U.S., Mexico: Trade Deal to Replace NAFTA Faces High Hurdles

3 MINS READAug 27, 2018 | 21:00 GMT
The Big Picture

The United States, Canada and Mexico have been negotiating a new North American Free Trade Agreement for nearly two years. Using the threats of auto tariffs and withdrawal from the deal, Washington successfully ground down Mexico's resistance to key U.S. demands. Now, Washington is moving to do the same with Canada, though Ottawa is likely to push back hard using what leverage it has through its ties to the supply chains of the U.S. automotive industry.

What Happened

During a televised discussion with Mexican President Enrique Pena Nieto on Aug. 27, U.S. President Donald Trump announced that the two countries had reached a preliminary deal to solve their bilateral disagreements in the ongoing NAFTA negotiations. Trump also claimed that he would withdraw from NAFTA, replace it with the bilateral agreement with Mexico and later add Canada to the deal. U.S. Trade Representative Robert Lighthizer will notify Congress on Aug. 31 of the Trump administration’s intent to negotiate a bilateral deal with Mexico should Canada decide to not join the talks. Canadian Minister of Foreign Affairs Chrystia Freeland will travel to Washington on Aug. 28 to discuss NAFTA with U.S. officials.

In their talks, Mexico and the United States reached consensus on a proposed sunset clause for the trade deal and on procedures for settling disputes between investors and governments. Under that mechanism, NAFTA members would not be able to opt out of the safeguards on investor-state dispute settlements. The sunset clause would be incorporated later and would allow 10 years of negotiations if NAFTA members did not agree to keep the agreement intact. Mexico also agreed to Section 232 tariffs on Mexican steel and aluminum exports to the United States.

U.S. and Mexican negotiators at the NAFTA talks had already reached agreement on future automotive tariffs on Aug. 24. Mexico ceded to Washington and preliminarily agreed to subject automotive production from future plants to possible higher U.S. tariffs. The agreement with Mexico implies that heavier auto tariffs are likely. Canada can be expected to strongly resist their implementation in upcoming negotiations.

Why This Matters

Mexico and the United States have now formally ironed out the major points of disagreement that had stalled a trade deal. Withdrawing from NAFTA at this stage and formally negotiating a bilateral deal with Mexico (that Canada could later join) would be politically difficult, given the realities of trade legislation. To begin and eventually cement a bilateral negotiation with Mexico, Trump would have to receive Congress' permission, known as Trade Promotion Authority, to begin a new negotiation. He may not be able to get that before the midterm elections in November or after then if the majority of seats in the House of Representatives changes hands. Moreover, Congress may also move to check his trade authority on implementing tariffs under Section 232 of the Trade Expansion Act of 1962. 

So the administration seems to be using the threats of imposing auto tariffs and breaking NAFTA into bilateral agreements to make progress on U.S. demands in talks with Canada. After successfully pressuring Mexico to accept terms that benefit Washington, the Trump administration will now turn its attention north. The United States is still demanding a resolution to disputes over softwood lumber and agricultural subsidies, and Washington will also focus on other issues, such intellectual property, when it resumes talks with Ottawa. But Canada will strongly push back against these demands, and it will likely point to the interconnected nature of automotive trade under NAFTA to deflect U.S. tariff threats.


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