position from which it cannot negotiate agreements on labor mobility, humanitarian protection, and economic development. Mexico seems to have made a strategic error in response to Trump’s most recent tantrum – one likely to reoccur under even more challenging conditions as the 2020 election nears.

June 25, 2019

* Alexandra Délano is chair of the Global Studies Department at the New School in New York City. This article is adapted from her essay in El País on June 5, Lo que está en juego en las negociaciones con Estados Unidos: la dignidad humana.

U.S.-Mexico: Tariffs, Threats, and Trade Agreements

By Ken Shadlen*

Cargo ships

Cargo ships off shore of Galveston Island, TX / Jocelyn Augustino / Creative Commons / https://commons.wikimedia.org/wiki/File:FEMA_-_38860_-_Cargo_ships_off_shore_of_Galveston_Island,_TX.jpg

The United States’ threat last week to apply tariffs on imports from Mexico, unless Mexico revamped its approach to Central American migrants passing through the country, underscores the power asymmetries in the global economy – and undermines the credibility of U.S. trade agreements elsewhere. President Trump threatened to abrogate U.S. commitments under NAFTA (and the WTO) unless Mexico introduced measures in an area that is not addressed by NAFTA. While the tariffs won’t be applied, at least not now, and there is debate about just how much Mexico changed its migration policies as a result of Washington’s maneuver, the linkage between trade and “non-trade” issues such as immigration, especially within preferential trade agreements such as NAFTA, have deep implications for the political economy of international trade.

  • Many critics of Trump’s threats claim that immigration policy and trade policy are distinct, and that it makes no sense for the administration to link the two. But this misses the point: what is and is not “trade” is determined politically. Since the 1980s, the United States has conditioned market access on the introduction and enforcement of a wide range of “trade-related” policies, including investment, intellectual property, government procurement practices, and so on. Market size confers to the importing country the power to define what constitutes “trade,” and the definition of “trade” thus has changed according to Washington’s preferences. In that sense, Trump’s linkage maneuver is not at all new.
  • On the one hand, NAFTA is the outcome of massive linkage of this sort, as Mexico was required to introduce extensive changes to policies and practices in a range of trade-related policy areas in order to qualify for the agreement. On the other hand, NAFTA was meant to protect against further “ad hoc linkage,” with new conditions attached at the whim of the United States.
  • Prior to NAFTA, Mexico’s exports largely entered the U.S. market under the Generalized System of Preferences (GSP), which offers preferential market access to exports from developing countries under a wide range of conditions. But GSP preferences can be withdrawn unilaterally, and, as the importing country, the United States changed GSP preferences in response to its changing sentiments. Beneficiary countries always ran the risk of having the U.S. Congress and Executive attach additional conditions to the program, like ornaments on a Christmas tree.
  • NAFTA and other NAFTA-like trade agreements that have followed promised to deliver substantially more predictability and stability than the GSP.

Recent events question these premises. In 2017-18, Trump warned that Washington would withdraw entirely from NAFTA unless it was renegotiated on terms more to his liking. Last week’s threat to remove preferential market access unless Mexico changed its immigration policies and practices is precisely the sort of behavior that NAFTA was meant to protect against. The agreement supposedly replaced the unstable preferences of GSP, which were always vulnerable to the whims of U.S. politicians, with a new set of preferences that were clearly defined, had fixed conditions, and were less prone to being unilaterally withdrawn. But evidently it didn’t.

Washington’s actions are similar to if the Mexican government announced it would stop enforcing copyrights and patents of U.S. firms, unless the United States were to substantially increase science and technology assistance to help upgrade the stock of biologists, chemists, and engineers in Mexico. The reaction to such an announcement would be ridicule, and Washington would claim NAFTA (and the WTO) binds Mexico to protect intellectual property. The United States would assert, moreover, that its science and technology assistance is not covered by NAFTA; Mexico’s threat would elicit no change of behavior on the part of the US. 

  • Beyond NAFTA per se, these events make one wonder why any country would sign a trade agreement with the United States. After all, if countries already have preferential market access under the GSP, then one of the main benefits of reciprocal trade agreements is to lock-in and stabilize those preferences – even with the need to make substantial concessions on “trade-related” policy areas. If, in reality, only half of the bargain is locked in, if the benefits can be made to disappear at the whim of the U.S. President, then for many trading partners the benefits of such agreements will be unlikely to compensate for the costs.

June 11, 2019

*Ken Shadlen is Professor of Development Studies and Head of Department in the Department of International Development at the London School of Economics and Political Science.

South America: Can it Navigate the Changes Ahead?

By Leslie Elliott Armijo*

Latin america

Latin America / Google Images / Creative Commons

Venezuela is the latest example of how Latin America, especially South America, has missed an opportunity to demonstrate the sort of hemispheric leadership it has long striven for – and instead has ceded that role to the United States and even Russia and China.  Although the United States, and the rest of the hemisphere more generally, have been slow to realize it, economic drivers are making the world more multipolar.  In a recent article by two colleagues and myself, we analyze international financial statistics covering 180 countries from 1995 to 2013 that reveal the slow relative decline of the United States as the reigning financial hegemon.  U.S. influence, although still formidable by some margin, is eroding.

  • The Trump Administration’s activities in the larger world are also undermining Washington’s influence. Policies in the WTO and other trade actions writ large – such as withdrawing from the Trans-Pacific Partnership (TPP) and threatening and implementing trade sanctions with little apparent logic – have brushed even allies back. Positions on the Paris climate accord, at the United Nations, and in the President’s relations with North Korean leader Kim Jung Un and Russian President Vladimir Putin have left many around the world increasingly reluctant to follow the U.S. lead.

In this increasingly multipolar world, Latin America, especially South America, is going to find itself not so much freed of U.S. influence – as intellectuals in the region have often stated their wishes – as exposed to new pressures.  The change will be manifest mostly in the economic arena.  New research by McKinsey Global Institute suggests that global value chains are ever more concentrated within multinational corporation networks, which tie major markets (essentially the United States, Western Europe, China, and Japan) to geographically contiguous countries.  This is arguably good for closer neighbors, such as Central America and the Caribbean in our hemisphere, but potentially harmful to those left out – including Sub-Saharan Africa, possibly the Mideast, and South America.

South America has diversified its trade – generally a good thing – among the United States, EU, and East Asia, with the latter having become the major trading partner for a number of countries. Chile and others have been pushing hard to build the Pacific Alliance, as well as to institutionalize the alliance’s relationship with Mercosur. This strategy will be put to the test if, as early trends indicate, the world regionalizes and South America comes under great pressure to refocus on its relations with the United States. To protect and advance their interests in the future, South American countries probably will try to find the right balance between embracing and rejecting the declining yet still dominant hegemon to the north and, as in the case of Venezuela, developing their own strategic vision, forging unity among themselves, and putting some muscle behind an agenda that prepares them for the future.

March 18, 2019

* Leslie Elliott Armijo is an associate professor at the School for International Studies, Simon Fraser University, Vancouver. She is the co-author, with Daniel C. Tirone (Louisiana State University) and Hyoung-kyu Chey (National Graduate Institute for Policy Studies, Tokyo), of The Monetary and Financial Powers of States: Theory, Dataset, and Observations on the Trajectory of American Dominance.

Latin America Takes on Big Pharma

By Thomas Andrew O’Keefe*

Colorful pills in capsule form and tablet form

Generic pills / Shutterstock / Creative Commons

For the past decade, Latin America has attempted to reduce the prices of high-cost medications through either joint negotiations, pooled procurement, or both, but so far with limited success.  The incentive for reducing prices is that all Latin American countries have national health care systems, and in some cases (such as Colombia and Uruguay) are legally obligated to provide their citizens with any required medication free of charge and regardless of cost.

  • In the bigger countries, such as Brazil and Mexico, the prices for certain pharmaceutical products and medical devices for public-sector purchase at the federal, state, and even municipal level are negotiated by a single governmental entity. Argentina, Chile, and Mexico also have mechanisms for pooled procurement of public-sector health-related purchases at all levels of government.  Given its huge internal market, Brazil also unilaterally caps prices on medications and threatens to issue compulsory licenses to extract concessions from pharmaceutical multinationals.

Latin American countries have also tried turning to sub-regional mechanisms to protect themselves from excessively high prices, albeit with meager results.

  • The Central American Integration System (SICA) has the most active regional mechanism to negotiate the prices of high-cost drugs and medical devices. The governments of Belize, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama have authorized the Council of Central American Ministers of Health (COMISCA) to negotiate lower prices on their behalf.  Those medications and devices that obtain a reduction are then acquired by the public sector utilizing each government’s procurement procedures.  By negotiating as a bloc, the SICA countries report total savings of about US$60 million on dozens of products since the initiative began in 2010.
  • In late 2015, MERCOSUR launched a mechanism to negotiate prices for both the full and associate member states. Since those 12 countries coincided with UNASUR’s membership, that entity was given a supporting role to create a continental data bank of pharmaceutical prices paid by each member government that would be used to support the MERCOSUR negotiations.  That data bank proved to be ineffective, however, as not all countries submitted the required information and the methodologies for determining prices was inconsistent.  To date, MERCOSUR has only obtained price reductions for one HIV medication, manufactured by an Indian firm eager to establish a market presence in South America, and reportedly for an immunosuppressive drug used after organ transplants to lower the risk of rejection.  Reduction offers by Gilead for its Hepatitis C cure have, so far, been rejected by the MERCOSUR governments as inadequate.

MERCOSUR’s limited achievements appear to have encouraged individual countries to press on alone.  Colombia, while initially supporting the MERCOSUR initiative as an associate member, eventually established its own national mechanism to negotiate prices, and in July 2017 announced that it had obtained cost savings of up to 90 percent for three Hepatitis C treatments.  MERCOSUR’s sparse track record also helps to explain why Chile’s Minister of Health announced in October 2018 that his country, Argentina, Colombia, and Peru would utilize the Strategic Fund of the Pan American Health Organization (PAHO) to purchase 10 state-of-the art cancer treatments.  Because of PAHO’s annual bulk purchases, it is often able to obtain significant price reductions from pre-qualified manufacturers and suppliers that are then passed on to member governments.  Member states facing a public health emergency can also make purchases without cash in hand, as the Strategic Fund will extend a short-term loan at no interest.  In the future, the Latin American countries are likely to pragmatically utilize a range of options in trying to contain the rising costs of new medications that include both national and regional mechanisms as well as PAHO’s Strategic Fund.  The challenge will be to avoid Big Pharma “red lining” the region and excluding it from accessing the most innovative medical cures such as gene therapies that can fetch a million-dollar price tag per treatment.

February 19, 2019

* Thomas Andrew O’Keefe is president of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University.  He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere (New York: Routledge, 2018).