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US President Donald Trump and Mexican President Enrique
Peña Nieto said on 27 August that both countries had reached a
preliminary agreement to rebalance their trade relationship under a
new United States-Mexico Trade Agreement.
The agreement represents a positive turn in respect to
Mexican-United States trade disputes, and offers increased investor
certainty regarding future relations.
Canada will likely not sign onto the agreement by 31 August,
but will almost certainly join negotiations over the next month in
search of a deal.
If approved, the deal is a political win for US President
Donald Trump, but the US Congress would strongly prefer a deal that
includes Canada.
The announcement was made by US President Donald Trump and
Mexican President Enrique Peña Nieto during a telephone
conversation, and was made in the context of the North American
Free Trade Agreement (NAFTA) renegotiation. NAFTA renegotiations
started in August 2017 and until the end of July the parties had
only reached agreement on nine out of 30 negotiating chapters.
Mexico and the United States opted in July 2018 to negotiate
bilaterally to expedite progress in the most controversial
subjects, such as rules of origin in the auto industry, leaving
Canada out.
The preliminary agreement will include subjects already
renegotiated and will redefine the trade relationship between both
countries if ratified and implemented. The agreement will last
until 2034 and is set to be reviewed and updated every six years
without the threat of termination. Primary components of the
agreement include:
Increasing regional local content in the auto industry from the
current 62.5% to 75%.
Ensure that 40-45% of auto content is made by workers earning
at least USD16 per hour.
Strengthen rules of origin enforcement beyond existent NAFTA
and Trans-Pacific Partnership requirements in the auto, chemicals,
steel, glass, and optical fiber sectors.
Implementation of new market access chapter to support trade in
manufacture goods, as well as a new textile trade-related
provisions.
The incorporation of sectoral annexes on information and
communication technology, pharmaceuticals, medical devices,
cosmetic products, and chemical substances.
Maintaining agriculture tariffs between both countries at zero
while including agricultural biotechnology in the agreement.
Agreement on enhancing science-based sanitary and phytosanitary
measures, as well as protections for proprietary food
formulas.
Agreement on intellectual property chapter, digital trade,
financial services, environment, and labor.
The agreement is highly positive for the Mexican economy as it
eliminates the uncertainty that had been generated over its
relationship with the US. Such uncertainty affected the value of
the Mexican peso substantially over the past 12 months and had put
the country's economic growth in jeopardy given that over 80% of
its exports are US-bound. However, in order to reach an agreement,
the Mexicans had to concede to a number of US demands including
maintaining existent US tariffs on Mexican steel and aluminum and,
particularly, accepting the production of 40-45% of auto content in
manufacturing plants paying workers USD16 per hour. The acceptance
of such demand will prove costly to Mexico as manufacturing wages
in the country, including other industries besides auto, are closer
to USD3 per hour according to IHS Markit data. Mexican Secretary of
Economy Ildefonso Guajardo believes that 68% of Mexico's auto
exports will be able to cope with the new local content
requirements, which he estimates will be progressively rolled out
from 1 January 2020. However, the remaining 32% of the country's
auto exports will need to take measures to adapt to the new
requirements, according to Guajardo.
For its part, the US offered several concessions to Mexico to
push the agreement through before 1 December 2018 - or in time for
outgoing president Peña Nieto to sign the agreement - most
importantly by scrapping the five-year sunset provision.
The role of Canada
Peña Nieto and President-elect Andrés Manuel López
Obrador - who assumes office on 1 December 2018 - have both
welcomed the agreement but emphasized of the need to incorporate
Canada in the final agreement. However, US President Donald Trump
criticized Canadian Prime Minister Justin Trudeau and his
administration's continued imposition of a 300% tariff on US dairy
products, and mentioned that he would be willing to leave the
country outside the renamed US-Mexico Free Trade Agreement. To
pressure Canada, the US administration has said that it is planning
on sending the agreement to the US Congress as soon as 31 August
and that it also planned to impose tariffs on its auto sector.
A major consideration for Canada to rejoin the negotiations, and
for Mexico's ratification of the announced agreement, remains the
future of NAFTA's dispute settlement mechanism. Canada wants the
existent framework to be modernized. Mexico and the US have given
contradictory statements. Mexico has said that the dispute
settlement issue has not been addressed. The US has claimed that
Mexico had agreed to eliminate it from the new treaty barring for
energy, telecoms, power, and infrastructure.
Outlook and implications
The announcement of a deal creates a trust-building measure to
other trade partners that Trump can negotiate and conclude trade
agreements. Up until now, Trump has generally utilized the threat
and deployment of higher tariffs in trade disputes. This agreement,
along with the 25 July truce between the European Union and the US
over higher tariffs, means Trump and his team can focus their
efforts more pointedly on pressuring China to change its policies
over technology transfer, government subsidies, and greater US
company market entry into the People's Republic of China.
The main sticking point for the future of the agreement will be
Canadian acquiescence. Major provisions of the new agreement
involving dispute settlement, the oil and gas industries
regulation, intellectual property technicalities, and the sunset
provision were all ironed out without Canadian negotiators in the
room. Accordingly, the odds of Canada officially signing on to the
new bilateral agreement by the US - mandated 31 August - appears
dim, especially as Trudeau would be reluctant to appear to be
kowtowing to US pressure to sign within such a limited timeframe.
To accommodate Canada's need for more time, on 31 August the US
will likely report to Congress that an agreement has been made only
with Mexico, but that Canada is expected to join within the
required 90-day waiting period. However, if Canada delays approval
for longer than a few weeks the odds will increase that Trump will
follow through on his threats to impose new tariffs on Canadian
cars.
Without Canada's signature, Congress will be reluctant to sign
off on the new agreement prior to the mid-term elections, if at
all, as the US business community will lobby congresspersons to
protect companies located within their districts that conduct cross
border trade. This would raise the chances that Trump would simply
annul the NAFTA agreement, as he has threated, submitting the
Mexican agreement as a separate agreement, an action that would
lead to legal battles on whether Congress would need to approve
such a move. At that point, Canada would be left only with its 1987
US bilateral free trade agreement and would be forced to negotiate
a new agreement with Mexico separately.