Plenty to sort through regarding the future fate of NAFTA

For more than a while now, there has been a general sense of confusion, when it comes to the fate of the North American Free Trade Agreement (NAFTA).

There are many reasons for that premise, to be sure. At the top of that list, of course, is that President Donald Trump has made it very clear he is not a NAFTA supporter, at times often suggesting it could, or should, go away, and at other times saying he may be with OK with some changes.

Well, based on news coming out of the nation’s capital yesterday, it appears that progress on NAFTA’s future is becoming visible, at least, with the U.S. and Mexico coming to terms on various facets of a new NAFTA, so to speak.

While not overly detailed, a document from the office of the United States Trade Representative (USTR), explained that the U.S. and Mexico have reached a “preliminary agreement in principle, subject to finalization and implementation, to update the 24-year-old NAFTA with modern provisions representing a 21st century, high-standard agreement.  The updated agreement will support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.”

As for what this new agreement with Mexico, which President Trump dubbed the United States-Mexico Trade Agreement is comprised of, the key components include updates to provisions regarding the digital economy, automobiles, and labor unions, coupled with U.S.-based companies being allowed to operate in Mexico and Canada without tariffs, as it currently does, according to a New York Times report.

One of the key provisions in the U.S.-Mexico deal according to the USTR, is that it encourages United States manufacturing and regional economic growth by requiring that 75 percent of auto content be made in the United States and Mexico, with the rules

• incentivizing billions annually in additional United States vehicle and auto parts production;
• helping to preserve and re-shore vehicle and parts production in the United States;
• transforming supply chains to use more United States content, especially content that is key to future automobile production and high-paying jobs; and
• closing gaps in the current NAFTA agreement that incentivized low wages in automobile and parts production

Chris Rogers, research director for global trade intelligence firm Panjiva, said that in the context of the Trump Administration’s key trade metric, the trade-in-goods deficit, this resolves uncertainties relating to $56.8 billion in the goods deficit in the 12 months to June 30, which, on a native basis, is equivalent to 96.8% of the total trade deficit with Mexico.

In an interview, Rogers said that the auto part being sorted is a huge positive while expressing caution about Canada.

“Canada has to be brought into the tent and Trump does not have the authority under TPA (trade promotion authority) for a Mexico bilateral,” he said. “However, if Canada does want a quick deal its main ‘give up’ needs to be in dairy, where it accounts for just 8% of American imports (milk powder and cheese are the keys). Canada and Mexico have to reconcile their NAFTA and CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) commitments to each other and autos is a huge part of their bilateral relationship.”

Rogers also noted that it's not clear all the U.S.-Mexico controversies are sorted, as there's no mention of energy where incoming Mexican President Andrés Manuel López Obrador, wants to cut Mexico's $28 billion of energy imports from America.

Canada i.e. the “other” country involved in the current incarnation of NAFTA is not included in this potential new deal. In media reports, President Trump indicated there is a possibility that Canada may very well not be included in a new pact, unless things happen sooner than later.

On a phone call with President Trump yesterday, Mexican President Enrique Pena Nieto said that he assumes the U.S. is going to carry out negotiations of the sensitive bilateral issues between Canada and the U.S.

President Trump explained that negotiations with Canada will kick off soon, adding that is if Canada wants to “negotiate fairly,” stating that Canada currently has tariffs of nearly 300% on some U.S. dairy products.

And he added that the easiest thing that the U.S. could do is “tariff their cars coming in,” which represent “a tremendous amount of money and it’s a very simple negotiation.” But he also noted that there is a possibility Canada gets a separate deal or one is meshed into the deal announced with Mexico yesterday. 

Feedback regarding the U.S.-Mexico deal from two prominent U.S.-based lobbyists could be viewed as positive but cautious.

National Retail Federation President (NRF) Matthew Shay said that coming to terms with Mexico is an encouraging sign, while the U.S. threatening to pull out of the existing agreement marks the opposite.

“NAFTA supports millions of U.S. jobs and provides hardworking American families access to more products at lower prices,” Shay said in a statement. “To preserve these benefits and protect complex, sophisticated and efficient supply chains, the administration must bring Canada, an essential trading partner, back to the bargaining table and deliver a trilateral deal. We hope all parties will resolve their remaining differences, and we will assess any final agreement based on whether it promotes U.S. economic growth and continues to improve the lives of American workers and consumers.” 

NRF pointed to done for it and other organizations by AT Kearney, which explained that were NAFTA to go away, it would increase costs for U.S. consumers and retailers by up to $16 billion per year. 

National Association of Manufacturers President and CEO Jay Timmons agreed with the NRF’s Shay, saying that yesterday’s announcement marks a step in the right direction and serving as a positive signal that some form of NAFTA will survive.

“Our hope—for the sake of our workers and a successful manufacturing industry here in America—is that the final agreement will include all three of the original signatories: the United States, Mexico and Canada,” Timmons said. “Because of the massive amount of movement of goods between the three countries and the integration of operations which make manufacturing in our country more competitive, it is imperative that a trilateral agreement be inked.”

Timmons also lauded how the U.S.-Mexico framework appears to include content requirements that are more workable than previous suggestions, investment protections for some industries (with NAM preferring that it applies to all manufacturers), stronger intellectual property protections than negotiated in previous agreements and a modernized approach to how we operate in a digital age. He also noted it also does not include language incorporating the disruptive uncertainty of ending the agreement every five years (sunset provision) and instead establishes a rigorous review process. 

As things stand with regards to the fate of NAFTA, or whatever it may end up be called, there is more than a lot to sort through and assess. The good news is it is here today. The North American supply chains, and, by extension, the global supply chain depends on it. Clearly, it is not perfect and changes appear to be coming. While it is far too early to come to any type of definitive conclusion, without the U.S. and Canada having yet to meet, let’s hope a deal that helps everyone out is in the offering.