This week on the Trading Room, we address the Mexican the weekly news that impacts international trade in Mexico: Mexican COVID-19 strategy to resume activities, changes to the essential activities, Director General of the WTO steps down and its implications to Mexico, as well as the G20 decision. Download our newsletter in the following link: Trading Room – May 15.
After requests from the US government and industry, the Mexican Ministry of Health finally published yesterday the decision that adds as an “essential activities” the transportation equipment manufacturing industry, as well as the construction and mining; the decision also establishes a three-stage strategy to resume educational, social, and economic activities.
However, the three aforementioned industries will be able to resume activities until June 1, so supply chains will likely be affected, particularly OEM plants in the US that will begin operations the following week, as we reported last week citing the MENA.
For more information on the stages, we prepared an Alert – COVID.
We consider it important to share that the General Health Council published a similar decision on Wednesday, May 13, however, it was suddenly and incredibly withdrawn during the day by the Official Gazette of the Federation. The department issued a statement with an explanation.
Importante: Aclaración sobre la publicación de la edición electrónica del DOF del día de hoy. pic.twitter.com/DFmTVAckCJ
— Diario Oficial DOF (@DOF_SEGOB) May 13, 2020
A retired supreme court judge, Mr. Cossío, stated in a tweet that the alteration of the Official Gazette was done because public officials realized that the General Health Council lacked powers to issue such a decision.
La publicación del acuerdo del Sec. de Salud en el Diario Oficial del día de hoy, demuestra que la grave alteración al Diario Oficial de ayer fue porque se dieron cuenta que el Consejo de Salubridad era incompetente para dictar tales medidas.
— José Ramón Cossío D. (@JRCossio) May 14, 2020
The Mexican Bar issued a statement regarding this event calling the government to protect the trustworthiness of the Official Gazette.
— BMA COLEGIO ABOGADOS (@BMA_Abogados) May 14, 2020
In VTZ we fully endorse the content of the letter.
Yesterday, May 14, Roberto Azevedo, Director General (DG) of the WTO, announced that he will step down from his position on August 31 of this year. Roberto Azevedo began his position in 2013, a mandate that was renewed in 2017, and that ended in August 2021.
Within his mandate, the Commercial Facilitation Agreement, the expansion of the Information Technology Agreement, among other decisions, were agreed; Also, Azevedo has been criticized for being passive in defending the multilateral trading system due to the constant attacks of the US against the Appellate Body (including on a budgetary basis).
According to his farewell speech, Azevedo explains that he is resigning because, in part, members will be able to choose a new director who will have the time to prepare for the next Ministerial Conference as well as to set a new path for the future of the WTO, taking into account the new post-COVID-19 realities.
The WTO is going through a critical time, as no consensus has been reached, notably, with regard to the selection of Appellate Body members. Without a leader at the head of the WTO, the multilateral system will be paralyzed because members will hardly be able to reach new agreements to renew the foundations of the WTO, such as new agreements on subsidies, dispute settlement, fishery subsidies, etc.
Lighthizer, the US Trade Representative, stated that he looks forward to participating in the selection of the new DG; however, if the members do not manage to choose promptly, the trade uncertainty will continue because it will be difficult to reduce the tensions of the US-China trade war, to return the “Rule of Law” to international trade relations punishing unilateral-protectionist actions, as well as to face the post-COVID effects.
The regional blocs will continue to take on greater relevance in international trade, fragmenting and rendering the multilateral system obsolete. Although Mexico is a strong supporter of the multilateral system, Mexico has established itself in various regional blocs, notably USMCA (with a renewed dispute settlement chapter), CPTPP, Pacific Alliance, and now modernizing its trade relations with the European Union, which may allow Mexico to become an attraction pole for new regional and global value chains.
On May 14, the Ministry of Economy reported that the Trade and Investment Ministers of the G20 agreed on a series of specific actions in the short and long term to counter the economic effects of the COVID-19 pandemic.
— Economía México (@SE_mx) May 14, 2020
The actions foreseen in the short term focus mainly on issues of trade regulation and facilitation, global value chains, strengthening of foreign investment, transparency, and operation of logistics channels. In the long term, members agreed to strengthen the multilateral trading system.
Finally, the Ministry of Economy’s statement indicates that the G20 Trade and Investment Working Group must report the status of implementation of the agreed actions.
This week our newsletter addresses the issue regarding the essential businesses in Mexico, developments as to when economic activities for non-essential businesses in Mexico will resume, proposals to reactivate the Mexican economy on behalf of the Business Coordinating Council, as well as VTZ alerts. Download our newsletter here.
Last Friday and in the last days, news outlets reported that a group of senators submitted a letter to the Secretary of State, Mike Pompeo, so that the government of Mexico may clarify the definition of “essential businesses”. In the letter, the senators ask Pompeo to pressure Mexico to include food, medical, transportation, infrastructure, aerospace, auto, and national security as essential businesses. The food, medical, and national security sectors are essential activities in Mexico as we reported in our previous edition.
On Tuesday, the Motor & Equipment Manufacturers Association (MENA), for its part, also submitted a letter to the Secretary of State regarding resuming activities in the auto and auto parts industry in Mexico. Although to our knowledge Pompeo has not made any public statements on this matter these days, MENA appreciated the efforts of the Secretary and his team, including Ambassador Christopher Landau.
In this regard, MENA informs Pompeo that the majority of the assembly plants (OEMs) will resume operations in the US on Monday 18 May. Hence, MENA requests that the automotive sector in Mexico resumes operations by next Tuesday, 12 May. MENA acknowledges that,
“[w]ithout parts from Mexico, it will be virtually impossible for U.S. motor vehicle assembly plants to restart.”
There is still no legal news about resuming activities for non-essential businesses in Mexico, but yesterday the Mexican President, AMLO, pointed out that Mexico is preparing to return to normality regarding productive activities and “once we have greater control over the pandemic, all economic, social, and cultural activity will be opened, of course, in a careful, gradual, and responsible manner.”
In response to a question of a journalist, the President said that communities that have not registered COVID cases may resume activities on Sunday 17 May. The president also announced that a plan to resume activities will be presented the following week. In this regard, the President also raised the possibility of establishing a sort of “traffic light” mechanism to determine if sectors, such as manufacturing, automotive, etc., can resume activities.
Needless to say, the Mexican States with the highest COVID registered cases, according to the federal government statistics, are:
*Figures dated May 6.
Fuente/Source: Secretaría de Salud
At a local level, we observe that cities or zones with a strong industrial activity register “considerable” COVID cases, which can be seen in the following map. Mexico is one of the countries with the lowest number of COVID tests per million people and, therefore, Mexico has a “low” number of registered cases because it is using the “sentinel surveillance” methodology.
#TestingForCovid19 has varied widely across countries ⤵️
— OECD ➡️ Better policies for better lives (@OECD) April 20, 2020
Taking into account the President’s public statements and the presence of COVID in industrial regions (such as Aguascalientes, León, Monterrey, Puebla, and northern border cities), we believe that it is extremely unlikely for the auto or manufacturing industry to resume operations the following week.
On May 6, the Mexican Business Coordinating Council (CCE) presented 68 recommendations to the Mexican President, AMLO, prepared by panelists from the private and public sectors. The recommendations aim to face the COVID-19 pandemic and its effects on the Mexican economy. The following three types of actions are submitted:
Within this last category, a Policy for the Mexican Economy is developed that includes, among other matters, the following recommendations on Investment and Trade:
We emphasize that these proposals are not new. For example, adding more regional or domestic content to the global value chains and promoting export diversification has been a goal of past administrations; in fact, they are policy objectives of the current administration.
This week the European Commission published the “updated” texts of the EU-Mexico FTA modernization. These texts are preliminary and subject to a legal review known as “legal scrubbing”. Read the texts here.
During this week, several news outlets reported incorrect information about the pilot test of a digital currency conducted by the People’s Bank of China. Our partner who heads the Chinese Desk, Susana Muñoz, prepared an alert where she clarifies the information about the digital currency in China, check it out here.
This week, the First Amendment to the Miscellaneous Tax Regulations was published, which provides for the suspension of certain tax acts due to the health emergency. Our partner, Jorge Montes, prepared a tax alert on such matters, visit here (in Spanish only).
Download our Newsletter in PDF in the following link: Trading Room -24042020
On March 19, the Cybersecurity and Infrastructure Security Agency (CISA) issued a non-binding guideline (guidance) considering 16 sectors considered “essential” for the US. The guideline identifies the manufacturing sector that includes the primary metals (e.g. steel mills, aluminum, non-mineral ferrous), machinery (e.g. motors and turbines, power transmission equipment, and agricultural, mining and construction equipment), electrical (e.g. electric motors, transformers, and generators), and transportation equipment (e.g. ships, aerospace, and rail).
On March 30, Mexico issued an Agreement (“COVID Agreement”) ordering the immediate suspension of non-essential activities until April 30 and listed as essential activities, among others, those related to health, pharmaceuticals, manufacturing of supplies medical and health technologies, security, fundamental sectors of the economy (e.g. financial, tax collection, energy, food industry, retail, agricultural production, fish, and livestock, chemical industry, steel, etc.).
In sum, Mexico did not include manufacturing activities as an essential sector, except those that are related to medical supplies and equipment, so non-essential factories and/or maquiladoras are (or in theory should be) closed.
Consequently, the US government has expressed its concern about supply chains, particularly those that concern inputs used for national security. The National Manufacturing Association of the United States (NAM) submitted a letter, dated April 15, to the President of Mexico calling to expand and clarify the industries that are essential and requesting to take into account CISA guidelines.
On Tuesday, April 21, the US Ambassador said on Twitter that he is doing everything he can to save supply chains between Mexico, the US, and Canada. The supply chains of the North American region have been interrupted, in part, because the countries have not harmonized the definition of what constitutes “essential activities”.
That same day, the Ministry of Economy issued a brief statement on Twitter. The Ministry recognized that it is in constant communication with the US Trade Representative (USTR) to protect the health of their fellow citizens and, at the same time, the productive integration of their economies.
The President of Mexico, for his part, approached this problem in his conference on Thursday, April 23, albeit superficially. He acknowledged that the automotive and other industries are closely interrelated, but he also pointed out that “an agreement will be reached at the time, when [USA] will resume activities. We have made a commitment… to analyze when to resume activities so that gradually production on the border returns to normality. But this has not been decided yet…”
According to recent reports, leaders of the Mexican manufacturing industry have stated that companies in the US will turn to local suppliers displacing Mexicans permanently and that contracts are at risk. Luis Aguirre Lang, president of INDEX, indicated to El Universal that options to resume activities at the work centers will be presented to the federal government to sustain the 3 million jobs generated by the export manufacturing industry or IMMEX.
In this regard, both the US and Mexican media have reported outbreaks of COVID in the workplace. For example, it is reported that the counties where the largest meat processing plants are located have a higher rate of COVID infection; it is also reported that there are more health risks in the food industry than manufacturing, so it is also likely that there are greater risks of COVID infection in the food industry. In Mexico, for example, outbreaks of COVID have also been reported in workplaces, including maquiladoras in Baja California (report April 22), Chihuahua (report April 20), Ciudad Juarez (report April 19).
On April 21, the Ministry of Health modified the “COVID Agreement” ordering to extend the suspension of non-essential activities until May 30. The modification to the COVID Agreement also orders state authorities to enact prevention and control measures pursuant to the “general criteria” issued by the Ministry of Health and in accordance with the magnitude of the COVID epidemic.
On Tuesday, April 21, the Mexican Central Bank’s Governing Board approved a package of measures with the objective to (1) promoting orderly behavior in the financial markets, (2) strengthening credit-granting channels, and (3) providing liquidity for healthy development of the financial system; among other measures, we highlight the “provision of resources to [development] banking institutions to channel credit to [SMEs] and individuals… ”; this program will benefit from 250 billion pesos. These actions seek to reduce the possibility that credit institutions have pro-cyclically behavior and that financial intermediaries can continue to provide financing to the economy in order to offset the adverse effects of the impact of COVID on financial markets. This decision was well received by the business community.
On Wednesday, April 22, the President in his morning conference detailed his “plan” to face the economic crisis, which was published as a Decree yesterday.
In essence, the plan emphasizes to continue with projects and programs considered as a priority and to adopt austerity measures, rejecting the idea to request debt. However, economists point out that Mexico’s public debt has increased due to the peso devaluation, the value of Mexican debt set in USD, the price of oil, among other factors.
Finally, on Thursday, April 23, the Ministry of Economy announced that it will give one million micro credits (25,000 pesos each) to small family businesses that are registered in the “Census of Well-being”. This census has been criticized because it has been used for political purposes. The micro credits announced by the Ministry of Economy are in addition to the Mexican Institute Social Security (“IMSS“) credits for the same amount to those SMEs that have not reduced their workforce or wages. Clearly, these programs are very limited and insufficient to face the economic consequences of COVID that will affect companies in all sectors of the economy.
So far, the only tax relief measure at the federal level is for individuals that consist of filing the annual tax return until June. At the state level, authorities have implemented relief measures for state and local taxes as a result of COVID.