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

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1 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

2 Introduction Objectives of the SIA: To develop the analysis of expected economic, social, human rights and environmental impacts of the modernization of the EU-Mexico Global Agreement. This is to be done by complementing the existing EU-Mexico GA impact assessment, incorporating: Quantitative and qualitative analysis Stakeholder consultation contributions

3 Overview of SIA Tasks 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 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 3: Stakeholder Consultation Process Active engagement of relevant stakeholders in negotiations of the modernization of the EU-Mexico GA Electronic Communication s Online Public Consultation Roundtables Civil Society Dialogue Partner Country Workshop 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

4 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 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 CO 2 emissions

5 Economic Analysis: Overview of Estimated GDP Effects

6 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

7 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 NUMBEO indicators of standard of living and consumer welfare Both EU and Mexican consumers could benefit from higher levels of mutual recognition

8 Economic Analysis: Consumer Welfare NUMBEO indicators of standard of living and 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.

9 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 Methodology Quantitative 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.

10 Social Analysis: Indicators

1992 1994 1996 1998 2000 2002 2004 2005 2006 2008 2010 2012 2014 2016 Social Analysis: Initial Findings Comparative analysis shows that Mexico performs poorly in measures of income inequality.

11 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. People living on less than international poverty line ($1.90) Trends in food and patrimonial poverty ( ) Comparative Income Inequality Gini Index * Food poverty (%) Patrimonial poverty (%) 0 MEX BRA PER ARG

12 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.

13 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

14 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 Leo n) have the lowest informality rates, while poorer Southern states (Collima, Chiapas, Guerrero, Oaxaca) have the highest levels of informal employment

However, here informal employment is comparatively lower than it is in agriculture or

15 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.

16 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.

17 Human Rights Analysis: Indicators

18 SERF Index Value Human Rights Analysis: Initial Findings 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. Quality of Governance Related to Enforcing Contracts and Trading Across Borders México s Respect for Social and Economic Rights, Trading across Borders - DTF Enforcing Contracts -DTF Right to Health Index Right to Work Index Right to Education Index

19 Human Rights Analysis

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

21 Human Rights Analysis: Draft Modernization Provisions Related to Human Rights

22 Environmental Analysis Aim The 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 Methodology Baseline 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

23 Environmental Analysis: Indicators

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

25 Environmental Analysis: Indicators

26 Environmental Analysis: EPI for Mexico and the EU

27 Environmental Analysis EPI Subcategory Scores for Mexico and the EU Climate Laws, Institutions and Measures Index and GDP per capita

Environmental Analysis Net Exports of CO2 Emissions The power generation sector dominates emissions in the EU (37% of total emissions) and Mexico (39%).

28 Environmental Analysis Net Exports of CO2 Emissions 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 Co2 Emissions by sector in Mexico and the EU

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.

29 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.

the EU and motor vehicle, and transport sectors, the largest consumers of energy

30 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.

31 Selected Sectors Sector Fruits & Vegetables (including bananas) Other Meats Other beverages Honey Energy Commodities Chemicals Machinery (Electrical + Other) Motor Vehicles Metal Parts Business Services Financial Services Justification 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. 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. 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. Trade in honey produces a value over 60 million annually, representing 6% of all of Mexico s agricultural exports. Energy commodities represent an important sector for trade flows between Mexico and the EU countries. 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 When taken combined, the motor vehicle and other machinery industries account for almost 30% of Mexican manufactured exports to the EU. In upcoming years, Mexico is expected to become an even bigger competitor within the automotive industry on a global scale. 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. 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 bytravel and transport services as well as telecommunications. Although trade in the services sectors is much smaller, bilateral trade flows in were shown to have increased significantly since the original FTA.

32 Initial Sectoral Analysis: Agriculture Structure of EU-Mexico agricultural trade (average ) 01 LIVE ANIMALS 02 MEAT AND EDIBLE MEAT OFFAL 04 DAIRY PRODUCE; BIRDS' EGGS; 05 PRODUCTS OF ANIMAL ORIGIN, NOT 06 LIVE TREES AND OTHER PLANTS; 07 EDIBLE VEGETABLES AND CERTAIN 08 EDIBLE FRUIT AND NUTS; PEEL OF 09 COFFEE, TEA, MATÉ AND SPICES 10 CEREALS 11 PRODUCTS OF THE MILLING INDUSTRY; 12 OIL SEEDS AND OLEAGINOUS FRUITS; 13 LAC; GUMS, RESINS AND OTHER 14 VEGETABLE PLAITING MATERIALS; 15 ANIMAL OR VEGETABLE FATS AND OILS 16 PREPARATIONS OF MEAT, OF FISH OR 17 SUGARS AND SUGAR CONFECTIONERY 18 COCOA AND COCOA PREPARATIONS 19 PREPARATIONS OF CEREALS, FLOUR, 20 PREPARATIONS OF VEGETABLES, 21 MISCELLANEOUS EDIBLE PREPARATIONS 22 BEVERAGES, SPIRITS AND VINEGAR 23 RESIDUES AND WASTE FROM THE 24 TOBACCO AND MANUFACTURED OTHER AGRICULTURAL PRODUCTS Export Import Beverages constitute the most important product traded between the EU and Mexico, but NTBs include cumbersome procedures, high compliance costs, arbitrary measures, and labelling. Share of EU and Mexico in agriculture trade ( ) (in %) EU imports from Mexico Mexico exports to EU % of Employment in the Agricultural Sector EU EU exports to Mexico Mexico imports from EU Mexico

The effect of the FTA on Mexico exports is expected to be low.

33 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

34 Distribution of employment and agricultural output in the EU in 2013 by farm size Average hourly wage by sector in Mexico 2017 (in US dollars per hour) Performance of key agricultural products between 2000/02 and 2014/16 in Mexico (% growth change)

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

36 Initial Sectoral Analysis: Manufacturing 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 Top 3 Exports Mexico EU Fuels & Mining Products Transport Equipement % of Trade Other Machinery % of Employment in the Industrial Sector Top 3 Exports EU Mexico EU Mexico Other Machinery Transport Equipement % of Trade Chemicals

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

38 Initial Sectoral Analysis: 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 % of Employment in the Services Sector EU Mexico Source: Worldbank Data EU Mexico Trade in Services ( bn) EU imports EU exports Balance EU Imports from Mexico Travel services Top EU Mexico Traded Services Transport services EU Exports to Mexico Transport services Telecommunications, computer & info systems

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

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

41 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.

42 Stakeholder Consultation Process Electronic Communications Raising awareness and facilitating stakeholder engagement through 1. Dedicated Website: 2. 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 Participants from Mexico 3. Joint Opening Plenary 4. Parallel Events on Sectorial Specific and Thematic Specific Issues

43 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

44 Final Phase (Months 6-12) Operational Third commission meeting Third CSD meeting Draft final report (9.5 months) Review of draft final by ISG Final report Task 1 Suggestions and potential ex-post analysis Task 2 Suggestions and potential ex-post analysis Task 3 Details of communication activities Task 4 Policy recommendations and accompanying measures

45 Thank you for your attention! Website: Facebook: SIA EU-Mexico LSE Consulting Contact: Daniela Baeza Breinbauer

Draft Interim Technical Report. Civil Society Dialogue Paul Wymenga, Erik Merkus, Joachim Schellekens and Stephanie Bouman. Brussels, 30 May 2016

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