A New UK-Mexico FTA

Last week the UK government launched negotiations with Mexico on upgrading its free trade agreement (FTA). The existing FTA is based on the EU-Mexico Global Agreement[1], which was transitioned into UK law as part of the Brexit process.

The bilateral UK-Mexico trade relationship is worth over £4 billion annually, with Mexico’s demand for imports expected to grow by almost 35% by 2035. Mexico’s fast-growing economy is home to over 130 million consumers and is forecast to be among the world’s largest over the next two decades.

The existing terms of trade were negotiated in the 1990s, with the original FTA entering into force in the year 2000. The nature of global trade has of course changed significantly over the last two decades, so the old agreement’s focus on trade in goods looks rather outdated. Trade in services now accounts for two thirds of global GDP and is particularly important to a services-intensive economy like the UK.

In fact, since the original terms were agreed, services as a share of total UK trade have doubled and the UK now finds itself the second-largest exporter of services in the world, despite being the sixth largest economy. It comes as little surprise then that UK trade negotiators will be seeking to modernise the agreement to support trade in services, stating: “the agreement could increase trade flows across the financial, creative, digital and technology services sectors thanks to advanced services provisions, boosting the UK’s already world-leading services industries”.

We expect to see the inclusion of modern rules for cross-border trade in services which minimise trade barriers behind the border, including numerical quotas on the number of service suppliers, economic needs tests and local presence requirements. We also expect negotiators to seek more generous terms for business travel and establish a process for qualifications to be recognised in each country’s territory. We may also see sector-specific annexes to support growth in key areas such as financial, legal, professional and transportation services. Indeed, DIT modelling suggests that liberalising UK-Mexico trade in financial services could lead to exports increasing by around 22% - or up to £30 million. UK exports of insurance services alone could increase by around 41%.

The new agreement is expected to incorporate some of the most modern provisions to support digital trade and the movement of data, with the UK’s aspirations matching those of its other recent agreements signed with Singapore, Australia and New Zealand – as well as those included within the CPTPP agreement. The two sides may also make progress towards implementing paperless trading. With over 80% of UK services exports to Mexico delivered digitally, dedicated rules in this area could help to create a more stable investment environment, create opportunities for technology sectors and improve efficiency in the bilateral trade corridor.

While this new FTA will be more comprehensive than its predecessor, more traditional aspects will not be overlooked. While over 97% of tariff lines on UK exports are currently duty-free, negotiators will push for further market access in specialised areas where remaining duties are comparatively high (such as up to 45% on dairy and 20% on alcohol products). Currently 91% of tariff lines on Mexican imports to the UK are duty-free and we can expect some further liberalisation here too.

Importantly, UK negotiators will also aim to establish permanent and flexible rules of origin, which under the existing agreement only permit the cumulation of EU content for up to 3 years. Without agreement in this area UK exporters could encounter new tariffs levied on their products that are not currently in place – for example, 20% duties on vehicles and machinery where UK production is reliant on foreign inputs.

The agreement is also expected to include dedicated chapters in a wide range of other areas, including customs facilitation, investment, government procurement, agriculture, intellectual property and sustainability. These are expected to be largely in line with the UK’s other recent FTAs.

The government is aiming ideally to conclude these bilateral negotiations by mid-2023. The negotiation is taking place alongside the UK’s accession process to CPTPP, which also includes Mexico.

What should I be doing now 

The UK-Mexico trade corridor is set to widen substantially over the coming years due to the growth of the Mexican economy and improved terms for bilateral trade. Whether you’re in goods or services, large or small, you should evaluate your operations, supply chain and investment decisions to find out where the opportunities might lie for you.

For support in assessing your priorities, Deloitte’s specialists are on hand to help.

[1] The EU and Mexico have since undertaken their own negotiations on upgrading the original agreement.