U.S.-Mexico Economic Relations: Trends, Issues, and Implications

Summary

During the 114^th Congress, policy makers will likely maintain an interest in Mexico on issues related to the proposed Trans-Pacific Partnership (TPP) agreement and possible effects on U.S.-Mexico trade relations; cross-border trade and investment; trade issues related to the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO); Mexico's economic reform measures, especially in the energy sector; and U.S.-Mexico border management. Congress may also take an active interest in ongoing bilateral efforts to promote economic competitiveness, increase regulatory cooperation, and pursue energy integration. Under the U.S.-Mexico High Level Economic Dialogue (HLED), which was launched in September 2013, the United States and Mexico are striving to advance economic and commercial priorities through annual meetings at the Cabinet level that also include leaders from the public and private sectors. Another bilateral initiative that may be of interest to policy makers is the High-Level Regulatory Cooperation Council (HLRCC), launched in February 2012, which is intended to help align regulatory principles. In addition, the two countries have a bilateral initiative for improving border management under the Declaration Concerning 21^st Center Border Management that was announced in 2010.

The economic and trade relationship with Mexico is of interest to U.S. policymakers because of Mexico's proximity to the United States, the high level of bilateral trade, and the strong cultural and economic ties that connect the two countries. Also, it is of national interest for the United States to have a prosperous and democratic Mexico as a neighboring country. Mexico is the United States' third-largest trading partner, while the United States is, by far, Mexico's largest trading partner. Mexico ranks third as a source of U.S. imports, after China and Canada, and second, after Canada, as an export market for U.S. goods and services. The United States is the largest source of foreign direct investment (FDI) in Mexico.

The United States and Mexico have strong economic ties through NAFTA, which has been in effect since 1994. Most studies show that the net economic effects of NAFTA on both countries have been small but positive, though there have been adjustment costs to some sectors within both countries. Much of the bilateral trade between the United States and Mexico occurs in the context of supply chains as manufacturers in each country work together to create goods. The expansion of trade has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.-Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican manufacturers.

Negotiations for the proposed TPP were concluded on October 5, 2015. The agreement was signed on February 4, 2016. If approved by Congress and when it enters into force, the agreement would likely enhance the economic links Mexico already has with the United States and Canada under NAFTA. Policymakers may consider how a TPP would affect the U.S.-Mexico trade and investment relationship. Because almost all U.S. trade with Mexico is now conducted duty and barrier free under NAFTA, the TPP would be unlikely to have a major effect on trade but it could alter certain rules governing trade and investment. A TPP may have implications in several areas, including intellectual property rights protection, investment, state-owned enterprises, services trade, agriculture, government procurement, worker rights, and the environment.

Introduction

The U.S.-Mexico bilateral economic relationship is of key interest to the United States because of Mexico's proximity, the high volume of trade with Mexico, and the strong cultural and economic ties between the two countries. The United States and Mexico share many common economic interests related to trade, investment, and regulatory cooperation. The two countries share a 2,000 mile border and have extensive interconnections through the Gulf of Mexico. There are also links through migration, tourism, environmental issues, health concerns, and family and cultural relationships.

This report provides an overview of U.S.-Mexico economic relations, trade trends, the Mexican economy, NAFTA, and trade issues between the United States and Mexico. It will be updated as events warrant.

Mexico is one of the United States' most important trading partners, ranking second among U.S. export markets and third in total U.S. trade (imports plus exports). Under the North American Free Trade Agreement (NAFTA), the United States and Mexico have developed significant economic ties. Trade between the two countries has more than tripled since the agreement was implemented in 1994. Through NAFTA, the United States, Mexico, and Canada form one of the world's largest free trade areas, with about one-third of the world's total gross domestic product (GDP). Mexico has the second-largest economy in Latin America after Brazil. It has a population of 124 million people, making it the most populous Spanish-speaking country in the world and the third-most populous country in the Western Hemisphere (after the United States and Brazil).

Mexico

United States

2005

2005

2015

Population (millions)

Per Capita GDP (US$)

Per Capita GDP in $PPPs

Nominal exports of goods & services (US$ billions)

Nominal imports of goods & services (US$ billions)

Source: Compiled by CRS based on data from Economist Intelligence Unit (EIU) online database.

(U.S. $ in billions)

Source: Compiled by CRS using the United States International Trade Commission (USITC) Interactive Tariff and Trade DataWeb at http://dataweb.usitc.gov.

Mexico continues to be reliant on the United States as an export market with approximately 80% of its total merchandise exports headed to the United States in 2015. Its share of the U.S. market has lost ground since 2003 when China surpassed Mexico as the second-leading supplier of U.S. imports. The U.S. share of Mexico's import market has also decreased. Between 1996 and 2013, the U.S. share of Mexico's total imports decreased from 83% to 47%. China is Mexico's second-leading supplier of imports, with an 18% market share.⁶

(U.S. $ in billions)

Items (NAIC 4-digit)

2011

2012

2013

2014

2015

% Total in 2015

Motor vehicles

30.5

35.3

40.1

46.4

50.5

17%

Motor vehicle parts

28.5

33.3

36.2

40.1

43.7

15%

Computer equipment

14.5

16.0

14.8

14.3

17.7

6%

Audio and video equipment

14.7

14.2

13.8

14.2

14.6

5%

Communications equipment

13.2

13.8

13.5

10.7

13.3

5%

Oil and gas

39.6

37.2

32.0

27.8

12.5

4%

Other

121.9

127.8

130.2

140.6

142.4

48%

Total

262.9

277.6

280.6

294.1

294.7

(U.S. $ in Billions)

Items (NAIC 4-digit)

2011

2012

2013

2014

2015

% Total in 2015

Motor vehicle parts

17.2

19.4

21.1

21.5

23.8

10%

Computer equipment

14.5

14.8

16.0

16.3

16.3

7%

Petroleum and coal products

20.3

20.7

19.3

19.0

15.4

7%

Semiconductors and other electronic components

10.9

11.4

13.0

13.5

13.9

6%

Basic chemicals

9.1

10.1

10.1

10.1

8.5

4%

Resin and synthetic rubber or fiber

7.3

7.7

8.2

8.7

8.2

3%

Other

119.0

131.8

138.4

151.1

150.3

64%

Total

198.3

215.9

226.1

240.2

236.4

1994-2014 Historical Cost Basis

Much of the trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods. The expansion of trade has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.-Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican manufacturers. One report estimates that 40% of the content of U.S. imports from Mexico.⁸

Many economists and other observers have credited NAFTA with helping U.S. manufacturing industries, especially the U.S. auto industry, become more globally competitive through the development of supply chains.⁹ Much of the increase in U.S.-Mexico trade, for example, can be attributed to specialization as manufacturing and assembly plants have reoriented to take advantage of economies of scale. As a result, supply chains have been increasingly crossing national boundaries as manufacturing work is performed wherever it is most efficient.¹⁰ A reduction in tariffs in a given sector not only affects prices in that sector but also in industries that purchase intermediate inputs from that sector. The importance of these direct and indirect effects is often overlooked, according to one study. The study suggests that these linkages offer important trade and welfare gains from free trade agreements and that ignoring these input-output linkages could underestimate potential trade gains.¹¹

NAFTA, along with a combination of other factors, contributed to maquiladora growth after 1993. Trade liberalization, wages, and economic conditions, both in the United States and Mexico, increased the number of Mexican export-oriented assembly plants. Although some provisions in NAFTA may have encouraged growth in certain sectors, manufacturing activity likely has been more influenced by the strength of the U.S. economy and relative wages in Mexico.

Changes in Mexican regulations on export-oriented industries after NAFTA merged the maquiladora industry and Mexican domestic assembly-for-export plants into one program called the Maquiladora Manufacturing Industry and Export Services (IMMEX). In 2001, the North American rules of origin determined the duty-free status for a given import and replaced the previous special tariff provisions that applied only to maquiladora operations. The initial maquiladora program ceased to exist and the same trade rules applied to all assembly operations in Mexico.

NAFTA rules for the maquiladora industry were implemented in two phases, with the first phase covering the period 1994-2000, and the second phase starting in 2001. During the initial phase, NAFTA regulations continued to allow the maquiladora industry to import products duty-free into Mexico, regardless of the country of origin of the products. This phase also allowed maquiladora operations to increase maquiladora sales into the Mexican domestic market. Phase II made a significant change to the industry in that the new North American rules of origin determined duty-free status for U.S. and Canadian products exported to Mexico for maquiladoras. The elimination of duty-free imports by maquiladoras from non-NAFTA countries under NAFTA caused some initial uncertainty for the companies with maquiladora operations. Maquiladoras that were importing from third countries, such as Japan or China, would have to pay applicable tariffs on those goods under the new rules.

Remittances are one of the three highest sources of foreign currency for Mexico, along with oil and tourism. Most remittances to Mexico come from workers in the United States who send money back to their relatives. Mexico receives the largest amount of remittances in Latin America. Remittances are often a stable financial flow for some regions as workers in the United States make efforts to send money to family members. Most go to southern states where poverty levels are high. Women tend to be the primary recipients of the money, and usually use it for basic needs such as rent, food, medicine, or utilities.

Electronic transfers and money orders are the most popular methods to send money to Mexico. The rapid increase in remittances during the late 1990s through the mid-2000s can be attributed to numerous factors, but it was also largely influenced by considerable reductions in transaction fees charged by banks. In the 1990s, these fees were as high as 8%, and went down as low as 2.5% in 2003.¹⁴ The Inter-American Development Bank reported that the average cost to send $200 was 6.0% in 2010.¹⁵

Worker remittance flows to Mexico have an important impact on the Mexican economy, in some regions more than others. Some studies report that in southern Mexican states, remittances mostly or completely cover general consumption and/or housing. A significant portion of the money received by households goes for food, clothing, health care, and other household expenses. Money also may be used for capital invested in microenterprises throughout urban Mexico. The economic impact of remittance flows is concentrated in the poorer states of Mexico.

(from all countries)

Source: Compiled by CRS using data from the Inter-American Development Bank, Multilateral Investment Fund; and Mexico's Central Bank.

The Obama Administration has engaged in bilateral efforts with Mexico, and also with Canada, to address issues related to the U.S.-Mexico border, enhance economic competitiveness, increase regulatory cooperation, and pursue energy integration.

The United States and Mexico launched the High Level Economic Dialogue (HLED) on September 20, 2013 to help advance U.S.-Mexico economic and commercial priorities that are central to promoting mutual economic growth, job creation, and global competitiveness. The initiative is led at the Cabinet level and is co-chaired by the U.S. Department of State, Department of Commerce, the Office of the United States Trade Representative, and their Mexican counterparts. ¹⁶

HLED Goals

Major goals of the HLED are meant to build on, but not duplicate, a range of existing bilateral dialogues and working groups. The United States and Mexico aim to promote competitiveness in specific sectors such as transportation, telecommunications, and energy, as well as to promote greater two-way investment. ¹⁷

The HLED is organized around three broad pillars, including:

• 1. Promoting competitiveness and connectivity;
• 2. Fostering economic growth, productivity and innovation; and
• 3. Partnering for regional and global leadership.

The HLED is also meant to explore ways to promote entrepreneurship, stimulate innovation, and encourage the development of human capital to meet the needs of the 21^st Century economy, as well as examine initiatives to strengthen economic development along the U.S.-Mexico border region. The United States and Mexico view the HLED as a way to facilitate greater alignment and cooperation on issues of shared concern, especially in regard to the proposed Trans-Pacific Partnership (TPP) agreement, the Asia Pacific Economic Cooperation (APEC) forum, the G20, and other initiatives.¹⁸

HLED Priorities for 2016

U.S. Vice President Joe Biden and Mexican Finance Minister Luis Videgaray co-chaired the third cabinet-level meeting of the HLED in Mexico City on February 25, 2016. The meeting served as a forum to review the progress made during 2015 and to discuss goals for 2016 and beyond.¹⁹ The meeting included government cabinet-level government officials from both the United States and Mexico. Vice President Biden told a Mexican audience that the United States is interested in building more bridges and good will between the two countries. He stated that the United States and Mexico "are joined at the hip" and can benefit significantly from each other.²⁰

A few examples of the 2016 priorities discussed at the meeting include the following:

• Strengthening border infrastructure such as the new border crossing for cargo at Otay II-Otay Mesa East port of entry project and the new cargo pre-inspection pilot in San Jeronimo, Chihuahua;
• Formalizing the establishment of the U.S.-Mexico Energy Business Council to provide assistance in Mexico's transition to become a more competitive energy producer; promote sustainable development of unconventional energy resources; and share best practices in offshore oil and gas project regulations and environmental procedures;
• Expanding the Bilateral Forum on Higher Education, Innovation, and Research for the purpose of increasing economic opportunities for U.S. and Mexican citizens, developing a 21^st century workforce for mutual economic prosperity, and fostering greater technical expertise in energy and tourism;
• Affirming commitments to seek timely approval of the TPP agreement and to coordinate closely on the implementation of the agreement; and
• Fostering actions to strengthen anti-corruption efforts in international fora such as the G-20 and the Open Government Partnership (OGP) anti-corruption working groups.

Another bilateral effort is the U.S.-Mexico High-Level Regulatory Cooperation Council (HLRCC) launched in May 2010. The official work plan was released by the two governments on February 28, 2012, and focuses on regulatory cooperation in numerous sectoral issues including: food safety; e-certification for plants and plant products; commercial motor vehicle safety standards and procedures; nanotechnology; e-health; and offshore oil and gas development standards. U.S. agencies that are involved in regulatory cooperation include the U.S. Food and Drug Administration, Department of Agriculture, Department of Transportation, Office of Management and Budget, Department of Interior, and Occupational Safety and Health Administration.²¹ A second work plan was announced in February 2016 and is expected to include lessons learned from the first plan and will focus on a balanced approach considering sectors and activities of both countries.²²

The United States and Mexico are engaged in a bilateral border management initiative under the Declaration Concerning the 21^st Century Border Management that was announced in 2010. This initiative is a bilateral effort to manage the 2,000-mile U.S.-Mexico border through the following cooperative efforts: expediting legitimate trade and travel; enhancing public safety; managing security risks; engaging border communities; and setting policies to address possible statutory, regulatory, and/or infrastructure changes that would enable the two countries to improve collaboration.²³ With respect to port infrastructure, the initiative specifies expediting legitimate commerce and travel through investments in personnel, technology, and infrastructure. ²⁴ The two countries established a Bilateral Executive Steering Committee (ESC) composed of representatives from the appropriate federal government departments and offices from both the United States and Mexico. For the United States, this includes representatives from the Departments of State, Homeland Security, Justice, Transportation, Agriculture, Commerce, Interior, Defense, and the Office of the United States Trade Representative. For Mexico, it includes representatives from the Secretariats of Foreign Relations, Interior, Finance and Public Credit, Economy, Public Security, Communications and Transportation, Agriculture, and the Office of the Attorney General of the Republic.²⁵

Since 2005, the United States, Mexico, and Canada have increased cooperation on security and economic issues through various endeavors, most notably by participating in trilateral summits known as the North American Leaders Summits. The most recent summit took place on February 19, 2014 in Toluca, Mexico, with an agenda focused on immigration, energy, and commerce. The 2016 Summit is scheduled to take place later this year in Canada. Some observers view the initiatives as constructive to addressing issues of mutual interest and benefit for all three countries. Critics of the most recent summit contend that the agenda did not include human rights issues or discussions on the drug-related violence in Mexico.

During the February 2014 Summit, President Obama, Mexican President Peña Nieto, and Canadian Prime Minister Stephen Harper announced initiatives regarding the economic prosperity of the region; education initiatives; energy and climate change; citizen security; and regional, global, and stakeholder outreach.²⁶ The leaders discussed numerous economic and security initiatives for North America in the 21st century with the goal of setting new global standards for trade, education, sustainable growth, and innovation. In the areas of economic cooperation, discussions included developing a North American Transportation Plan; streamlining procedures and harmonizing customs data requirements; facilitating the movement of people through the 2014 North American Trusted Traveler Program; promoting trilateral exchanges on logistics corridors and regional development; and continuing prior initiatives such as protecting and enforcing intellectual property rights. In energy cooperation, the leaders continued their commitment to developing and securing affordable, clean and reliable energy supplies to help drive economic growth and support sustainable development. The leaders committed to continuing cooperation on climate change and environmental cooperation; security; and effective information exchanges and coordination among law-enforcement authorities to counter drug trafficking, arms trafficking, money laundering, and other illicit activities. The three governments also stated that they share a commitment to combating human trafficking in all its forms and agreed to work toward improving services for the victims of this crime.²⁷

Mexico's economy is closely linked to the U.S. economy due to the strong trade and investment ties between the two countries. After modest economic growth in 2014 and 2015, economic conditions are expected to improve in the next few years, partly because of recent reform measures but also because the outlook for the U.S. economy is positive. However, violence in Mexico remains an issue and security risks could threaten economic growth.

Mexico's economic growth is expected to continue to rise modestly in 2016 before gaining momentum in 2017 as global economic conditions are expected to improve.²⁸ The Mexican economy performed poorly in 2014 and 2015, expanding by just 2.3% and 2.5%, respectively. Over the past 30 years (1984-2014), Mexico has had a low economic growth record with an average growth rate of 2.6%.²⁹ The country has benefitted from important structural reforms initiated in the early 1990s, but events such as the U.S. recession of 2001 and the global economic downturn of 2009 adversely affected the economy and offset the government's efforts to improve macroeconomic management. Factors such as plentiful natural resources, a young and abundant labor force, and proximity to the United States may help Mexico's economy to grow at a faster rate over the next 20 years. The growth forecast over the next two decades is estimated at 3.0%. GDP is forecast to grow 2.3% in 2016 and 2.6% in 2017. ³⁰

The proposed TPP would likely enhance bilateral economic relations with Mexico. The two countries have shared values in their external trade relations and their efforts to lower trade barriers with the rest of the world. In October 2015, U.S. Under Secretary of Commerce for International Trade Stefan M. Selig visited Mexico City where he met with senior government officials and business leaders to promote the benefits of the TPP. At the conclusion of the visit, Selig stated that the "TPP paves the way for the United States and Mexico to elevate their commercial partnership to new heights under this high-standard, 21^st Century trade agreement."⁵⁹ The Mexican government views the TPP as an opportunity for the three North American countries to have a unified vision in their trade relations with other countries. In the textile and apparel negotiations, for example, the United States and Mexico submitted a unified proposal for textile and apparel rules of origin.

As discussed earlier in the report, companies in the United States and Mexico together produce goods through an integrated manufacturing sector. The production sharing developed since NAFTA strengthened the regional competitiveness of certain industries, such as the automotive and electronic industries. The proposed TPP could provide more opportunities to expand value chains with other TPP countries in the hemisphere, including Canada, Chile, and Peru. Some observers view the TPP as an opportunity to deepen and expand regional supply chain integration, expand North American export opportunities to the Asia-Pacific region, and attract more investors to the United States and Mexico. While the TPP could provide numerous opportunities to enhance integration, the NAFTA region may have to complement trade agreements with domestic and regional efforts to boost competitiveness and innovation.⁶⁰

If TPP enters into force, Mexico would have to adhere to new trade rules in areas related to trade facilitation, intellectual property rights (IPR), state-owned enterprises (SOEs), e-commerce, as well as stronger and more enforceable labor and environmental provisions.

The United States and Mexico have had a number of trade disputes over the years, many of which have been resolved. These issues have involved trade in sugar, country of origin labeling, tomato imports from Mexico, dolphin-safe tuna labeling, and NAFTA trucking provisions.

On December 19, 2014, the U.S. Department of Commerce (DOC) signed an agreement with the Government of Mexico suspending the U.S. countervailing duty (CVD) investigation of sugar imports from Mexico. The DOC signed a second agreement with Mexican sugar producers and exporters suspending an antidumping (AD) duty investigation on imports of Mexican sugar. The agreements suspending the investigations alter the nature of trade in sugar between Mexico and the United States by 1) imposing volume limits on U.S. sugar imports from Mexico, and 2) setting minimum price levels on Mexican sugar.⁶¹

After the suspension agreement was announced, two U.S. sugar companies, Imperial Sugar Company and AmCane Sugar LLC, requested that the DOC continue the CVD and AD investigations on sugar imports from Mexico. The two companies filed separate submissions on January 16, 2015 claiming "interested party" status. The companies claimed they met the statutory standards to seek continuation of the probes. The submissions to the DOC followed requests to the ITC, by the same two companies, to review the two December 2014 suspension agreements.⁶² The ITC reviewed the sugar suspension agreements to determine whether they eliminate the injurious effect of sugar imports from Mexico. On March 19, 2015, the ITC upheld the agreement between the United States and Mexico that suspended the sugar investigations. Mexican Economy Minister Ildefonso Guajardo Villarreal praised the ITC decision, stating that it supported the Mexican government position.⁶³

The dispute began on March 28, 2014, when the American Sugar Coalition and its members filed a petition requesting that the U.S. ITC and the DOC conduct an investigation, alleging that Mexico was dumping and subsidizing its sugar exports to the United States. The petitioners claimed that dumped and subsidized sugar exports from Mexico were harming U.S. sugar producers and workers. They claimed that Mexico's actions would cost the industry $1 billion in 2014. On April 18, 2014, the DOC announced the initiation of AD and CVD investigations of sugar imports from Mexico.⁶⁴ On May 9, 2014, the ITC issued a preliminary report stating that there was a reasonable indication a U.S. industry was materially injured by imports of sugar from Mexico that were allegedly sold in the United States at less than fair value and allegedly subsidized by the Government of Mexico.⁶⁵

In August 2014, the DOC announced in its preliminary ruling that Mexican sugar exported to the United States was being unfairly subsidized. Following the preliminary subsidy determination, the DOC stated that it would direct the U.S. Customs and Border Protection to collect cash deposits on imports of Mexican sugar. Based on the preliminary findings, the DOC imposed cumulative duties on U.S. imports of Mexican sugar, ranging from 2.99% to 17.01% under the CVD order. Additional duties of between 39.54% and 47.26% were imposed provisionally following the preliminary AD findings.⁶⁶ The final determination in the two investigations was expected in later in 2015 and had not been issued when the suspension agreements were signed.

The Sweetener Users Association (SUA), which represents beverage makers, confectioners, and other food companies, argues that the case is "a diversionary tactic to distract from the real cause of distortion in the U.S. sugar market—the U.S. government's sugar program."⁶⁷ It contends that between 2009 and 2012, U.S. sugar prices soared well above the world price because of the U.S. program, providing an incentive for sugar growers to increase production. According to the sugar users association, this resulted in a surplus of sugar and a return to lower sugar prices.⁶⁸ The SUA has been a longstanding critic of the U.S. sugar program.⁶⁹

In 2006, the United States and Mexico resolved a trade dispute involving sugar and high fructose corn syrup. The dispute involved a sugar side letter negotiated under NAFTA. Mexico argued that the side letter entitled it to ship net sugar surplus to the United States duty-free under NAFTA, while the United States argued that the sugar side letter limited Mexican shipments of sugar. In addition, Mexico complained that imports of high fructose corn syrup (HFCS) sweeteners from the United States constituted dumping. It imposed anti-dumping duties for some time, until NAFTA and WTO dispute resolution panels upheld U.S. claims that the Mexican government colluded with the Mexican sugar and sweetener industries to restrict HFCS imports from the United States.

In late 2001, the Mexican Congress imposed a 20% tax on soft drinks made with corn syrup sweeteners to aid the ailing domestic cane sugar industry, and subsequently extended the tax annually despite U.S. objections. In 2004, the United States Trade Representative (USTR) initiated WTO dispute settlement proceedings against Mexico's HFCS tax, and following interim decisions, the WTO panel issued a final decision on October 7, 2005, essentially supporting the U.S. position. Mexico appealed this decision, and in March 2006, the WTO Appellate Body upheld its October 2005 ruling. In July 2006, the United States and Mexico agreed that Mexico would eliminate its tax on soft drinks made with corn sweeteners no later than January 31, 2007. The tax was repealed, effective January 1, 2007.

The United States and Mexico reached a sweetener agreement in August 2006. Under the agreement, Mexico can export 500,000 metric tons of sugar duty-free to the United States from October 1, 2006, to December 31, 2007. The United States can export the same amount of HFCS duty-free to Mexico during that time. NAFTA provides for the free trade of sweeteners beginning January 1, 2008. The House and Senate sugar caucuses expressed objections to the agreement, questioning the Bush Administration's determination that Mexico is a net-surplus sugar producer to allow Mexican sugar duty-free access to the U.S. market.⁷⁰

The United States was involved in a country-of-origin labeling (COOL) trade dispute under the World Trade Organization (WTO) with Canada and Mexico for several years, which has now been resolved.⁷¹ Mexican and Canadian meat producers claimed that U.S. mandatory COOL requirements for animal products discriminated against their products. They contended that the labeling requirements created an incentive for U.S. meat processors to use exclusively domestic animals because it forced processors to segregate animals born in Mexico or Canada from U.S.-born animals, which was very costly. They argued that the COOL requirement was an unfair barrier to trade. A WTO appellate panel in June 2013 ruled against the United States. The United States appealed the decision. On May 18, 2015, the WTO appellate body issued rejecting the U.S. arguments against the previous panel's findings.⁷² Mexico and Canada were considering imposing retaliatory tariffs on a wide variety of U.S. exports to Mexico, including fruits and vegetables, juices, meat products, dairy products, machinery, furniture and appliances, and others.⁷³

The issue was resolved when the Consolidated Appropriations Act of 2016 (P.L. 114-113) repealed mandatory COOL requirements for muscle cut beef and pork and ground beef and ground pork. USDA issued a final rule removing country-of-origin labeling requirements for these products. The rule took effect on March 2, 2016.⁷⁴ The estimated economic benefits associated with the final rule are likely to be significant, according to the U.S. Department of Agriculture (USDA).⁷⁵ According to USDA, the estimated benefits for producers, processors, wholesalers, and retailers of previously covered beef and pork products are as much as $1.8 billion in cost avoidance, though the incremental cost savings are likely to be less as affected firms had adjusted their operations.

On January 9, 2015, the Department of Transportation's Federal Motor Carrier Safety Administration (FMCSA) announced that Mexican motor carriers would be able to apply for authority to conduct long-haul, cross-border trucking services in the United States, marking a significant milestone in implementation of U.S. NAFTA commitments.⁸⁰ The International Brotherhood of Teamsters filed a still-pending lawsuit on March 20, 2015, in the U.S. Court of Appeals for the Ninth Circuit, seeking to halt FMCSA's move to allow Mexican motor carriers to operate in the United States. The Mexican government stated that it would consider retaliatory measures if the Teamsters lawsuit is successful.⁸¹

The concept document outlined three sets of elements:

The United States and Mexico are currently involved in a trade dispute under the WTO regarding U.S. dolphin-safe labeling provisions and tuna imports from Mexico. The issue is ongoing and has not been resolved. The most recent development occurred when, in November 2015, a WTO appellate body found for a fourth time that U.S. labeling rules aimed at preventing dolphin bycatch violate international trade obligations. The United States reportedly expressed serious concerns with this ruling and stated that the panel exceeded its authority by ruling on acts and measures that Mexico did not dispute or were never applied.¹⁰¹ On March 16, 2016, Mexico announced that it would ask the WTO to sanction $472.3 million in annual retaliatory tariffs against the United States for its failure to comply with the WTO ruling. On March 22, 2016, the United States announced that it will revise its dolphin-safe label requirements on tuna products to comply with the WTO decision. The revised regulations seek to increase labeling rules for tuna caught by fishing vessels in all regions of the world, and not just those operating in the region where Mexican vessels operate. The new rules will not modify existing requirements that establish the method by which tuna is caught in order for it to be labeled "dolphin-safe". The Humane Society International announced that it was pleased with U.S. actions to increase global dolphin protections.¹⁰²

The issue relates to U.S. labeling provisions that establish conditions under which tuna products may voluntarily be labeled as "dolphin-safe." Products may not be labeled as dolphin-safe if the tuna is caught by means that include intentionally encircling dolphins with nets. According to the Office of the United States Trade Representative (USTR), some Mexican fishing vessels use this method when fishing for tuna. Mexico asserts that U.S. tuna labeling provisions deny Mexican tuna effective access to the U.S. market.¹⁰³

The tuna labeling dispute began over 10 years ago. In April 2000, the Clinton Administration lifted an embargo on Mexican tuna under relaxed standards for a dolphin-safe label. This was in accordance with internationally agreed procedures and U.S. legislation passed in 1997 that encouraged the unharmed release of dolphins from nets. However, a federal judge in San Francisco ruled that the standards of the law had not been met, and the Federal Appeals Court in San Francisco sustained the ruling in July 2001. Under the Bush Administration, the Commerce Department ruled on December 31, 2002, that the dolphin-safe label may be applied if qualified observers certify that no dolphins were killed or seriously injured in the netting process. Environmental groups, however, filed a suit to block the modification. On April 10, 2003, the U.S. District Court for the Northern District of California enjoined the Commerce Department from modifying the standards for the dolphin-safe label. On August 9, 2004, the federal district court ruled against the Bush Administration's modification of the dolphin-safe standards and reinstated the original standards in the 1990 Dolphin Protection Consumer Information Act. That decision was appealed to the U.S. Ninth Circuit Court of Appeals, which ruled against the Administration in April 2007, finding that the Department of Commerce did not base its determination on scientific studies of the effects of Mexican tuna fishing on dolphins.

In late October 2008, Mexico initiated WTO dispute proceedings against the United States, maintaining that U.S. requirements for Mexican tuna exporters prevent them from using the U.S. "dolphin-safe" label for its products. The United States requested that Mexico refrain from proceeding in the WTO and that the case be moved to the NAFTA dispute resolution mechanism. According to the USTR, however, Mexico "blocked that process for settling this dispute."¹⁰⁴ In September 2011, a WTO panel determined that the objectives of U.S. voluntary tuna labeling provisions were legitimate and that any adverse effects felt by Mexican tuna producers were the result of choices made by Mexico's own fishing fleet and canners. However, the panel also found U.S. labeling provisions to be "more restrictive than necessary to achieve the objectives of the measures."¹⁰⁵ The Obama Administration appealed the WTO ruling.

On May 16, 2012, the WTO's Appellate Body overturned two key findings from the September 2011 WTO dispute panel. The Appellate Body found that U.S. tuna labeling requirements violate global trade rules because they treat imported tuna from Mexico less favorably than U.S. tuna. The Appellate Body also rejected Mexico's claim that U.S. tuna labeling requirements were more trade-restrictive than necessary to meet the U.S. objective of minimizing dolphin deaths.¹⁰⁶ The United States had a deadline of July 13, 2013, to comply with the WTO dispute ruling. In July 2013, the United States issued a final rule amending certain dolphin-safe labelling requirements to bring it into compliance with the WTO labeling requirements. On November 14, 2013, Mexico requested the establishment of a WTO compliance panel. On April 16, 2014, the Chair of the compliance panel announced that it expected to issue its final report to the parties by December 2014.¹⁰⁷ In April 2015, the panel ruled against the United States when it issued its finding that the U.S. labeling modifications unfairly discriminated against Mexico's fishing industry.¹⁰⁸

The government of Mexico requested the United States to broaden its dolphin-safe rules to include Mexico's long-standing tuna fishing technique. It cites statistics showing that modern equipment has greatly reduced dolphin mortality from its height in the 1960s and that its ships carry independent observers who can verify dolphin safety.¹⁰⁹ However, some environmental groups that monitor the tuna industry dispute these claims, stating that even if no dolphins are killed during the chasing and netting, some are wounded and later die. In other cases, they argue, young dolphin calves may not be able to keep pace and are separated from their mothers and later die. These groups contend that if the United States changes its labeling requirements, cans of Mexican tuna could be labeled as "dolphin-safe" when it is not. However, an industry spokesperson representing three major tuna processors in the United States, including StarKist, Bumblebee, and Chicken of the Sea, contend that U.S. companies would probably not buy Mexican tuna even if it is labeled as dolphin-safe because these companies "would not be in the market for tuna that is not caught in the dolphin-safe manner."¹¹⁰

U.S. policy makers are likely to closely follow trade issues regarding the proposed TPP and regulatory cooperation with Mexico. They are also likely to follow ongoing economic reforms and policies implemented by the Peña Nieto government.

Policymakers may consider how a TPP would affect NAFTA and U.S.-Mexico trade relations. Although nearly all U.S. trade with Mexico is now conducted duty and barrier free through NAFTA, the TPP may have implications for NAFTA in several areas, including IPR, investment, services trade, e-commerce, state-owned enterprises, government procurement, as well as enhanced labor and environmental provisions. The provisions in more recent agreements that the United States has negotiated, such as the FTAs with Colombia and Peru, include commitments that go beyond NAFTA. If the proposed TPP enters into force, Mexico would have to adhere to stronger and more enforceable labor and environmental provisions, stronger IPR provisions, as well as other new rules.¹¹¹

Potential questions that Congress might consider include the following: How would the TPP affect U.S. economic relations with Mexico? Would NAFTA remain relevant? How would it affect bilateral trade? Would a TPP address concerns of policy makers related to the environment and worker rights? Would there be a difference in the enforcement mechanism? How would stronger IPR provisions affect U.S.-Mexico trade? How would a TPP affect jobs in the United States and Mexico?

Policy makers may consider issues on how the United States can improve cooperation with Mexico in the areas of border trade, transportation, competitiveness, economic growth, and security enhancement through the HLED, HLRCC, and the 21^st Century Border Management programs mentioned earlier in this report. Some policy experts emphasize the importance of U.S.-Mexico trade in intermediate goods and supply chains and argue that the two governments can improve cooperation in cross-border trade and can invest more in improving border infrastructure. The increased security measures along the U.S.-Mexico-border, they argue, have resulted in a costly disruption in production chains due to extended and unpredictable wait times along the border.

Potential questions that Congress might consider include the following: How effectively has the United States pursued border initiatives with Mexico? What are the challenges facing U.S.-Mexico trade flows along the border? What steps can be taken by the two countries to improve competitiveness of industries located along the U.S.-Mexico border and elsewhere within the two countries? How successful have the United States and Mexico been in improving the flow of goods and services, while improving safety and security along the border? What have been the actual results of the initiatives that have been launched? To what extent has the emphasis on border security caused delays in border crossings or transportation of merchandise? How have recent efforts to facilitate trade affected the trade relationship?

As Mexico moves forward with reform measures to modernize the energy sector and other parts of the economy, the overarching questions are how the reform agenda will be implemented; whether it will be implemented fully; how will it affect the U.S.-Mexico trade relationship; and whether it will be enough to drive economic growth among all sectors of the economy, increase employment in the formal sector, and bring more people out of poverty.

Potential oversight questions that Congress might consider include the following: How effectively are the Peña Nieto government and the Mexican Congress implementing economic reforms? What efforts are the United States and Mexico making on energy cooperation? To what extent will the energy reforms provide opportunities for U.S. oil companies? Will the reforms improve Mexican economic performance? What complementary measures could the Mexican government take to stimulate economic growth?

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Acknowledgments

[author name scrubbed], Visual Information Specialist at CRS, contributed to this report.