The United Kingdom and Mexico have a long history of cooperation around trade, with more than $5 billion in two-way trade between the countries in 2019 alone. So, as the U.K. prepares for Brexit at the end of 2020, it only makes sense that the two countries would work to cement a future for tariff-free trade.
With that in mind, the two countries signed the UK-Mexico Trade Continuity Agreement on Dec. 15, 2020, to ensure tariff-free trade for British businesses. The agreement is a prelude to 2021 negotiations for a new free trade agreement that is expected to dive into deeper detail around digital trade and data, intellectual property rights, and investment.
The result is a win for British manufacturers, who have faced uncertainty around demand for their products as consumers wait to see the cost impact of the drawn-out Brexit negotiations.
“This deal is great news for businesses on both sides. It provides certainty for the thousands of British firms who already export to Mexico,” commented U.K. Minister for International Trade Ranil Jayawardena in a statement on the trade agreement. “Together with our friends and allies in Mexico, we can now look forward to deepening and strengthening our trading partnership, boosting our businesses and creating better jobs in both countries.”
The value of a free trade agreement with Mexico
Mexico’s free trade agreements are among the leading drivers encouraging multinational organizations to operate in Mexico. Mexico has more free trade agreements than any other country, granting manufacturers access to low-cost trade with more than 50 countries. These agreements reduce barriers to trade, including tariffs and import quotas, to build strong cooperation in support of the exchange of goods and services.
For the U.K., these trade agreements are particularly vital in establishing a competitive presence in the world after the U.K. leaves the European Union. The lack of strong trade deals could land costly tariffs on a wide range of U.K. manufactured and imported goods, driving up the cost of consumer goods, automobiles, pharmaceuticals, textiles, and other products.
While discussions continue to veer around the possibility of a UK-EU trade agreement before the Dec. 31 exit of Britain from the E.U., Mexico has long been vocal in its support of trade with the United Kingdom. As far back as 2016, the Mexican Secretariat of Economy and the U.K. Minister of State for Trade Policy had begun establishing a framework for how the two countries would handle trade following Brexit, providing stability for manufacturers operating in and trading across both nations.
The financial impact of tariff-free trade with Mexico
The U.K. government notes that this newly signed Trade Continuity Agreement provides security for U.K. automotive manufacturers in ensuring that tariffs will not impact the cost of moving automotive components and related goods across borders. In 2018, Mexico exported to the U.K. $145 million USD in vehicle parts and $75 million in cars, just a small indication of the level of automotive-related goods being transported between the two countries.
The CEO of the British Society of Motor Manufacturers and Traders noted in a statement that free trade has been a “key pillar of the U.K. automotive sector’s success.” The country exported 80% of all cars it manufactured in 2019.
Mexico is also a tremendous site of activity for UK-based automotive, textile, pharmaceutical, agriculture, and food and drink manufacturers, among other sectors. Major players include U.K.’s largest manufacturing brand, Unilever, which has had a strong Mexico presence for nearly 50 years. AstraZenica, the leading pharmaceutical brand, has headquarters and manufacturing locations in and around Mexico City. British firm Rolls-Royce has developed a strong aerospace component supply chain in Mexico, localized largely in Guaymas, Sonora.
Experts predict the new agreement will save around $79 million USD (£59 million GBP) worth of duties that otherwise would be levied on U.K. exports to Mexico.
Under the agreement, tariffs upon U.K. car exports remain at 0%, compared to up to 20% under the terms World Trade Organization’s (WTO) terms. This is a predicted cost savings of approximately $39 million USD (£29 million GBP) in 2021 duties on U.K. exports of vehicles. Tariffs applied to U.K. beverage exports also remain at 0%, compared to WTO tariffs of 20%.
A valuable partner for U.S. market entry
Approximately 3,800 UK businesses export goods to Mexico, and U.K. government officials highlight Mexico as a land of opportunity for exports. However, Mexico has also proven to be a valuable location for U.K. manufacturers seeking easy, cost-effective entry into the U.S. market.
With an operation in Mexico, U.K. manufacturers can significantly save on shipping costs while also benefiting from competitive labor costs. Mexico is home to a highly-skilled, dependable labor force that is up to 70% less expensive than the cost of labor in the United States. Combined with its strong industrial clusters, providing dense supply chains across a range of sectors, and it’s clear that Mexico provides tremendous strength as a manufacturing base for multinational companies seeking to diversify their global footprint.
A stable location for global exports
With changes on the horizon for the European Union, Mexico is working to build strong, independent relationships with all nations and trade blocs. Mexico agreed to a new trade agreement in principle with the E.U., virtually eliminating tariffs between the two. Mexico has also recently entered into the USCMA with the United States, cementing a reliable tariff-free trade relationship with its largest export partner.
With these and other trade agreements in effect, Mexico provides a stable location from which multinational organizations can operate and reach markets around the globe. It’s no wonder that more companies are expanding and moving operations into Mexico. To discover how your manufacturing company can begin to maximize the benefits of a location in Mexico, contact Tetakawi today.
Thinking about manufacturing in Mexico? Download this ebook and start moving your due diligence forward.
