The U.S. has reached a compromise with Canada on a renegotiated North American Free Trade Agreement (NAFTA) after striking an earlier deal with Mexico. The agreement still has to be ratified but it is President Donald Trump’s biggest success in trade policy so far, gaining agreement on new, more favourable conditions for the U.S.
The talks were a fulfilment of one of Trump’s election campaign promises. At the time, he described NAFTA as “the worst trade agreement” the U.S. had ever signed. According to the president, it was necessary to change the terms of exchange of goods and services, in particular with Mexico, with which the U.S. has had a substantial trade deficit. It was also necessary to regulate areas that didn’t exist 25 years ago when NAFTA was negotiated, namely the digital economy—free flow of data and e-commerce.
The NAFTA renegotiations started in August 2017 but were affected by protectionist moves by the Trump administration, including the imposition of duties on imports of steel and aluminium. In August, a preliminary agreement with Mexico was reached, and then on 30 September, with Canada.
The deal, now to be called the USMCA (United States-Mexico-Canada Agreement) will cover new areas such as e-commerce), the rules for trade in agricultural products will be changed, and provisions regarding labour law and environmental protection will be strengthened. Trump’s biggest success is the tightening of the rules of origin in the automotive sector. Under the new deal, duty-free access to the U.S. market will be guaranteed only for autos with 75% of components produced in USMCA countries (compared to 62.5% under NAFTA). There also are provisions limiting Mexico’s ability to compete in this sector with low-wage labour. The U.S. administration also secured better access to the Canadian dairy market and other sectors.
In return, the U.S. agreed to keep the dispute settlement system in the trade deal and granted Canada and Mexico the right to export duty-free up to 2.6 million autos each to the U.S. if the latter imposed new global duties in the automotive sector.
The North American free-trade zone is too important to the economies of Canada and Mexico to risk them not ratifying the new agreement. For Mexico, it is essential it be signed by outgoing President Enrique Peña Nieto, whose term ends on 30 November.
Although in November are also the scheduled mid-term elections to the U.S. Congress, in which the Democrats might win the majority, it seems doubtful that the agreement will be blocked. The Democratic Party supported NAFTA and the changes to the agreement should not be reason enough to block it. The administration may also increase the pressure towards ratification by terminating the current agreement. Then, Congress would have only six months to decide whether to adopt the new agreement or work with none.
In the context of the most extreme scenarios—a total or partial break-up of the North American free-trade area—the agreement is a positive development for the EU. European enterprises investing in those markets and participating in the local value chains based on the current NAFTA rules will avoid an additional burden (the EU foreign direct investment stock in the U.S. in 2016 amounted to almost €3 trillion).
The changes introduced by the USMCA will not significantly change the conditions for EU entities. Moreover, the Union has concluded the Comprehensive Economic and Trade Agreement (CETA) with Canada and updated the FTA with Mexico. This will help companies from EU Member States compete with U.S. entities on these markets.