U.S. and Mexico Reach Landmark Trade Agreement, Canada under Pressure

U.S. and Mexico Reach Landmark Trade Agreement, Canada under Pressure
28/08/2018 Mari Carmen


The U.S. and Mexico have reached a preliminary agreement on key parts of the North American Free Trade Agreement dealing mostly with auto manufacturing and labor standards, President Trump  announced Aug 27.

Speaking to Mexican President Enrique Peña Nieto by phone in the Oval Office, Trump said the two countries will sign what he called the “United States-Mexico trade agreement,” noting the deal would replace NAFTA and calling on Canada (the third party to NAFTA) to join it.

Trumps’ announcement lifted financial markets. U.S. stocks rose to new records

This accord between the U.S. and Mexico is the biggest development in talks that began a year ago driven by Trump’s threats to quit NAFTA. The U.S., Canada and Mexico trade more than $1 trillion annually, mostly under NAFTA.

Deal Details

Following are the most significant aspects of the new agreement:

  • Auto manufacturing: The new deal would require that 75 percent of the parts in any car sold in North America be produced in the U.S. or Mexico to qualify for duty-free treatment, up from 62.5 percent is currently required to be produced in the U.S., Mexico or Canada per NAFTA rules.
  • American companies importing vehicles made in Mexico that do not comply with these rules would pay a 2.5 percent tariff.
  • Higher labor standards: The agreement would require that 40 percent to 45 percent of auto parts in cars sold be made by workers earning at least $16 an hour.
  • Sunset clause: The pact would last for 16 years and be reviewed every six years. If renewed at that time, it would be extended for 16 years from that point. If not, the parties would negotiate every year for the final decade of the agreement until they could reach a new 16-year window.
  • Dispute settlement panels: Mexico agreed to eliminate dispute settlement panels for certain anti-dumping cases, a move that could complicate talks with Canada.
  • The deal updates rules on intellectual property rights and labor negotiations.

White House officials said the agreement would help U.S. workers by making it harder for countries like China to ship cheap products through Mexico and then into the U.S. Harmonizing labor and environmental rules would also protect U.S. jobs and salaries by making it less attractive for U.S. companies to move operations to Mexico.

The new agreement will need to be ratified by Congress.

U.S. Trade Representative Robert Lighthizer described the deal as “preliminary agreement in principle, subject to finalization and implementation” and said the White House will send Congress a letter to formally start a 90-day process for changing NAFTA.

If the administration does not formally notify Congress that it has reached agreement with both Mexico and Canada by the end of August, Peña Nieto, the outgoing Mexican president, will not be able to sign it before Mexico President-elect Andrés Manuel López Obrador takes office December 1.

Markets Approve

Trumps’ announcement lifted financial markets. U.S. stocks rose to new records, with automakers and railroads among the top gainers.

The Dow Jones Industrial Average climbed more than 259.29 points, or 1 percent, to break 26,000. The S&P 500 index gained 22.05 points, closing at 2,896.74. The Nasdaq Composite Index rose 71.92 points to 8,017.90. In addition, the Mexican peso and Canadian dollar also advanced.

Car Manufacturers Cautiously Optimistic

The American Automotive Policy Council, which represents General Motors, Ford Motor and Fiat Chrysler Automobiles, said it is optimistic about the new deal while it reviews the details.

The Alliance of Automobile Manufacturers praised the agreement: “We are pleased to hear that the U.S. and Mexico have reached a consensus on several issues, including automotive rules of origin, and we look forward to learning more.” The group also urged the U.S. and Mexico to “quickly re-engage with Canada to continue to build on this progress.”

Industry groups representing oil and natural gas producers, farmers and retailers praised the deal, but stressed the importance of continued talks with Canada.

The Alliance of Automobile Manufacturers praised the agreement

“Coming to terms with Mexico is an encouraging sign, but threatening to pull out of the existing agreement is not,” the National Retail Federation said in a statement. “The administration must bring Canada, an essential trading partner, back to the bargaining table and deliver a trilateral deal.”

The National Association of Manufacturers urged that a final trade deal include Canada.” Because of the massive amount of movement of goods between the three countries and the integration of operations which make manufacturing in our country more competitive, it is imperative that a trilateral agreement be inked,” it said in a statement.

Eyes on Canada

The big unknown is whether Canada, the third NAFTA country, will join the new U.S.-Mexico deal. Some in Congress have expressed concern that the agreement will have little utility if Canada is not in it.

“We are starting negotiations with Canada pretty much immediately,” Trump said. Lighthizer pointed out that every effort would be made to include Canada, even if it took weeks or longer for them to agree to changes.

the agreement will have little utility if Canada is not in it.

Canada officials are still hoping for a new NAFTA pact. “Canada is encouraged by the continued optimism shown by our negotiating partners,” said Adam Austen, spokesman for Canada’s minister of foreign affair, Chrystia Freeland, adding that Canada “will only sign a new NAFTA that is good for Canada and good for the middle class.”

Canada has only a few days to examine the new deal and agree to it before the White House sends it to Congress. If Canada rejects it, it is unclear what Trump might do, as he has threatened to cancel the entire NAFTA pact.


NAFTA Ordeal

NAFTA negotiations have dragged on for more than a year. Mexico and Canada have stood firm on the importance of maintaining NAFTA’s trilateral format, but Trump has signaled a desire for individual deals with each country.

Trump has made renegotiating NAFTA a centerpiece of his economic and foreign policy agenda, arguing that the 24-year-old trade pact disadvantages American workers by luring U.S. jobs and companies overseas.

NAFTA negotiations have dragged on for more than a year.

Canada and Mexico strongly opposed a sunset clause that would require reevaluating NAFTA every five years with the option to get out, claiming it would create economic uncertainty and allow the U.S. to unilaterally end NAFTA. The new deal reached with Mexico softens this demand to 16 years with reviews every six years.

NAFTA generally prevents the trade partners from imposing tariffs on imports from one another, but in May the U.S. imposed tariffs on steel and aluminum imports to pressure Mexico and Canada into renegotiating the NAFTA deal. In response, Mexico slapped tariffs on $3 billion of U.S. goods, including steel, pork, apples, potatoes, bourbon and various types of cheese, and Canada imposed tariffs on $12.5 billion of U.S. goods, including steel, toffee, maple syrup, coffee beans and strawberry jam. Earlier in August, Trump threatened Canada with auto tariffs if the U.S. and Canada fail to forge a deal.

Still Pending

Will Canada join the new deal? That remains to be seen.

Also unknown is how the Trump administration will steer a deal through Congress. Trump has been authorized by Congress to seek a new NAFTA deal through fast-track authority, which allows the president to submit trade deals to lawmakers for a basic yes-or-no vote, provided the administration follows certain procedures.

In addition, U.S. and Mexican trade leaders also failed to resolve whether the tariffs the U.S. and Mexico imposed on each other will remain in place.

September 7 Update

On Sep 7, Canadian Foreign Minister Chrystia Freeland announced she and U.S. Trade Representative Robert Lighthizer were making “very good progress” in talks to save NAFTA; however, an agreement did not appear imminent. A Canadian source, who declined to go on the record, said Canadian negotiators expect talks to continue until the end of this month.

Trump has notified Congress he intends to sign the trade deal reached last month with Mexico by the end of November. The U.S., Canada and Mexico have missed several deadlines since NAFTA talks started in August 2017.

Aug 31 Update

After four days of intensive talks following the U.S.-Mexico deal, U.S.-Canada trade talks ended Friday with no agreement to revamp NAFTA but with plans to continue negotiations on Sep 5 on a three-way pact.

U.S.-Canada trade talks ended Friday with no agreement

The biggest sticking points are U.S. demands for more access to Canada’s closed dairy market and Canada’s insistence to keep a trade dispute settlement system that the U.S. wants to scrap.

Sources: Reuters, CNN, Fox News, The Wall Street Journal, The Washington Post, Bloomberg, Chicago Tribune, CNBC, Business Insider, Washington Examiner, MarketWatch.


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