The Trump Administration has, within the short space of one year, succeeded in renegotiating the former NAFTA trade agreement with its neighbouring countries. On several occasions it looked as though negotiations were going to fail and that the relationship would have to resort back to the WTO standards, such as is still the case with the Brexit negotiations. Then, customs tariffs and increased bureaucracy would have rendered trade between the North American countries harder and more expensive. Instead, President Trump has managed to fulfil his election promise and has done so only a few weeks before the important mid-term elections to Congress. After all, what ultimately counts for him is to maintain his majority in the Senate and House of Representatives in order to be able to realise as many of his election promises as possible in the coming two years of his Presidency.
NAFTA has now become USMCA, which is the name of the new trilateral agreement between the USA, Mexico and Canada. The compromise now achieved is no doubt the result of Canada’s export trade relying so heavily on the United States. After all, no less than three quarters of Canadian exports head south of the border, while US exporters sell short of 20 percent of their goods to Canada. President Trump set the Canadian government an ultimatum which ran until this weekend. Not only the Canadian economy’s existential dependency on the US ensured that the USMCA was signed, but also the agreement reached back in August with Mexico.
The new breakthrough was presumably above all made possible by the fact that the Canadian government has already stated that it would open its domestic market to agricultural products from the USA. In return, 2.6 million cars made in Canada and Mexico will largely remain exempt from customs duties if the USA actually implements the car tariffs it has repeatedly threatened on the international stage. Moreover, the USA had demanded the abolition of independent courts of arbitration on trade disputes, but this has been dropped.
However, the existing customs duties on steel and aluminium from Canada remain in place for the time being. It is not yet clear whether a volume cap will be introduced or whether the tariffs will possibly be eliminated in their entirety. It became abundantly clear at the latest when the USMCA was announced that everyone involved had an interest in as fast a solution to the conflict as possible. This is not all that big a surprise given that the three economies are strongly interlocked, and not just at the level of supply chains. Indeed, the trade agreement covers an economic area with an annual output of just short of USD 23 trillion.
For the economies of the three countries directly involved, this latest agreement is good news as it brings to an end a period of uncertainty. Countless investments were no doubt put on ice given the uncertain legal framework and will now be activated. For the car industry in other countries, the content of the USMCA is not such good news as the danger of punitive car tariffs being introduced by the USA has now probably risen.