A New Trade Deal Gets NAFTA Members Back Together

5 MINS READOct 1, 2018 | 21:49 GMT
U.S. President Donald Trump speaks during a press conference to discuss a revised U.S. trade agreement with Mexico and Canada in the Rose Garden of the White House on Oct. 1, Washington, DC.

U.S. President Donald Trump speaks during a press conference to discuss a revised U.S. trade agreement with Mexico and Canada in the Rose Garden of the White House on Oct. 1.

  • The United States, Mexico and Canada have reached a new trade agreement that largely replicates the North American Free Trade Agreement, with a few significant changes in the automotive and dairy sectors, as well as in environmental and labor standards.
  • The stance that Washington adopted in the negotiations on issues such as currency manipulation, labor standards and the auto sector will probably influence its future trade talks, including those with Japan and the European Union.
  • Though the United States has agreed to exclude Canada and Mexico from steeper auto tariffs, it may still use the threat in negotiations.

A truly North American free trade deal is back on the table. In the last minutes of Sept. 30, just before their midnight deadline, negotiators from Canada and the United States reached an agreement on a trilateral deal to replace NAFTA, the United States-Mexico-Canada Agreement (USMCA). The pact will spare Washington many of the challenges of moving ahead with a bilateral trade deal with Mexico while still enabling it to finalize a new agreement before Mexican President Enrique Pena Nieto leaves office. And though the deal looks a lot like the North American Free Trade Agreement — most of NAFTA's chapters, in fact, are unchanged in the USMCA — it addresses some of the United States' biggest concerns.

The Big Picture

For more than a year, the United States, Mexico and Canada have been negotiating changes to NAFTA, making slow progress over what to include in the new deal and whether to preserve the trilateral format. A new agreement among the three countries has put those matters to rest, at least for now. Though a few questions remain unanswered, the talks are over, and the new agreement could reach U.S. Congress for a vote as soon as February 2019.

A Big Come Up in Cars and Cows

One notable change applies to the automotive sector. Throughout the renegotiation process, the United States insisted on stricter rules of origin to require that vehicles eligible for free trade access under NAFTA contain more content produced in the trade area, including at least 40 percent content manufactured in high-wage areas. Mexico agreed to these conditions in its deal with the United States, and now Canada has signed off on them, too. In return, the United States agreed that it would not impose tariffs on Mexican or Canadian auto imports under Section 232 of the Trade Expansion Act of 1962 without first going through a 60-day consultation process. It also affirmed that Mexico and Canada could each export 2.6 million passenger vehicles annually to the U.S. market — more cars than the countries currently export to the United States each year — along with auto parts up to a certain value, free of tariffs.

Outside the automotive sector, the United States scored a few other victories. After resisting U.S. demands to open up its dairy sector, Canada finally conceded, agreeing to give U.S. dairy farmers access to about 3.5 percent of the domestic market. Ottawa also will abandon the pricing mechanisms that kept some of its milk products more competitive than their U.S. equivalents. In addition, the United States got Canada to agree to the same sunset clause Mexico signed off on. The clause dictates that the USMCA will automatically terminate 16 years after it takes effect unless all countries involved agree to continue it, and that the signatories will conduct a joint review after six years.

The United States also included two clauses in the agreement that it may use as precedents in future trade negotiations. One clause requires the signatory parties to give special notice if they intend to negotiate new trade agreements with non-market countries — namely China. (The provision is likely a not-so-subtle warning to Ottawa against signing a deal with Beijing.) The other prohibits currency manipulation, a practice U.S. President Donald Trump has frequently and vocally criticized.

Although the new agreement dispels many concerns about the challenges of two-track negotiations with Mexico and with Canada, congressional approval for the USMCA is not guaranteed.

Canada Has Its Say

Despite its successes, however, Washington had to make its share of compromises in the negotiations. Ottawa, for instance, got its way over NAFTA's Chapter 19 dispute settlement mechanism, which remains largely untouched, though it is now part of a different chapter. The mechanism prescribes a binational dispute panel, rather than domestic court systems, to handle disagreements over countervailing duties and anti-dumping cases. Given Canada's long-standing concerns about U.S. anti-dumping cases in the lumber industry, keeping the dispute settlement process intact was a priority for Ottawa.

NAFTA's investor-state dispute settlement (ISDS) process, on the other hand, got a makeover. The process gives companies the ability to sue governments outside of the domestic court system using arbitration panels. The United States and Canada will phase out the mechanism, while Mexico will keep it in place in sectors where the government plays a prominent role, such as energy.

Looking Ahead

Even under the new agreement, trade relations between the United States, Mexico and Canada will be bumpy. Washington's assurances about Section 232 tariffs for the auto sector, made in side letters, are flimsy at best, and the United States could still try use the threat of tariffs to encourage the deal's speedy approval in Mexico and Canada. The agreement, moreover, does not address the steel or aluminum tariffs that the United States placed on its North American neighbors earlier this year.

But the deal may face its biggest obstacles in the United States. Although the new agreement has dispelled many concerns about the challenges of two-track negotiations with Mexico and with Canada, congressional approval for the USMCA is hardly a guarantee. If Democratic candidates pick up enough seats in November's midterm elections, Trump could order a withdrawal from NAFTA when he submits the implementing legislation for the deal, forcing lawmakers' hands.

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