The US and Mexico announced that they have reached a bilateral trade deal. Notwithstanding the facts that the preliminary agreement does not involve Canada and lacks details, and the US Congress would not vote on it until next year, President Trump has declared victory in ending NAFTA- a trilateral agreement among the US, Canada and Mexico. Trump, using his usual threatening tactic, obviously hopes to convert the bilateral deal with Mexico into a trilateral one that includes Canada. Meanwhile, Mexican President Enrique Pena Nieto is trying to finalize a deal before he is replaced by leftist Andrés Manuel López Obrado (a.k.a. AMLO) from December 1.
We doubt the feasibility of such wishful thinking. Not only does it depend on Canada’s calculus (protection of the dairy industry and unresolved issues on government procurement, etc), US’ midterm election also has a chance of shuffling the control of the Congress which might affect the vote on the trade deal. We notice the positive market reaction (S&P and Nasdaq jumped to record highs, while Mexican peso and Canadian dollar soared) after the announcement but expect the thrill would be short-lived.
What is the US-Mexico Preliminary Bilateral Trade Agreement About?
The focus is on automobile. The new deal requires 75% of the value of a vehicle to be produced in the partner countries, up from 62.5% required under NATFTA. The deal also requires 40- 45% of auto content made by workers earning at least $16 an hour, as well as greater use of US and Mexican steel, aluminum, glass and plastics.
Meanwhile, the deal will be reviewed every 6 years and will be eligible for expiration after 16 years. It can be extended for another16 years if there are no irreconcilable issues in the review process. If a key issue is identified after the 6-year review, the deal would be reviewed every year until that key issue was resolved. This marks a back down of Trump’s initial insistence on a 5-year sunset clause.
Mexico agrees to double the de minimus duty-free shipment values to US$100 and to improve working condition by practicing labour rights recognized by International Labor Organization. Duty-free access for farm products will be maintained and there will be no restriction on market access for US named “cheeses”. Both parties have also agreed on areas on intellectual property and environment protection.
There are still a number of areas remained unresolved. For instance, whether NAFTA’s Chapter 11 (investor-state) and Chapter 19 (anti-dumping and countervailing duty) dispute settlement mechanisms. under which bi-national panels make binding decisions on complaints about illegal subsidies and dumping, would be modified is uncertain. The White house has been calling to remove both clauses while the Mexican and Canadian governments are eager to keep. The US has also pushed for more stringent measure on government procurement, one of the issues that Canada has strongly objected. The US-Mexico deal has made no mention on this area.
Canada’s Calculus
Canadian Foreign Minister Chrystia Freeland has cut short her European trip to Europe and will be meeting with the US today. Trump has made the US-Mexico bilateral agreement a done deal and a “take it or leave it” offer for Canada. As he noted, “I think with Canada, frankly, the easiest we can do is to tariff their cars coming in. It’s a tremendous amount of money and it’s a very simple negotiation. It could end in one day and we take in a lot of money the following day”.
Although Trump believes that this would force Canada to make concessions, Canadian Prime Minister Justin Trudeau, facing national election by October 2019, has often affirmed that “no deal is better than a bad deal”. The thorniest areas between the US and Canada are dairy and the dispute settlement mechanism (the abovementioned Chapter 19). The latter is even viewed as uncompromisable for the Canada government.
Back in August last year, Freeland cited that Canada had withdrawn its chief negotiator from 1987 talks on a bilateral trade treaty with the US over the same issue, stressing that “Canada will uphold and preserve the elements in NAFTA that Canadians deem key to our national interest – including a process to ensure anti-dumping and countervailing duties are only applied fairly when truly warranted”.
Finalised by Friday?
Trump has planned to seek Congressional approval by the end of this week, noting that Canada might opt to join later if it cannot make up its mind by Friday. The urgency of the approval is two-folded. First, Trump would like to get it done before the mid-term election of which the result might eliminate Republican’s majority. Second, it is to accommodate the 90-day window for a deal to be signed by outgoing Mexican President.
However, there are mixed expectations on whether the Congress would accommodate. Congressional approval of NAFTA renegotiation back then was based on the assumption that the new agreement would be a trilateral one. As such, the White House would need to seek Congress’s approval to change it to a bilateral deal (if Canada refuses to join). This process could take at least 180 days. Yet, some believe that they might skip this process.
While Trump’s lip service has again succeeded in stimulating the financial markets, the effect is short-lived. While the US and Mexico attempt to end NAFTA hastily and forcefully, Canada’s own interests and US Congressional procedures remain the key hurdles to overcome.
