Economy

US and Mexico reach breakthrough with Nafta revamp

Stricter rules for Mexican exports as Trump prepared to complete deal without Canada

Mexico’s economy minister Ildefonso Guajardo arrives at the US Trade Representative’s office in Washingto.

Mon Aug 27 2018 - 19:39

The US and Mexico have reached a breakthrough in efforts to revamp the Nafta trade agreement, potentially ending an acrimonious impasse in relations between the countries since Donald Trump took office.

The US president said on Monday that the overhauled trade deal - which was tentatively agreed between officials in Washington and Mexico City - would be renamed the United States-Mexico trade agreement due to Nafta’s negative connotations.

It was unclear if Canada, Nafta’s third partner, would sign on to the deal. Ottawa was expected to join the talks as early as Monday evening.

Mr Trump said the US was prepared to do a deal exclusively with Mexico if Canada was not on board.

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“It’s a big day for trade. It’s a big day for our country,” he said in the Oval Office during a televised phone call with Enrique Peña Nieto, his counterpart in Mexico.

A spokesman for Chrystia Freeland, Canada’s foreign minister, said Canada was “encouraged” by the “optimism” shown by the US and Mexico but cautioned that a full Nafta deal was not a foregone conclusion.

“We will only sign a new Nafta that is good for Canada and good for the middle class,” the spokesman said.

Mr Peña Nieto said he hoped to conclude the talks with Canada “as had always been intended from the beginning”. The Mexican president added that he hoped to toast a deal between the three countries with “a glass of tequila”.

In an effort to break a months-long stalemate on the North American trade deal, the US and Mexico this month ramped up negotiations on a series of bilateral issues - from cars and agriculture to energy - that have been the source of trade tensions between the countries for many years.

The two sides agreed to stricter rules for Mexican car exports to the US, including requirements that 75 per cent of the content be made in North America, and that 40-45 per cent of the content be made with workers earning at least $16 per hour - a measure aimed at discouraging manufacturers from relocating to lower-wage Mexico.

The deal maintains tariff-free trade for farm products, but with new measures on labelling and health standards. It also maintains the existing investor dispute settlement regime for the energy and telecoms sectors.

“We think this is going to lead to more trade, not less trade,” Robert Lighthizer, the US trade representative, said on Monday. One thorny issue - regarding US insistence on a review of the deal after five years - was resolved by giving the deal a 16-year lifespan, but allowing the parties to revisit the agreement after six years. Another issue remained outstanding, with the US offering no commitment to drop US tariffs on aluminium and steel from Mexico and Canada.

Even if a comprehensive deal is reached including Canada, approval by all three countries’ legislatures presents a complicated final hurdle. The US Congress is likely to vote at the earliest in a “lame duck” session of Congress after the midterm elections in November, or next year, when it is possible that a Democratic majority will hold the reins of power.

In the 2016 presidential campaign, Mr Trump promised to renegotiate or pull out of Nafta, a 1994 Clinton-era pact that slashed tariffs, integrated supply chains and boosted economic ties across North America.

Mr Trump blamed it for leading to job losses as production shifted south of the US border, even as vast swaths of American business and consumers came to depend on the pact. During the talks, the US took a hardline stance on many issues, particularly on requirements for North American content in Mexican-produced cars, which frustrated negotiators in Mexico City and contributed to the stalemate.

Meanwhile, tensions have flared with Canada over trade, particularly after the G7 summit in June, where Canadian prime minister Justin Trudeau repeatedly clashed with Mr Trump on the subject.

If a deal can be reached by all three countries, it would signify a truce in trade relations on North America, after a similar, tentative detente was reached with the EU in July.

International trade relations remain extremely fraught, however, with the US poised to impose a further $200bn in tariffs on Chinese products as early as next month, after the latest round of negotiations between Beijing and Washington ended without much progress.

Optimism over the Nafta development boosted both the peso and Canadian dollar against the US dollar on Monday morning. US stocks also soared, with the S&P 500 and Nasdaq Composite both opening at all-time highs.

US automakers’ shares also rose strongly.

“We wouldn’t expect manufacturers to adjust production locations - that is, moving production to the US - as a knee-jerk reaction,” said Michelle Krebs, auto analyst at Autotrader.com. “The only reaction will be higher vehicle prices. The new agreement will push production costs higher on Mexican products - parts and vehicles - which, eventually will be paid by American consumers. To date, automakers have absorbed the higher costs related to aluminium and steel tariffs, but that is not sustainable.” – Copyright The Financial Times Limited 2018

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