North America Has a New Trade Pact. Now What?

7 MINS READNov 30, 2018 | 19:33 GMT
Mexican President Enrique Pena Nieto (left), U.S. President Donald Trump (center) and Canadian Prime Minister Justin Trudeau sit together after signing a new free trade agreement in Buenos Aires, Argentina, on Nov. 30.

Mexican President Enrique Pena Nieto (left), U.S. President Donald Trump (center) and Canadian Prime Minister Justin Trudeau sit together after signing a new free trade agreement in Buenos Aires, Argentina, on Nov. 30. Trudeau, meanwhile, conspicuously avoided showing his signature for the cameras.

Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.
  • The new trade agreement has been signed, but its ratification will likely be slow in all three countries.
  • Although the countries did not sign any binding deal on auto quotas, the Trump administration could take action that would effectively forestall U.S. automakers from moving production to Canada and Mexico.
  • The new NAFTA deal has shown that other countries negotiating new trade deals with the United States cannot expect Washington to lift tariffs it has already imposed on their products.
As expected, Canada, Mexico and the United States signed a replacement agreement for the North American Free Trade Agreement (NAFTA) on Nov. 30 on the sidelines of the G-20 Summit in Buenos Aires. But while the countries' respective leaders — the United States' Donald Trump, Mexico's Enrique Pena Nieto (on his last day in office) and Canada's Justin Trudeau — were all present, they did not put pen to paper themselves. Trudeau, for one, categorically refused to sign the agreement himself unless the United States removed aluminum and steel tariffs. Instead, the three leaders signed letters authorizing their lead negotiators on the trade agreement to sign the new deal, which, incidentally, all three have chosen to call by a different name. There's the United States-Mexico-Canada Agreement, the Canada-United States-Mexico Agreement and the Mexico-United States-Canada Agreement. (For the sake of clarity, Canadian Foreign Minister Chrystia Freeland said she was just calling it the new NAFTA.) The signing ceremony laid bare the extent of the issues that still require resolution and provide a harbinger of the difficult ratification process ahead. What's more, plenty of other countries currently matching wits with Trump on trade will be taking notes for when the time comes to seal their own deals. 
The Big Picture

Nearly a year and a half since talks began, the United States, Mexico and Canada have signed a new North American trade deal. That, however, is only the beginning, because disputes involving steel, aluminum, dairy and the auto sector all await resolution. In addition, complications will arise in the ratification process around the world.

The countries also signed various side letters at the event, including two in which the United States agreed not to enact new tariffs on vehicles assembled in Canada and Mexico until they reach a certain quota level. According to the new deal, the quota level is not binding, but a new wrinkle has emerged: The Trump administration is now pressing Ottawa and Mexico City to allow Washington the right to decide how to organize the quotas. In the end, that means Mexico and Canada may find that what they thought were unbinding quotas could become binding if the United States imposes restrictions on companies mulling whether to expand production at certain plants in Mexico or Canada — effectively dealing a blow to the latter countries' car industries. And given Trump's annoyance at GM's recent announcement that it would leave five factories idle in the United States as it reorganizes its corporate strategy, Washington wants to gain more leverage against U.S. and foreign automakers. Of course, legal issues will inevitably arise if the United States meddles with companies' quotas for political purposes. But more importantly, Canada and Mexico may hold off on ratifying and implementing the new agreement as a means of pressuring Trump on auto tariffs. Such a course of action, however, could provoke Trump into threatening to withdraw from the existing NAFTA deal — which will remain in effect until the new deal is ratified — and declaring his way or the highway.

Trump Draws Canadian Ire

Besides difficulties with the auto sector, Trudeau will face other complications. The Canadian prime minister was visibly annoyed about the whole process and even declined to present his authorization signature for the cameras, unlike Pena Nieto and Trump. The Canadian prime minister has taken some political flak because of his concessions on the dairy sector — which has a few unresolved issues of its own — and because he failed to persuade Trump to remove the aluminum and steel tariffs during the negotiations. Talks on those two metals will continue, but U.S. Trade Representative Robert Lighthizer also added that the United States ultimately wants to protect Trump's steel and aluminum tariffs because they believe they are effective. Canada will hold federal elections by Oct. 21, 2019, at the latest, so Trudeau must hope that auto, aluminum and steel restrictions do not hurt his chances. For now, his Liberal Party has about a six-point lead over the opposition Conservative Party.

A Wall to Stop U.S. Carmakers From Going to Mexico?

In Mexico, Andres Manuel Lopez Obrador, who takes over the presidency on Dec. 1, could also prove to be a roadblock to a quick and easy ratification. Like Ottawa, Mexico City finds itself in a bind on auto and steel tariffs. But auto tariffs are perhaps an even bigger concern for Mexico. The possibility of U.S. automakers' closing their U.S. operations and setting up shop in Mexico has become a bone of contention in the United States, so  Mexico City is likely to attract far more pressure from Washington than Ottawa on the issue. Ultimately, auto tariffs and quotas give Lopez Obrador — a self-proclaimed populist — even more reason to try to stand up to Trump.

It Won't Be Any Easier at Home for Trump

Even in the United States, ratification is likely to encounter more than a few bumps. Several Republicans, including House Ways and Means Chairman Kevin Brady, have said there is little chance that the lame-duck Congress will vote on the agreement before new legislators are sworn in on Jan. 3. And based on the current law, the Republicans would have to throw rules, norms and processes out the window to even attempt to ratify the deal within the next four weeks. And since the Democrats will gain control of the House in January, they will most certainly not grant Trump an easy victory on trade; instead, they will pressure the administration to implement legislation that addresses some of their key concerns, such as labor and environmental standards. But as the House's incoming leaders ratchet up the pressure on Trump, he may turn around and announce his intention to formally withdraw from the old NAFTA deal in an effort to force the new deal through the House.

Once Trump imposes a tariff, heaven help anyone trying to escape it.

A Message to the World?

While the legal text on the new NAFTA deal is more or less done and dusted, the lack of resolution to several important trade issues will not escape the attention of other countries negotiating trade deals with Trump's White House. The United States largely steered clear of radically altering the original NAFTA deal, choosing instead to focus on one clear goal: erecting barriers to goods that the United States has a large trade deficit in. Originally, the United States used steel and aluminum as a means of coercing Mexico and Canada to accelerate the talks. But now that the tariffs have entered force, they have demonstrated their staying power. Trump has lauded the tariffs ever since he enacted them, highlighting them as a great success whenever a company opens up a new aluminum smelter or steel mill at home. And while the United States may still not be taking a hard line on Canada and Mexico in the auto sector, the fact that the White House could meddle with corporate quotas means Ottawa and Mexico City will remain vulnerable to his whims.

All of this has several implications for other countries as they craft their negotiating strategies with Washington. First, once Trump imposes a tariff, heaven help anyone trying to escape it. Accordingly, China cannot expect to offer something to Trump to remove all the tariffs already in place. And if Trump implements tariffs on autos, global automakers must expect to agree to quotas that cut their exports to the United States to secure the removal of the tariffs. Second, can the United States be trusted? Pacta sunt servanda is a principle of all contracts, but if the United States tries to alter articles after the fact, what's the point of the agreement? Finally, U.S. trade policy is all about throwing up trade barriers. For Germany, Japan and South Korea — all of which are desperate to avoid auto tariffs — the takeaway from the new NAFTA talks is that the United States will only accept an agreement that restricts auto imports from those countries. Nothing less will do.

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