After Much Bluster, NAFTA 2.0
After more than a year of uncertainty and unnecessary bluster, the United States, Mexico, and Canada have hammered out a trade agreement that revises and modernizes the terms of the North American Free Trade Agreement (NAFTA). That the American, Mexican, and Canadian negotiators could get past the sticking points and negotiate NAFTA 2.0 is good for American workers and for more productive bilateral relations with both Mexico and Canada, which have suffered mightily since President Trump took office.
NAFTA was originally negotiated 25 years ago, before the internet changed the way we do business and when Mexico had a much more inward-looking economy. Since NAFTA went into effect, Mexico has transformed dramatically — in large part because of NAFTA — evolving in everything from its workforce, consumer culture, and technical know-how to its integrated supply chains, industrial capacities, and global trading networks. Still, Mexico’s economic expansion over the last quarter century is inextricably linked to the U.S. economy, with around 80 percent of its exports going to the United States. Considering how much Mexico had to lose if NAFTA negotiations failed, the preliminary trade deal between the United States and Mexico signed in August was significant for the success of a more comprehensive, renegotiated agreement.
Meanwhile, despite the strong-arming negotiating tactics of the Trump Administration, Canada had long wanted an updated NAFTA, too; after all, U.S.-Canadian trade in goods and services totaled about $673.1 billion in 2017 alone. Therefore, once the American and Mexican negotiators had struck the preliminary deal, Canadian Foreign Affairs Minister Chrystia Freeland headed to Washington with a willingness to move forward with negotiations. President Trump’s threats to leave Canada out of the deal rang hollow, of course, given that Congress gave the administration authority to do a trilateral deal, not a bilateral one with Mexico alone. Further, from the U.S. perspective, NAFTA 2.0 was always meant to include all three countries so that American businesses operating in Mexico and Canada without tariffs could continue to do so.
The revised deal, rebranded as the “U.S. Mexico Canada Agreement” or USMCA, includes updates to sections regarding the digital economy, automobiles, agriculture, and labor unions. The deal establishes new rules for the auto industry, including important rules of origin designed to boost production here and require parts be made in North America. The parties agreed that, over time, 75 percent of auto parts must be made in North America, up from the current 62.5 percent, in order to qualify for zero tariffs.
The new deal also provides American dairy farmers with increased access to the Canadian market, which has been protected previously and was a Canadian concession. The dispute resolution mechanism known as Chapter 19 remains in the revised deal; however, and the timeline horizon for the agreement is 16-years, to be reviewed every six years. This represents a softening of the U.S. stance on both the so-called “sunset clause” and President Trump’s original demand for a five-year automatic expiration of the agreement, which was a deal-breaker for Mexico and Canada. Left unaddressed, however, was the outstanding issue of President Trump’s steel and aluminum tariffs.
A revised, modernized and expanded NAFTA was always the goal for the business community, and, indeed, markets responded favorably to news of the deal. Increasing opportunities for the free flow of goods and services, finding willing buyers and sellers, and creating efficiencies in the market are good for the American, Mexican, and Canadian economies.
And just as significantly, it may mark the beginning of new and improved relationships with both Mexico and Canada, which have suffered tremendously as a result of the difficult NAFTA negotiations and the negative rhetoric from President Trump. For Mexico in particular, the election of the leftist, nationalist candidate Andrés Manuel López Obrador (popularly known as “AMLO”) as the next Mexican President strained the alliance with the United States, but for the moment at least, ALMO signaled his approval of the new deal. His trade advisers had worked with the Peña Nieto team to negotiate with the United States, lending support to the talks and establishing Mexico’s new administration as more pragmatic on economic policy issues.
Ultimately, the renegotiated NAFTA deal is a good revision of the old one, with nothing particularly radical. It is hard to imagine that what is good about the new trade deal was worth the rupture to relations with two or our closest allies — but hopefully it will set the stage for the United States, Mexico, and Canada to deal with a host of other thorny and complicated issues, such as immigration, drug trafficking, energy security, and border security. With luck, this is the beginning of a more balanced trilateral relationship.
Amanda Mattingly is a Managing Director at The Arkin Group and a Security Fellow with Truman National Security Project. She previously worked as a foreign affairs officer at the State Department. A version of this article was first published by CNN on August 28, 2018. Views expressed are her own.
