FLG Strategic Market & Government Advice

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1 The NASCO Weekly Report Vol. 1 No August 2015 Jorge Molina jfmolinal@gmail.com This week Trade Promotion Authority (TPA) p. 1 Trans Pacific Partnership (TPP) p. 1 Transatlantic Trade & Investment Partnership (TTIP) p. 4 World Trade Organization (WTO) p. 5 Country of Origin Labeling (COOL) p. 5 Energy p. 6 Mexican Politics p. 6 The Last One p. 7 Trade Promotion Authority (TPA) 1) Human rights, labor and trade. More than a month before the Customs Bill is settled in conference, human rights trade related issues remain on the front page. Last week, a consumer in California filled a class action lawsuit against Costco for selling seafood produced by slave labor. The suit alleges Costco is knowingly selling farmed shrimp from Thailand from producers involved with slave labor and fails to inform consumers of the product s origin. For the past two years, Thailand has been in tier 3 of the US State Department annual Trafficking in Persons Report. Thailand is interested in joining the TPP and has not been subjected to the same sanctions as other tier 3 nations. The Guardian, The Associated Press, and The New York Times have all published extensive investigations on the plight of enslaved seafood workers, many of whom are immigrants, which has helped raise awareness about the issue. Retailers linked to the slave shrimp, including Costco and Walmart, have responded with promises of audits, overhauls, and corrective action. Trans Pacific Partnership (TPP) 1) Only a handful of issues remain. On the sidelines of the 2015 annual meeting of the Association of Southeast Asian Nations (ASEAN), USTR Michael Froman met over the weekend with trade ministers from Australia, Brunei, Malaysia and New Zealand in Kuala Lumpur to discuss the remaining issues on the TPP agenda. According to statements made to Malaysia s press, there are only a handful of issues to be resolved which needed further work, said USTR Froman. He added that work is going on in small groups with the "goal of identifying landing zones in a creative and collaborative way" for each of the remaining issues and he hopes to reach a final agreement soon. Froman did not mention possible dates for the next meeting. Australia Trade Minister, Andrew Robb, also said that negotiations are very close to conclusion, with just a few more crucial issues to be sorted out. Minister Robb said he believes negotiations could be concluded by year end. Minister Robb met with USTR Froman on Sunday 23 August. Malaysia s Trade Minister Mustapa Mohamed said on Monday 24 August that he has yet to see the light at end of the tunnel in areas of dispute for Malaysia that include state owned enterprises and labor rights. Earlier this week, there were reports that the USTR has been assessing whether Malaysia will be able to ratify the agreement and fulfill its TPP obligations, particularly after the country was moved to tier 2 in the US State Department 2015 human trafficking report. Late night on Tuesday 25, President Obama had a 40 minute teleconference with Japanese PM Shinzo Abe to talk about the recent leaks of the US spying on top Japanese officials. During the conversation, President Obama and PM Abe agreed to work together to conclude the TPP talks. The US Chamber of 1

2 Commerce and other major US business groups say it is more important to get a good deal that set a definite timeline, although there is general consensus on trying to finish the negotiation this year. 2) Japanese proposal on entry into force. TPP countries are moving toward consensus on a Japanese proposal stipulating that the agreement will enter into force once at least six countries representing 85% of the region's economic activity have ratified the deal. Concern has grown as several TPP parties face elections over the next months, i.e., Canada, the US, Japan and Peru. 3) Asian preeminence. USTR Michael Froman spoke most favorably about the importance of economic integration in Asia and the role that the ASEAN group may play in it. The 10 member association set a deadline of 31 December 2015 to formally launch a regional trading bloc, where several parties are also TPP members. The USTR is looking to have common US promoted rules and standards in the Asia Pacific region by 2020, which will counterbalance the growth and influence of China in the medium run. Some think tanks have started to look into the possible consequences of the TPP in Central America and the Caribbean as the Obama administration is intent on providing significant new aid to reduce violence, support development and build institutions in the region. The two appear unrelated, but the TPP final shape may actually play an important part in determining whether the Obama administration will meet its policy and security goals in Central America, since it could unintentionally impede the region s economic development. There is concern particularly about the textile sector, one of the key sectors for both Central American and some Caribbean countries, like the Dominican Republic, where there is a perception that an estimated 300,000 textiles jobs across El Salvador, Guatemala and Honduras could be at risk, depending on whether it allows certain imports from China, for example, via Vietnam and Malaysia. Agriculture jobs from sugar to coffee could also be lost, which could trigger another migration wave towards the US and send more young people into regional gangs and drug cartels. 4) Canada, Mexico and the US met on autos. Canadian and Mexican auto executives warned last week in a joint letter to Canadian Trade Minister Ed Fast and his Mexican counterpart, Ildefonso Guajardo, that the TPP rule of origin (ROO) for autos as it stands could severely impact their companies. Both countries argue that the ROO must be higher than what it was negotiated between the US and Japan prior to the Hawaii meeting, 30% for auto parts and 45% for light duty vehicles. Japan wants to continue sourcing from cheap non TPP countries, like China and Thailand. Canadian and Mexican auto parts makers collectively employ nearly one million workers. Canadian officials say one of the biggest problems for them is that the provisional TPP agreement between Washington and Tokyo stipulated a series of exemptions that allow even lower TPP content in imported parts and vehicles. NAFTA rules stipulate that a car can be shipped duty free into Canada, the US or Mexico if at least 62.5% of it originates in these countries. Mexican auto executives say that the auto industry represents 20% of all trade across the three NAFTA markets. Canada, Mexico and the US met in Washington on Thursday 20 August, but there was no report on the meeting. In a letter sent last week to USTR Froman, Richard Trumka, president of the AFL CIO, urged trade negotiators to back rules that would make it harder for Japanese automakers to use more parts built in low wage countries for export to the US under the TPP. In the letter, obtained by The Detroit News, Mr. Trumka says I hope it is not the case that the Canadian and Mexican negotiators are actually holding a harder line than our own government on this issue. Mr. Trumka said the ROO should remain at least as 2

3 high as under NAFTA. The pact would end the US 25% tariffs on imported light trucks and 2.5% tariffs on cars and auto parts that have been in place for over 50 years. 5) Pressure builds up to include currency manipulation guidelines. On Friday 21 August, AFL CIO President Richard Trumka criticized USTR officials for failing to make a stronger push for adding exchange rate provisions into trade deals. Mr. Trumka said Vietnam's recent currency devaluation following the yuan s devaluation means it is time for the USTR to admit its mistake and make sure the TPP includes enforceable currency rules that protect and support America s working families. The National Farmers Union echoed the AFL CIO position. Mr. Trumka said that some TPP nations Australia, New Zealand and Malaysia also have experienced drops against the US dollar since China s surprise move two weeks ago to let their currency align better with market forces. He did not mention Mexico, where the peso/us dollar exchange rate reached an alltime high of $17.58 on Monday 24 August. Several Democrat legislators and some business organizations like the National Farmers Union are in favor of including currency manipulation guidelines in the TPP. On Friday 21 August, the IMF said it will not include the yuan in the special drawings rights (SDR) reserve basket at least until 30 September 2016 arguing it has yet to reach the level of free exchange. The review of the SDR basket valuation occurs every five years and was due for 31 December 2015 but will now be deferred an additional nine months, when a key focus will be whether the yuan is freely usable. 6) Still waiting for Canada dairy offer. Ottawa is telling Canadian dairy producers that it has not made any formal offer on that sector, even during the Hawaii ministerial meeting, while the longest campaign in recent history is in full swing. There was also no report that during last week s discussions on autos in Washington among Canada, Mexico and the US the dairy sector was part of the agenda. Still, there are rumors about some Canadian proposals made, none of which have been confirmed. On Wednesday 26 August, PM Harper visited Lancaster, Ontario south of Ottawa where a heavilyoriented crow of dairy farmers were disappointed that he did not speak about the future of supply management nor did he provide an update on the negotiations. Instead, PM Harper promised to spend C$200 million to boost high speed broadband Internet access in remote and rural areas. Members of the media did not ask PM Harper about supply management during the news conference. 7) Opposition against tobacco grows in other countries. Civil organizations of doctors and nurses in New Zealand are concerned the TPP may stop the on time implementation of measures to make that nation the first smoke free nation in the world by Tobacco is identified there as the largest preventable cause of mortality worldwide which has prompted the implementation in that country of some of the toughest rules and highest taxes against smokers. New Zealand s legislation considers tobacco adversely affects smokers, their families and the environment as tobacco plants displace food crops and cause serious nicotine poisoning in farmers and tobacco workers. One of the arguments to exclude tobacco at least from the investor state dispute settlement mechanism (ISDS) is that defending the legal challenges of tobacco companies against laws in Uruguay that aimed to significantly reduce the consumption of tobacco products became so expensive that the government was about to repeal the law before being rescued by the Bloomberg Philanthropic Trust and the Gates Foundation. Australia also believes in plain packaging laws where the government has already spent an estimated US$50 million contesting the first part of the legal challenge. Philip Morris and British American Tobacco have been pressing the European Commission in order to preserve the possibility of 3

4 tobacco companies to continue challenging laws against smokers in the TTIP negotiations, according to documents released by the British media this week, triggering a negative reaction from the public. 8) Mexico says labor talks and TPP are unrelated. Mr. José Luis Stein, Director General for International Affairs of the Mexican Labor Secretariat, wrote a letter emphatically denying that upcoming labor reforms in Mexico are tied to the TPP. After the Wednesday 12 August meeting between the Mexican and US Labor Secretaries, Alfonso Navarrete and Thomas Perez, there were reports in the US media that Mexico would implement several changes in its labor regime to comply with the new TPP regulations. Every time the TPP issue has been raised, it was specifically expressed that discussions on labor topics within the bilateral agenda were not under any circumstance subject to the signing of the TPP, or that the conclusion of the TPP was subject or conditioned to any of the topics of our bilateral agenda, he wrote. The comments are expected to draw a reaction from labor unions and members of Congress who have criticized Mexico s record on workers rights. 9) Opposition grows. New Zealand Trade Minister Tim Groser continues to face growing opposition to the TPP. On Tuesday 25 August he said that he will not let "anti trade forces" stand in the way of the deal and that TPP resistance was deeply ideological while extreme claims were being made without sound arguments. "But when we've done this deal if we do this deal then we'll be able to get the facts out and confront these ludicrously exaggerated concerns," he said. Thousands of people have taken part in anti TPP demonstrations across New Zealand this month. Even if a good deal is finally negotiated it will take a major sales job on the Government's behalf so it's not viewed as a con job by many Kiwis. There is also widespread opposition to the TPP in Malaysia, where the Trade Minister, Mustapa Mohamed, had been holding public roadshow events around the country aimed at educating people about the deal. We have some domestic challenges to overcome like the cost benefit analysis and convincing people of the benefit for Malaysia if it participates in TPP, Minister Mohamed said. Malaysia will present the draft of the final agreement together with a cost benefit analysis to Parliament to be deliberated on and voted for to guarantee its participation. Transatlantic Trade & Investment Partnership (TTIP) 1) Malmström responds to transparency complaints. On Friday 21 August, EU Trade Commissioner Cecilia Malmström committed to provide much more detailed and extensive summaries of each round of talks than those already published, addressing complaints against the lack of transparency of the negotiations. In a blog post, she emphasized that European Parliament members have full access to EU proposals and positions in the talks and that the commission has published virtually all the EU s negotiating positions and textual proposals and summaries on its website. She stressed there is one document in a reading room, which is a temporary measure so we could take time to think how to ensure a minimum confidentiality for a document that includes our internal discussions and tactical deliberations. The statement came after Germany urged the European Commission to restore EU governments' access to electronic reports on the state of the negotiations. Commissioner Malmström decided last month to stop sending out the reports to member states in order to stem a series of leaks. Politicians from individual EU countries can now only access the documents in secure reading rooms in Brussels. Although Chancellor Merkel is one of the major supporters of the agreement, only 39% of Germans back the TTIP. 4

5 2) Opposition against FTAs grows in EU. Protesters took to the streets on Saturday 22 August across the UK in efforts led by the organization 38 Degrees. Over 50,000 demonstrators representing more than 30 organizations are expected to gather in front of Berlin s central train station on Saturday 10 October to protest against the TTIP and CETA, with concerns ranging from the end of cultural diversity in Europe to devastating effects the deals could have in developing countries. The leading organizations, like Stop TTIP and CETA and the Confederation of German Trade Unions (DGB), are criticizing the lack of transparency surrounding negotiations and condemning the agreements as a threat to ecological and social standards. Others want to preserve book price fixing, copyright law and public broadcasting. The Stop TTIP movement said on Monday 24 August that more than 2.5 million Europeans have signed the European Citizens Initiative (ECI) against the TTIP and CETA. World Trade Organization (WTO) 1) Chief negotiators to meet and finish agenda for Nairobi. WTO chief negotiators will meet in Geneva in mid September to finalize the agenda for the December ministerial conference. WTO members have not finished the agenda because of differences in the priority order of the issues, neither the post Bali work program. Developing countries are expected to ask about bringing back issues related to the stalled Doha Round including agriculture (export subsidies), market access and services in the next meeting. The next Ministerial Conference, the highest WTO decision making body, is scheduled to be held from Monday 15 through Friday 18 in Nairobi, Kenya. The last meeting was held in December 2013 in Bali, Indonesia, where members finalized the trade facilitation agreement. 2) Possible consequences of the TTP and TTIP. It is expected that several of the new issues discussed in both the TTP and TTIP will make their way into the WTO body between 2016 and 2017, mostly on small and medium sized enterprises, competition and even currency manipulation. The most important changes are expected to take place in the regulatory agreements, like TBT, SPS and the environmental agreement. Getting these changes approved will be one of the first tasks of the next US government. Country of Origin Labeling (COOL) 1) Pressure builds prior to WTO meetings. Almost three weeks before the Tuesday 15 and Wednesday 16 September meetings in Geneva, different organizations are building up pressure both in favor and against the repeal of the US COOL legislation. The USTR filed a brief arguing that Canada and Mexico have dramatically overestimated their damages. The US has objected to a Canadian request for US$2.5 billion and a Mexican request for US$713 million in non compliance retaliation, arguing those amounts should be closer to US$43.22 million for Canada and US$47.55 million for Mexico. A final determination from the arbitration panel is expected in late October or early November. The National Farmers Union backs legislation sponsored by Sen. John Hoeven (R ND) and Sen. Debbie Stabenow (R MI) offering a voluntary COOL plan. The bill is competing with legislation sponsored by Senate Agriculture Committee Chairman Pat Roberts (R KS) to fully repeal COOL requirements for meat. Identical legislation was passed in the House of Representatives and has been publicly endorsed by Canada and Mexico to prevent retaliation. The USTR has said that both options being debated in the Senate have the potential to constitute compliance with US WTO obligations. R CALF USA, one of almost 150 organizations who support COOL, is holding firm to its long held position of backing a mandatory plan, while saying that not only are accusations of financial loss by Canada and Mexico due to COOL are more than an over exaggeration. R CALF, a non profit cattle trade organization, is seeking approval of a resolution calling for President Obama and Congress to immediately withdraw 5

6 the US from the WTO. The organization represents thousands of US cattle producers on domestic and international trade and marketing issues. Energy 1) Third bidding process of Round One. On Wednesday 26 August, the Mexican National Hydrocarbons Commission (CNH) announced that the rules for the third bidding process of Round One will be published early in September, which will award 25 licensed contracts for land fields in Nuevo Leon, Tamaulipas, Veracruz and northern Chiapas. Under the licensed contract, the government will receive an income based on the gross income of the company, before deducting costs. All fields have reserves and are producing. CNH said there are 82 interested companies and that both technical and financial requirements will be more flexible. 2) Sen. Reid sees chance for oil exports compromise. On Wednesday 26 August, Senate Minority Leader Harry Reid (D NV) said he sees room for a compromise on the effort to lift the ban on US crude oil exports. Sen. Reid was careful not to choose a side in the debate saying that both those in favor and those opposed to exporting US produced crude have made compelling arguments. We should sit down and work something out with those who are so focused on exporting it and those who are focused on not exporting it and come up with a deal, he said. Mexican Politics 1) Major changes in the Mexican cabinet. On Thursday 27 August, President Peña Nieto announced 10 changes in his cabinet, four months before the halfway point of his administration and a week before the start of the LXIII Legislature. The leading associations of the private sector were expecting some of these changes to take place since January, although the key members of the Economic Cabinet Luis Videgaray of Finance, Ildefonso Guajardo in Economics and Gerardo Ruiz Esparza in Communications and Transportation remain in place. The Mexican economy is currently in pace to grow less than 2%, while the original official forecast was 3.5%, the peso/ US dollar exchange rate reached on Monday 24 August an all time high of $17.58 and trade is stagnant. The initial reaction was that President Peña Nieto only shuffled some of his pieces around, strengthened his inner circle and got rid of some of the representatives of the older guard of the PRI. While the President mentioned in his speech the need to show results particularly when the federal government has been heavily criticized for a lack of sound results in its first two and a half years there were puzzled looks to try to understand some of the new appointments, particularly former Tourism Secretary Claudia Ruiz as the new Foreign Affairs Secretary, former general director of the Foreign Trade Bank (Bancomext) Enrique de la Madrid as new Tourism Secretary, and former Secretary of Social Development Rosario Robles as new Secretary of Rural, Territorial and Urban Development. The major challenge is perceived for the new Education Secretary and former Chief of the Office of the President Aurelio Nuño, while the announcement of José E. Calzada, former Queretaro Governor, as the new Agriculture Secretary had been expected for some time. Rafael Pacchiano, a member of the Green Party, will be the new Environment Secretary, former Foreign Affairs Secretary José A. Meade will be the new Social Development Secretary and Francisco Guzmán, former Chief Advisor to the President, will be the new Chief of the Office of the President. Several new announcements must come in the following days. 2) New Congress starts next week. The LXIII Legislature will officially start on Tuesday 1 September what promises to be one of the most challenging periods when it will have to approve in November a budget which will make necessary to review all federal programs. The PRI will hold a relative majority in both houses, with 40.6% of the 500 seats in the Lower House and 42.2% of the 128 seats in the Senate. The 6

7 Green Party (PVEM) is expected to continue working as a close PRI ally, giving the PRI an absolute majority in both houses. The agenda will be driven by the PRI over the next three years, leading to the 2018 presidential elections. The PAN remains the second largest party in both houses, with 21.6% of the seats in the Lower House and 28.9% in the Senate. The group of left wing parties represents 24% of the seats in the Lower House and 22% of those in the Senate. Each party chairs in each house a percentage of commissions equal to the percentage of seats it holds in that house, while the commissions headed by each party is subject of intense negotiations. Key commissions in each house are Budget, Energy, Telecommunications and Constitutional Issues and the PRI is expected to lead at least two of these in each house. 3) Senate will hold a hearing on Friday for nominee to become US ambassador. Miguel Basáñez, nominated by President Peña Nieto to become the next Mexican ambassador in Washington, will appear on Friday 28 August before the Foreign Affairs Commission, chaired by Sen. Gabriela Cuevas (PAN). The PRI and PAN account for 10 of the 15 members of this commission. The recommendation of Mr. Basáñez needs to be approved by the commission by simple majority and then it will be sent to the Senate floor, where simple majority will be necessary for Mr. Basáñez to be confirmed, most likely in September. It is expected that most of the questions on Friday will center on the lack of diplomatic experience of Mr. Basáñez, who is expected to operate one of the most complex and demanding agendas of the last fifty years, when the image of Mexico in the US is not exactly at its peak. The Last One Windows 10: the desktop is back. So far, sooooo very good. Any opinions, positions or projections expressed in this report are that of FLG Strategic Market & Government Advice and do not represent those of NASCO. FLG Strategic Market & Government Advice is a Mexico City based consultant firm specialized in political risk analysis, government affairs, public policies, political and economic intelligence, econometric modelling and forecasting. 7