The News
The News
Tuesday 26 of September 2023

Why an FTA With Korea Makes Sense

Foreign Relations Secretary José Antonio Meade Kuribreña skakes hands with South Korean President Park Geun-hye,photo: Cuartoscuro
Foreign Relations Secretary José Antonio Meade Kuribreña skakes hands with South Korean President Park Geun-hye,photo: Cuartoscuro
Mexico needs to reassure Korean investors that their capital is safe and that the rules of investment are not going to be rewritten whenever there is a change in administrations

South Korean President Park Geun-hye is in town for a four-day state visit, along with a government and business delegation of more than 150, and the main reason she is here is to try to jumpstart a proposed new bilateral free-trade agreement between her country and Mexico.

But while Mexico and Korea already have plenty of commercial and economic ties — Mexico is Seoul’s largest trade partner in Latin America, with a combined commercial interchange of more than $14 billion annually and some 1,700 Korean companies with capital holdings here — the chances of the new free-trade accord getting signed are fair to middling, at best.

The reason that the agreement is not likely to be reached is twofold.

In the first place, Mexico — despite having signed FTAs with more than 40 countries —still has a 1980s-style protectionist approach to free-market thinking when it comes to certain sectors, including the automotive, textile and steel segments, which are precisely the areas where South Korea wants to expand its commercial relations with Mexico.

To some degree, the Mexican hesitance to sign the accord is understandable. Mexico’s trade deficit with Korea currently comes to nearly $10 billion, and is growing.

But as any Ricardian economist will tell you, putting up trade barriers ultimately reduces a country’s overall wellbeing and inevitably leads to poor corporate competitiveness.

As it stands, far too many Mexican companies are still caught in the rut of looking north for their markets and ignoring the potential of new horizons, particularly those in Asia.

Mexican garment and steel producers may initially feel a pinch when it comes to an influx of quality imported goods from Korea, but if they can adapt and modernize their production lines (and an incursion of Korean rivals would nudge them in that direction), they could just find that their products are more competitive in the global marketplace.

Moreover, a free-trade accord between Mexico and Korea — which was first proposed in 2007 but have been stalled since 2008 due to strong opposition from the Mexican automobile industry and backward-thinking entities like the Mexican Chamber of Manufacturing Industries (Canacintra) — could, by reducing or eliminating tariffs, open the door for Mexican agro-industry and auto parts companies to sell to Korea and eventually lead to a downtick in the current trade deficit.

The other sticking point for the Mexican-Korean FTA is a proposed $2 billion production plant for KIA motors in Pesquería, Nuevo León, which is slated to begin production later this year.

That deal was inked in 2014 between Korea’s second-largest automotive company and then-Governor Rodrigo Medina de la Cruz.

But since the northern Mexican state has a new governor, Jaime Rodríguez Calderón, the Nuevo León administration is now saying that the terms have to be renegotiated and that some of the conditions are no longer valid.

This not only makes Nuevo León look bad, but is a blotch on the credibility and reliability of Mexico as a whole, and is certainly not going to entice new investors to the country.

A deal’s a deal, and a change of administration is not a justification for backtracking.

Rodríguez Calderón has said that the state wants to meet its end of the bargain, but simply does not have the financial resources to do so.

El Bronco, as the new governor likes to call himself, seems like he is trying to play a game of bait-and-switch with KIA in order to see what he can get out of the deal for himself, and it is a game that, if he persists in playing it, he is only going to lose.

The opening of the KIA plant represents a big win for Nuevo León already.

It is expected to be churning out some 300,000 new cars a year, which would represent 9 percent of Mexico’s automotive industry’s total production.

Most of those cars will be the K3 model — the company’s second-bestseller, currently only produced in Korea — and a large percentage of the production will likely be sent abroad (especially to the U.S. market), which will mean fresh international revenues for Nuevo León and Mexico in general.

The KIA scandal has already become big news in Korea, as well as in other countries, and could lead to many potential investors looking for more secure destinations to sow their money.

Nuevo León Governor Rodríguez Calderón needs to man up and stop trying to squelch on the deal.

And as for the proposed free-trade accord, Mexico needs to reassure Korean entrepreneurs that their capital is safe here and that the rules of investment are not going to be rewritten whenever there is a change in administration.

An FTA would provide that assurance, and reinforce the foundations for even greater economic and commercial cooperation within the context of larger multilateral agreements such as the newly drafted Trans-Pacific Partnership (which Korea has already shown an interest in joining) and MIKTA (the Mexico, Indonesia, South Korea, Turkey and Australia association).

Korea is already Mexico’s sixth-largest trade partner worldwide, and with the recent opening of the Mexican energy sector, there is ample room for even more growth in terms of two-way economic and commercial cooperation.

A free-trade agreement would provide the basis for that growth, and would allow Mexico to save face after its embarrassing Kia faux pas.

It would also fast-track new trade and investment projects,  since the details of TPP are still a long way from being ironed out and MIKTA is a more focused on political show than commercial substance.

A free-trade accord with Korea would represent a win-win for both sides, but would be especially beneficial for Mexico.