How Will New Trade Deal With Mexico Affect Auto Industry M&A And Investment?

07 September 2018 - 08:45 am UTC

The ongoing trade dispute between the US and its immediate neighbors has instilled uncertainty in investors, especially since it will affect the Mexican Auto Industy’s prospects.
Early last week (Aug. 27), Mexican officials agreed to a new trade deal proposed by US President Donald Trump’s administration, who has sought a rewrite of NAFTA, which has served as trade policy for the last quarter of a century among Mexico, United States and Canada.
Although the agreement includes provisions around financial services, digital trade and the environment, and a modified sunset clause, the major provisions focus on autos, including changes to NAFTA’s rules of origin, and dispute settlement procedures. Canadian officials have rebuffed calls for eliminating the dispute settlement procedures and agricultural tariffs.
“But perhaps one of the worst impacts from Trump’s bull-in-the-China-shop approach to trade negotiations is what he’s managed to do to relations between Mexico and Canada. By trying to negotiate individually, Trump employed a divide-and-conquer strategy that may prove counterproductive given the level of integration of North American supply chains, particularly in the manufacture of big-ticket goods like cars and airplanes,” reports Business Insider.
The FX markets have become just as volatile as trade negotiations.
The USD/MXN nominal exchange rate almost touched MXN 19.70 per USD 1 on Wednesday for a few moments before settling into a MXN 19.55 – 19.35 range. The Mexican peso reached an all-time high of MXN 21.92 in January 2017 against the Greenback.
“The Mexican peso dropped earlier today to the lowest level in two months amid emerging market jitters. As the negative tone eased, it started to recover ground and erased daily losses. Despite the recovery, emerging market currencies, including MXN remain under pressure,” writes Matias Salord of FXStreet.
As the Trump administration focused its efforts on NAFTA renegotiation with Canadian officials beginning August 27, the USD/CAD exchange trajectory shot upward from CAN 1.29 per USD 1 on August 29 to 1.32 on September 6. However, aside from trade relations, the sharp fall in crude oil prices has weighed on the commodity-sensitive loonie.
As currency concerns bear down on Mexico, many investors are wondering how the country’s auto industry supply chain will deal with challenges from the proposed rewrite of NAFTA, since it calls for higher wages of Mexican workers in new auto plants and the implementation of domestic content provisions.
Renegotiating NAFTA was a key plank in President Trump’s political platform in the 2016 election. When he was elected to the White House, the Mexican peso plummeted and several M&A deals were put on hold, which marred economic growth. According to Mergermarket data, no auto-industry related M&A deals have taken place in Mexico since mid-2017.
While the situation may change between now and Mergermarket’s annual Mexico M&A and Private Equity Forum on October 24, plenty of issues will remain that panelists are expected to discuss, including the auto business, energy, and other sectors as well as challenges behind the peso, balance of payments and rising rates.
In fact, all the talk around a new NAFTA deal may be moot.
“After returning from a trip to Mexico City to discuss the overhaul of the North American Free Trade Agreement, South Texas Congressman Henry Cuellar said he could not get assurances from the new ruling party there, led by leftist president-elect Andres Manuel Lopez Obrador, that its leaders would sign on to a new trade deal,” reports the Houston Chronicle.
The president-elect, also known as AMLO, also saw his political party, Morena, win a majority in the country’s legislature, where all of whom were sworn into their seats last weekend. There are questions if members of Morena will cut deals with outgoing President Enrique Pena Nieto. Moreover, multiple members of both the Republican and Democrat parties in the US Senate have expressed their reservations about a new trade deal if Canada is excluded.