Political and trade relations are not a zero-sum game. Even with the creation of economic blocs and integrations, understanding this is important. After 24 years of the North American Free Trade Agreement (NAFTA) and tense, complex renegotiations lasting more than a year, a preliminary agreement has been reached between two of the three member countries: Mexico and the United States. This accord reflects the global reality, where the European Union, Japan or the Trans-Pacific Partnership (TPP) signatory countries seek to gain strength through trade treaties that will drive their economic development.
Even though NAFTA stipulates the elimination of tariff barriers, President Trump’s administration contravened the agreement by imposing, in June, tariffs on aluminum and steel from Mexico. Mexico reciprocated with tariffs on products such as pork, steel goods, cheese, some agricultural products and bourbon, for example, equivalent to nearly three billion dollars. All of this undoubtedly impacted not only companies, but also markets.
The non-agreement scenario / What is at stake
Failure to reach an agreement would have had the greatest effect on:
- Mexico’s manufacturing sector and retail trade would have suffered a sharp setback, even with the World Trade Organization (WTO) standards had been in place.
- Mexico could have imposed tariffs on US products under WTO standards to balance the trade arena between developed and developing economies.
- According to WTO standards, these tariffs can reach 7% on average for developed countries and 3.5% for developing economies, which could have a significant effect on key imports for the trade relationship, such as corn, to mention just one case.
There is no doubt that negotiations were racing against time, given the proximity of a new government in Mexico and midterm elections in the United States, where the parliamentary majority could lean towards the pro-NAFTA Democratic Party.
In the preliminary round of the agreement, which has been presented as “a great day for trade” by the US government, it is important to take into account that progress was made in not considering the clauses with which Mexico and Canada did not agree, such as the five-year sunset clause, or those referring to seasonality for some agricultural products. Meanwhile, regional content in the automotive industry would grow from 62.5% to 75%. Progress was also made in the controversial topic of compensation and wage imbalances, linking it to the issue of regional content, for example, and in the incorporation of matters that were not included in the original agreement, including those related to the new digital era.
Greater definitions and more precise positions are still pending for several strategic, sensitive factors for both governments, such as energy, where, in the case of Mexico, owing to the reforms, an opening has been generated for foreign investments in the sector, not only from the North American region.
What about Canada?
Canada is already joining in the negotiations, which, in their last stage, have become bilateral, rather than trilateral, given the focus and targets of the complicated topics on the table. There are still some points that need to be finetuned, such as the resolution of differences and regeneration of a shared vision of regional trade power.
The bilateral negotiation of what our neighbor to the north calls the “Mexico-United States Trade Agreement”, and the situation of revising bilateral topics, this time between the United States and Canada, imply a challenge for the Canadian government’s negotiation team. With the preliminary agreement reached, the Mexican government has called for Canada to rejoin talks in order to conclude the negotiation of a “trilateral agreement”. Canada has shown that it is willing to continue, as long as the conditions are favorable for its middle class, in particular. For now, the agreement reached will be valid for the next 16 years, with periodical revisions every six years, or longer afterwards, all of which seeks to maintain a modernized trade agreement.