After 14 months of negotiations, it seems that Mexico, Canada and the US have finally reached an agreement on the new conditions of NAFTA. The agreement, however, will now be called the United States-Mexico-Canada Agreement, signaling a completely new deal according to US President Donald Trump.
Although President Trump had almost shunned Canada from the preliminary agreement the US had established with Mexico at the end of August, it seems the renovated NAFTA will be trilateral after all. September 30 was the last deadline for an agreement to be reached in time to be presented to the US Congress and after weeks of discussions with Canada, all three countries finally came to an understanding on Sunday night.
Trump and his counterparts, President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau, delivered official statements yesterday, declaring the dawn of what would now be called the United States-Mexico-Canada Agreement or USMCA. For Trump, this new deal will be a new beginning for trade in the region and a completely different agreement to what he called “the worst deal ever made,” also known as NAFTA. For some, such as Andrew Selee, President of the Migration Policy Institute, a rose by any other name would smell as sweet, but there is no denying that some changes have been made that will change the dynamics of industries such as automotive and energy, a previously uncharted segment in the original NAFTA.
The weeks leading to this resolution were particularly difficult because Canada appeared in no rush to sign an agreement, particularly one that would compromise the country’s economic position according to Trudeau. Apparently, concessions were made on all sides but all three leaders agree the end result will be beneficial to their national economies. “When your trading partner is 10 times your size, you need rules, you need a level playing field. Unless the new agreement achieved those objectives, we wouldn’t sign it,” said Trudeau at his press conference.
Unlike Trudeau, who admitted that Canada had to make compromises during the negotiation process, “some more difficult than others,” as he put it, Trump refused having to make any compromise to establish USMCA. “I think my biggest concession would be making the deal because we are the one that people come and want to take from,” he said. “That gives us a tremendous advantage in negotiating that we never used before with past administrations. Every deal we have is a loser.”
Nonetheless, the reality is that concessions were made when comparing the resulting USMCA with the original demands Trump made during his campaign and at the early stages of the NAFTA modernization process. One of the most important sticking points in the negotiation was the establishment of a Sunset Clause that would require the treaty to be terminated every five years unless all three parties agreed otherwise. This was changed in favor of a revision every 16 years that would allow USMCA to be constantly modernized.
Jesús Seade, appointed Chief Negotiator of President-elect Andrés Manuel López Obrador, said in an interview with Forbes he was deeply involved in the development of this alternative, which was not being properly addressed by the negotiators. “My special relationship with (US Trade Representative Robert) Lighthizer gave me the opportunity to discuss these issues and practically solve them in private,” he said. “The negotiation was pretty much stuck at a technical level. I had the opportunity to change its dynamic, things started moving and we managed to conclude in a few weeks.”
Trump also dropped his demands to have half of the content in North American vehicles coming from the US and homologating salaries across the region. These, however, morphed into the new rules of origin established in August 27 between Mexico and the US and which Canada agreed to on Sunday. Under these new conditions, cars eligible for free trade must contain 75 percent of regional content, 40 percent of which has to be manufactured in areas with salaries of at least US$16 per hour.
At Mexico Automotive Summit 2018, Eduardo Solís, Executive President of AMIA, said these new conditions might as well change to establish that 40 percent of the regional content must be manufactured in countries that start with U or C given the limits they impose on Mexico. For Óscar Albin, Executive President of INA, the scenario will be much more optimistic. According to a report from Reuters, Albin estimates an increase in the Mexican auto part business of approximately US$10 billion in the medium term and an addition of 80,000 jobs. Once achieved, the sector would be worth close to US$100 billion and generate a total of 880,000 jobs. “Automotive companies, particularly Asian and European, will have to invest more in tooling and components in North America to comply with these dew demands,” he said.
So far, just as the previous United States-Mexico Trade Agreement, USMCA is a preliminary understanding that Trump, Peña Nieto and Trudeau will have to sign so it can be ratified by each country. The details and overall conditions of the treaty must still be disclosed but so far, uncertainty has receded and optimism appears to clear the way ahead for investors.
The data used in this article was sourced from The White House, El Universal, Forbes, CBC News and Reuters.