Mexico and the USA agree on NAFTA 2.0

After five weeks of intensive negotiations, the USA and Mexico have reached a preliminary agreement for revamping the old NAFTA free trade agreement. However, Canada as the third NAFTA partner was not included in the negotiations. The USA and Mexico hope that Canada will join the agreements. But US President Trump does not want to use the name „NAFTA“ for the new agreement; the consequences associated with this for the US economy were too negative.

The main focus of the negotiations lay on regulating the automotive industry, with Mexico and the USA agreeing to raise the contracting parties’ minimum share of a car’s value to 75%. The old NAFTA scheme defined a share of 62.5% for the three countries. However, some carmakers have already refrained from raising the share of a car’s value to above 62.5% for their Mexican car production, thereby foregoing the exemption from duties within NAFTA. A new regulation is to be introduced in which 40 to 45% of automotive content is to be generated by workers earning at least USD 16 per hour. Given that wages in Mexico are significantly lower, this in effect means a minimum share of production in the USA and Canada. According to the Mexican Economics Minister Guajardo, nearly 70% of Mexican car exports comply with the new regulations. The agreement also provides for innovations in the areas of intellectual property protection and trade in services, among others.

The agreement does not cover US duties on steel and aluminium, with US national security considerations given as the reason for this. A solution here would be important, especially for Canada. The regulations for the automotive industry, on the other hand, are unlikely to prove problematic for Canada on the whole. For Canada to give its approval, solutions must be found above all in two areas. In the agricultural sector, Canada wants to retain its rules for restricting market access. In addition, a new agreement would have to contain a procedure for resolving conflicts comparable to the old regulation which the US side has so far strictly rejected.

US President Trump has called on Canada to join the agreements or face higher tariffs. The US government hopes to receive the green light by the weekend. Given the number of questions still requiring clarification, this timeframe seems very ambitious. On the other hand, the US side should also have a principled interest in a tripartite solution. The US Congress has assured the government that it would facilitate adoption of a successor regulation to NAFTA. Whether a bilateral agreement with Mexico meets this requirement is at least controversial.

The market response to the announcement of the agreement was generally positive, with rising prices on stock markets coming as no surprise. The peso was also firmer at first, but forfeited these gains afterwards. Following the gains in the last two weeks, this was clearly a case of „sell on good news“. Surprisingly, the Canadian dollar firmed up more strongly than the peso in response to the agreement. The market evidently does not see a particularly great risk of Canada being left out and the US administration fulfilling its customs threats.

 

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