The international trade community was abuzz yesterday over President Donald Trump’s announcement that the United States had come to terms with Mexico on a new bilateral trade agreement the administration hopes will replace the 25-year-old North American Free Trade Agreement (NAFTA).
Trump hailed the announcement as “a big day for trade, a big day for our country,” but skeptics pointed out that it may not be possible to ratify the agreement as it is written due to the fact that Canada has been absent from the latest negotiations on a revised NAFTA.
And here’s the thing: They’re both right.
Leaving aside some linguistic vagaries — Trump called it a new trade deal, while the Office of the U.S. Trade Representative referred to it as a “preliminary agreement in principle” — and some flat out erroneous statements during Trump’s announcement — Mexico is not, in fact, a larger trading partner with the United States than Canada and the U.S.-Mexico deal doesn’t even come close to being the “largest trade deal ever made” — the bottom line is that the U.S. and Mexico have agreed on some of their more contentious bilateral NAFTA disputes in Canada’s absence. Chief among these issues was a 75 percent regional content requirement for automobiles, an increase in Mexico’s de minimus shipment value, maintaining zero bilateral tariffs on agricultural products and a revision of the controversial “sunset” clause proposed by the United States.
This progress, in and of itself, is a good thing in that it broke a negotiating deadlock between the U.S. and Mexico and theoretically clears the way for Canada to rejoin talks this week.
However, because Canada has not been involved with these bilateral talks, Canadian negotiators now appear to be faced with an all-or-nothing decision — i.e. get on board with the U.S.-Mexico deal as is or be left out. And if they choose the latter, a separate U.S.-Mexico deal might be dead on arrival.
The so-called sunset clause, for example, was one of the major sticking points with Canada during trilateral negotiations and one of several provisions that could keep Canada from signing off on the U.S.-Mexico deal as a replacement for NAFTA. Rather than pulling the idea entirely in its agreement with Mexico, the U.S. has revised the proposal for a five-year sunset clause to a 16-year expiration date (the current NAFTA has no such expiration) that would be revisited and renewed every six years, thus restarting the 16-year clock. If any of the parties don’t want to renew after six years, they would all meet to renegotiate on those specific issues.
The problem here is that it’s far from clear that Canada would agree to any such clause, let alone the specific revision Mexico has agreed to in this new deal.
Mexican Foreign Minister Luis Videgaray Caso said yesterday that although Mexico prefers a trilateral deal, it cannot control the U.S.-Canada relationship and therefore is willing to move forward with this bilateral agreement if Canada doesn’t agree.
Supporters are hailing this as a successful divide-and-conquer negotiating tactic by Trump, but several analysts and lawmakers have questioned whether it’s even possible for him to put a bilateral deal in place without blowing up the current NAFTA framework.
Trump himself said he would be “terminating the existing deal and going into this deal,” but it is still unclear whether he even has the authority to negotiate a strictly bilateral deal with Mexico.
Sen. Pat Toomey, R.-Pa., who sits on the Senate Finance Committee, which along with the House Ways and Means Committee has primary congressional jurisdiction on trade matters, told reporters that any new NAFTA deal must include all three countries to be fast-tracked under trade promotion authority, meaning Congress could tell Trump they won’t consider this agreement at all and to come back with a trilateral deal.
That would require Republican lawmakers to defy Trump, however, something they’ve been hesitant to do, and could be at least part of why Trump is pushing to get this deal done prior to the midterm elections in November.
Jennifer Hillman, a former member of the World Trade Organization’s Appellate Body, USITC commissioner and general counsel, ambassador and chief textiles negotiator at USTR, said that at a minimum, the Trump administration cannot replace NAFTA with the new U.S.-Mexico Trade Agreement without first terminating NAFTA, which requires six months notice and congressional approval; notifying Congress it has begun separate negotiations with Mexico; and sending Congress of the full text of agreement, which then triggers a 90-day review period.
This is why statements from various trade associations yesterday portrayed a cautious optimism, indicating that the community by and large found the news encouraging, while also reiterating that they would still prefer a trilateral NAFTA due to the complex, interconnected nature of global supply chains.
Matthew Shay, president and CEO of the National Retail Federation, said, “Coming to terms with Mexico is an encouraging sign, but threatening to pull out of the existing agreement is not. NAFTA supports millions of U.S. jobs and provides hardworking American families access to more products at lower prices. 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.”
In perhaps the strangest twist, Trump said he now wants to rename NAFTA due to “bad connotations,” most of which he ironically created by bashing it as one of the worst deals ever and a “rip-off” for the U.S. Even so, neither Trump nor administration officials seem to have any idea what the new name would be if Canada were to sign off on it, but chances are the “United States-Mexico Trade Agreement” won’t stick in that case.
Regardless of what they eventually call this revamped free trade agreement, the real questions now are whether Canada will accede to a deal it did not negotiate and what happens if they refuse.