Free Trade Agreement in Principal Between U.S. and Mexico Sounds Good, but What Was Really Agreed Upon?

On August 27, 2018, the United States and Mexico publicized that they have reached a “preliminary agreement in principle” to update NAFTA. The third treaty-partner, Canada, would then join the negotiations on what is assumed as a take-it-or-leave-it approach. President Trump has even signaled that this is a new treaty encompassing the United States and Mexico exclusively, which might be a possible, however unlikely, outcome since Canada was not able to reach an agreement with the United States.

We should keep in mind that the Trump Administration notified to the U.S. Congress that it would re-negotiate a trilateral agreement thus, a new U.S.-Mexico bilateral agreement might need a specific approval from Congress.

Further, political terms under the current Trade Promotion Authority´s (TPA) are as follows: the conclusion of trilateral negotiations should be notified by August 31 to the U.S. Congress -a difficult, if not impossible task-, an agreed upon text should be sent by September 30 so that the outgoing Mexican President can sign it in November 30, its last day in office.

Regarding the 4 contentious issues, the following has been announced with no further details at this time:

1. Automobiles rules of origin. An 5-year transitional increase from 62.5% to 75% of the Regional Value Content, with the requisite of 40% (automobiles) to 45% (trucks) manufacturing performed in high value (US, and Canada) territories, has been agreed. Mexican Secretary Guajardo mentioned that almost 70% of current exports already comply with such rule of origin.

Opinion: NAFTA made automobiles and trucks would likely increase its manufacturing costs, yet it is unlikely that consumers would have noticed even in the absence of a revised NAFTA. There would also likely be an increase in the production-facility investments in the NAFTA region, with some manufacturers even considering not claiming NAFTA origin and instead pay the 2.5% import duty into the United States, as it could be more cost effective. If Canada does not join the U.S.-Mexico agreement, we would likely be in for a major shook-up as the three parties likely addressed the 75% percentage during previous negotiations, and Canadian inputs must have been part of the equation.

2. Seasonality of agro products. This U.S. effort to limit exports of fresh Mexican products and to facilitate the filing of antidumping petitions was dropped altogether.

Opinion: going forward with this United States request was simply unreasonable, in the sense that Mexican exports would have been penalized with harsher conditions not applicable to non-treaty partners.

3. Sunset Clause. Instead of a sudden-death review every five years, 16 year renewal periods were agreed upon, with 6-year requests to revise its terms when deemed necessary.

Opinion: This signals a long term commitment by treaty partners as, in order to exit NAFTA after several review periods, such effort would involve at least two administrations in any given country.

4. Dispute settlement. Chapters 11 (Investor-State disputes that can be brought by private parties) and 20 (a catch-all panel system to be brought exclusively by countries) to remain with certain variations to be determined. Chapter 19 (panel revision of antidumping determinations that can be filed by private entities) is said to be revised.

Opinion: The permanence of Chapters 11 and 20 dispute settlement systems sends the signal of a strong NAFTA that can self-administer its disputes; for Chapter 11 there would likely be levels of protection, with emphasis on services provided in critical sectors. Chapter 19 can certainly be revised to expedite its procedures, beginning by denying the opportunity of countries to informally block the formation of dispute settlement panels; this Chapter will be closely scrutinized by Canada, as it is a rollover from the currently suspended U.S.-Canada FTA.

In conclusion, the good news is that we likely have a rejuvenated, long-term NAFTA ahead of us, one that even seems to satisfy President Trump, as well as an incoming Mexican administration that would not seem inclined to revise or reject it. The certainty of being able to seamlessly manufacture goods and exchange services across North America (the “lower” North America?), though with increased, burdensome record-keeping and tracking of inputs, is clearly a better deal than not taking advantage of neighboring economies that clearly complement each other.

Having said the above, we shall wait and see the reactions of the U.S. Congress, Canada, and Mexico. We will continue following the process closely and provide further updates shortly.