Sustainability Impact Assessment in Support of the Negotiations for the Modernization of the Trade Pillar of the Global Agreement with Mexico

CSD meeting, Brussels, 13 March 2018

Introduction

Objectives of the SIA:

To develop the analysis of expected economic, social, humanrights and environmental impacts of the modernization of theEU-Mexico Global Agreement. This is to be done bycomplementing the existing EU-Mexico GA impact assessment,incorporating:

• Quantitative and qualitative analysis

• Stakeholder consultation contributions

Overview of SIA Tasks

Task 4: Policy Recommendations

• Recommendations to mitigate negative effects of the modernization of the EU-Mexico GA

• Economic elements

• Social elements

• Environmental Elements

• Human Rights

• Sectoral Elements

• Draw on Stakeholder Recommendations

Task 3: Stakeholder Consultation Process

• Active engagement of relevant stakeholders in negotiations of the modernization of the EU-Mexico GA

• Electronic Communications

• Online Public Consultation

• Roundtables

• Civil Society Dialogue

• Partner Country Workshop

Task 2: Detailed Analysis of Specific Sectors

• Sectoral SIA for the modernization of the trade pillar of the EU-Mexico GA

• Preliminary Sector Selection

• General Approach

• Impact on SMEs

• Impact on LDCs

• Impact on Consumers

Task 1: Overall Analysis of Sustainability Impacts

• Overall SIA arising from the negotiations of the modernization of EU-Mexico GA

• Economic Analysis

• Social Analysis

• Environmental Analysis

• Human Rights• Cross cutting

issues• LDCs

• SMEs

• Consumers

• Impact on outermost regions

Economic Analysis

• Complementing and developing the results from the CGE model (GTAPv9) run by the Commission for the first impact assessment (IA) of the EU-Mexico Global Agreement conducted in 2015.

• The simulation which is based on a neoclassical closure and assumes perfect market clearing, includes the following indicators:

• Changes in consumer welfare

• GDP

• Bilateral trade flows

• Sectoral output change

• Consumer prices

• Wages (for unskilled and skilled labour)

• Reallocation of jobs

• Changes in CO2 emissions

Economic Analysis: Overview of Estimated GDP Effects

Economic Analysis: Overview of Estimated Macroeconomic effects in 2028 setting for Comprehensive Modernisation Scenarios

Economic Analysis: Estimated effects on Total trade; EU28, Mexico and third countries as % change, Ambitious Scenario

Some minor trade diversion is expected to occur with regards to Mexico’s NAFTA partners and Mercosur, but in absolute effects, these changes are so small that they imply no negative effect on growth there

Economic Analysis: Consumer Welfare

Both EU and Mexican consumers could benefit from higher levels of mutual recognition or even the hamonisation of standards where an equivalent or higher level of consumer protection is given for products and services, e.g. environmental and healthcare goods and services.

NUMBEO indicators of standard of living and

consumer welfare

Social Analysis

Aims • Assessing the impact of the modernization of the EU-Mexico GA;

• Analysing different institutional mechanisms to foster cooperation on social protection and labour standards and encourage the diffusion of best practices

MethodologyQuantitative

• CGE model results to assess employment and wage effects in different sectors (including results from sectoral analysis);

• Gini coefficient developed from CGE model results to analyse change in inequality;

Qualitative

• Desk research and academic literature, esp. relevant studies on EU and Mexico relations, as well as analyses of Mexico’s experience under NAFTA and other trade agreements;

• Stakeholder consultation in Europe and Mexico.

Social Analysis: Indicators

Social Analysis: Initial Findings

Comparative analysis shows that Mexico performs poorly in measures of income inequality. According to the latest OECD figures, Mexico has the highest Gini coefficient among all OECD members.

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Food poverty (%) Patrimonial poverty (%)0

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Trends in food and patrimonial poverty

(1992-2016)

People living on less than international poverty line ($1.90)

Comparative Income Inequality Gini Index

Social Analysis: Poverty across Mexican regions (2014)

Regional disparities are also strongly correlated with gender inequality. In 2014, Mexico had one of the highest regional variations in gender differences of employment rate among OECD countries (OECD, 2016).

Social Analysis: Gini Coefficient before and After EU-Mexico FTA

The changes are very tiny as seen from this table. Mexico sees among the most visible change –an increase in wage inequality. EU may witness a slight decline in inequality. Turkey, Chile, ACP countries, Andean Pact, China and Japan may experience no change in inequality. Decrease in inequality is seen in Canada, MERCOSUR and Central America. Other countries like USA and rest of world may see an increase in inequality.

Social Analysis: Informal Employment by State

As is often the case regarding socio-economic indicators, there are large regional disparities within Mexico: the richest, most trade-connected Northern states (e.g. Baja California, Coahuila, Chihuahua, Nuevo Leon) have the lowest informality rates, while poorer Southern states (Collima, Chiapas, Guerrero, Oaxaca) have the highest levels of informal employment

Social Analysis: Effects on Informal Employment

Results from the CGE modelling predicts marginal labour market adjustments in the manufacturing sector. However, here informal employment is comparatively lower than it is in agriculture or the services industry, which means the aggregate impact on informal employment is unlikely to be significant.

Human Rights Analysis

Aim

• Assessing the impact of the modernization of the EU-Mexico GA;

• Analysing different institutional mechanisms to foster cooperation on social protection and labour standards and encourage the diffusion of best practices

Methodology

• Baseline: Description of Mexico’s domestic and international human and labour rights commitments and contemporary challenges to human rights protection

• Analysis: screening (broad selection of HR), scoping (data collection) and detailed assessment of potential impact of modernized GA (incl. text proposals)

• Policy recommendations

• Cross-linkages, esp. with social analysis

For each step, our analysis will draw from the results of our stakeholder consultation in the EU and Mexico.

Human Rights Analysis: Indicators

Human Rights Analysis: Initial Findings

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Trading across Borders - DTF Enforcing Contracts -DTF

Quality of Governance Related to Enforcing Contracts and

Trading Across Borders

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Right to Health Index 88.60 88.07 88.21 88.35 88.55 88.74 88.79

Right to Work Index 82.16 83.41 83.41 95.20 85.22 84.28 84.28

Right to Education Index 84.03 79.85 79.92 86.94 88.56 89.02 89.02

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México’s Respect for Social and Economic Rights, 2005 – 2015

In assessing potential impacts on the enjoyment of human rights, it is also important to assess Mexico’s capacity in respecting and enforcing its relevant commitments. Mexico’s scores on indices for the Respect for Social and Economic Rights are stable, with the strongest pertaining to the Right to Health.

Human Rights Analysis

Human Rights Analysis: Human Rights Gaps in the Draft Modernization Language

Human Rights Analysis: Draft Modernization Provisions Related to Human Rights

Environmental Analysis

AimThe analysis will focus on GHG emission and climate change; energy use; land use; resource use and efficiency; waste production; ecosystems and biodiversity; forestry and trade in environmental goods and services

MethodologyBaseline

• Benchmark of Mexico’s current environmental performance against that of the EU’s using indicators of environmental quality (i.e. Environmental Performance Index), and overview of current regulations and obligations.

Quantitative Analysis

• Based on the existing results of the CGE modelling, the study will analyse the effects (scope, products, technology etc.) in terms of both welfare and GHG emissions

• Results will be explained using a Log Mean Divisia Index (LMDI) to differentiate different sectoral effects

Qualitative Analysis

• Analysis of text proposals and experience under GA and NAFTA

• Results of the stakeholder consultation

Environmental Analysis: Indicators

Environmental Analysis: Trade-related MEAs signed by the EU and Mexico

Environmental Analysis: Indicators

Environmental Analysis: EPI for Mexico and the EU

Environmental Analysis

EPI Subcategory Scores for Mexico and the EUClimate Laws, Institutions and Measures Index and GDP per capita

Environmental Analysis

Net Exports of CO2 Emissions

Co2 Emissions by sector in Mexico and the EU

The power generation sector dominates emissions in the EU (37% of total emissions) and Mexico (39%). However, while in the EU emissions from power generation, as for most of the other sectors, have experienced a decline, Mexico’s CO2 emissions from energy production have increased by 10% from 2005 to 2010.

Environmental Analysis: Electricity Sources

The decline in Mexico’s share of renewables in electricity production from 24% in 1995 to 18% in 2015 explains the increase in CO2 emissions in Mexico. The only negative trends in CO2 emissions has been experienced by the agriculture and forestry sector (-32%) that, however, account for only a small share of total CO2 emissions in Mexico (7%). While, total renewable energy is on the rise as Mexico has been introducing policies aimed at promoting renewable energy since 200, the path is not yet stable.

Environmental Analysis: Electricity Sources

Among sectors predicted to be most affected are some environmentally sensitive ones such as milk and chemicals in the EU and motor vehicle, and transport sectors, the largest consumers of energy in Mexico. The effects, however, are expected to be low, in particular for the EU.

Selected Sectors

Sector Justification

Fruits & Vegetables (including

bananas)

Fruits and vegetables represent a key sector in agricultural trade between the EU and Mexico, with a specific emphasis on bananas for its high

export value as well as its significance in OMRs. In agreement with DG Trade, this study will not conduct an in depth analysis of sugar recognizing

that negotiations will not be considering an ambitious offer of trade in sugar. Additionally, Mexico is not a key international player in trade in

sugar.

Other Meats The EU holds a defensive position in respect to beef, where Mexican interest in the sector is not high enough for it to become a concern in

negotiations.

Other beverages Beverages including coffee, orange juice, and spirits represent high value export goods for Mexico, where it is specifically interested in the

protection of appellations of origin regarding spirits. Wine and beer will not be included in the analysis as trade in such goods is already

liberalized.

Honey Trade in honey produces a value over €60 million annually, representing 6% of all of Mexico’s agricultural exports.

Energy Commodities Energy commodities represent an important sector for trade flows between Mexico and the EU countries.

Chemicals Impacts on trade in chemicals, including pharmaceuticals, will be assessed in depth as stakeholders have voiced concerns over the sector’s

regulatory framework and issues surrounding intellectual property

Machinery (Electrical + Other) When taken combined, the motor vehicle and other machinery industries account for almost 30% of Mexican manufactured exports to the EU.

Motor Vehicles In upcoming years, Mexico is expected to become an even bigger competitor within the automotive industry on a global scale.

Metal Parts Metal parts represent an important sector in trade flows between the EU and Mexico, but in particular, an important sector in the employment of

unskilled workers.

Business Services The study will conduct an in depth assessment of the agreement’s impacts on business services recognizing that trade in services between the EU

and Mexico is dominated by travel and transport services as well as telecommunications.

Financial Services Although trade in the services sectors is much smaller, bilateral trade flows in were shown to have increased significantly since the original FTA.

Initial Sectoral Analysis: Agriculture

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Share of EU and Mexico in agriculture trade (2000-2016) (in %)

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OTHER AGRICULTURAL PRODUCTS

24 TOBACCO AND MANUFACTURED…

23 RESIDUES AND WASTE FROM THE…

22 BEVERAGES, SPIRITS AND VINEGAR

21 MISCELLANEOUS EDIBLE PREPARATIONS

20 PREPARATIONS OF VEGETABLES,…

19 PREPARATIONS OF CEREALS, FLOUR,…

18 COCOA AND COCOA PREPARATIONS

17 SUGARS AND SUGAR CONFECTIONERY

16 PREPARATIONS OF MEAT, OF FISH OR…

15 ANIMAL OR VEGETABLE FATS AND OILS…

14 VEGETABLE PLAITING MATERIALS;…

13 LAC; GUMS, RESINS AND OTHER…

12 OIL SEEDS AND OLEAGINOUS FRUITS;…

11 PRODUCTS OF THE MILLING INDUSTRY;…

10 CEREALS

09 COFFEE, TEA, MATÉ AND SPICES

08 EDIBLE FRUIT AND NUTS; PEEL OF…

07 EDIBLE VEGETABLES AND CERTAIN…

06 LIVE TREES AND OTHER PLANTS;…

05 PRODUCTS OF ANIMAL ORIGIN, NOT…

04 DAIRY PRODUCE; BIRDS' EGGS;…

02 MEAT AND EDIBLE MEAT OFFAL

01 LIVE ANIMALS

Export Import

Structure of EU-Mexico agricultural trade (average 2011-16)

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% of Employment in the Agricultural Sector

EU Mexico

Beverages constitute the most important product traded between the EU and Mexico, but NTBs include cumbersome procedures, high compliance costs, arbitrary measures, and labelling.

EU-Mexico Bilateral Trade

Although the GSP presents no preferences in many agricultural products, EU tariffs applied to Mexico were reduced from already low values in many products. The effect of the FTA on Mexico exports is expected to be low. However, the reduction of tariffs in the Mexican side have not generated an increase in the share of trade in agricultural products with Mexico, remaining a minor trading partner for the EU at about 1% of EU imports and exports

Distribution of employment and agricultural output in the EU in 2013 by farm size

Performance of key agricultural products between 2000/02 and 2014/16 in Mexico (% growth change)

Average hourly wage by sector in Mexico 2017 (in US

dollars per hour)

Distribution of employment and agricultural output in the EU in 2013 by farm size

Initial Sectoral Analysis: Manufacturing

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TransportEquipement

Chemicals

Top 3 Exports EU Mexico

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% of Employment in the Industrial Sector

EU Mexico

While crude oil constitutes the single largest exports from Mexico to the EU, at 32% of merchandise exports, a few other key exports include other machine equipment (17%), electronics (14%), motor vehicles (15%), and chemicals, rubber and plastics (8%). EU exports to Mexico largely constitute other machine equipment at 31% of EU-Mexico exports along with chemicals, rubber, and plastics, motor vehicles, petroleum products, metal products, and other transport equipment.

Estimated Ad Valorem Equivalents of NTMs in Baseline and Modernisation scenarios, Manufactured goods

Initial Sectoral Analysis: Services

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% of Employment in the Services Sector

EU Mexico

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EU Mexico Trade in Services (€ bn)

EU imports EU exports Balance

EU Imports from Mexico

EU Exports to Mexico

Travel services Transport services

Transport services Telecommunications, computer & info systems

Top EU – Mexico Traded Services

Trade in services between the EU and Mexico is much smaller in volume. EU imports in services from Mexico consist mainly of travel services and transport services, while EU exports in services to Mexico are dominated by transport services alongside telecommunications, computer & info

Source: Worldbank Data

Estimated Ad Valorem Equivalents of NTMs in Baseline and Modernisation scenarios, Services

Compound annual growth rate of EU-Mexico services trade, total vs. business services, 2010 - 2015

Sectoral Impacts on SMEs

The larger the SME, the more likely it is to have engaged in cross-national-border business activities inside the EU’s internal market in the past three years. While only 29% of micro enterprises have exported to another EU country in the last three years, 43% and 59% of small and medium enterprises have exported to another EU country.

Stakeholder Consultation Process

Electronic Communications

Raising awareness and facilitating stakeholder engagement through

1. Dedicated Website:

2. Email Address

3. Dedicated Twitter Account

4. Dedicated Facebook Page

Online Public Consultation

Commencing in March, the 12 week consultation aims to

1. Generate Ideas Through Stakeholder and Target Country Engagement

2. Identify Groups Impacted by GA

3. Validate Findings through External Input

Roundtables

1. Four Roundtables in Brussels

2. Interviews

3. Face-to-face meetings

Civil Society Dialogue

Stakeholders invited to contribute during implementation phase through

1. Month 3 CSD Presentation for Preparation of Inception Report

2. Month 6 CSD Presentation for Preparation of Interim Report

3. Month 13 CSD Presentation for Preparation of Final Report

Partner Country Workshop

1. One Day Workshop in Mexico City

2. 50 Participants from Mexico

3. Joint Opening Plenary

4. Parallel Events on Sectorial Specific and Thematic Specific Issues

Next Deliverables

Report on Workshop in the Partner Country

• Comprehensive summaries of the proceedings

• List of attendees

• Views expressed

• Report on roundtables and bilateral meetings

Draft Final Report and Final Report

The draft is to be delivered after 10 months, and the final after 13. They will contain

• Stakeholder consultation results

• Overall analyses

• Sector analyses

• Activities performed

• Executive summaries in French, Spanish, Portuguese, and German

Final Phase (Months 6-12)

Task 1

• Suggestions and potential ex-post analysis

Task 2

• Suggestions and potential ex-post analysis

Operational

• Third commission meeting

• Third CSD meeting

• Draft final report (9.5 months)

• Review of draft final by ISG

• Final report

Task 3

• Details of communication activities

Task 4

• Policy recommendations and accompanying measures

Thank you for your attention!

Website: www.siaeumexico.com

Twitter: @SIA_EUMexico

Facebook: SIA EU-Mexico

Email: lsee.sia-mexico2018@lse.ac.uk

LSE Consulting Contact: Daniela Baeza Breinbauer

d.f.baeza-breinbauer@lse.ac.uk