On Aug. 27, the Trump administration announced that it had struck a preliminary agreement with Mexico to update the North American Free Trade Agreement, which has been in place for 24 years. The original signers of the agreement included Canada, but as the three partners held NAFTA renegotiation talks the U.S. decided to exclusively continue the dialogue with Mexico.
At this point, it is unclear whether Canada will rejoin the agreement, although very powerful members of Congress have stated that Canada’s participation in any North American trade agreement is essential. Canada remains in communication with the U.S. on this matter.
Although much of what is going to change and how it is going to be implemented remains uncertain, major modifications were announced. The two nations agreed on a 16-year agreement, which can be renewed, with six-year review periods. The required North American content in vehicles produced in both countries will rise from 62.5 percent to 75 percent. In terms of wages related to auto production, the agreement calls for 45 percent of the content of pickup trucks and 40 percent of the content of light trucks to be built by employees earning more than $16 per hour.
At face value, this provision seems to be an attempt to wrestle some auto manufacturing away from Mexico. However, automobile makers may just pay a nominal tariff rather than modify their supply chains to use more expensive labor. If more auto manufacturing is conducted with more expensive labor, we can expect the price of North American-made automobiles to rise. This may affect North America’s competitiveness against auto manufacturers in Asia and Europe.
The original NAFTA renegotiations put special emphasis on addressing the energy sector; however, the latest announcement provides no details on what the U.S. and Mexico agreed upon in this respect. It is interesting to note that Mexican President-elect Andrés Manuel López Obrador stated after the Trump announcement that the new agreement would preserve Mexico’s energy sovereignty, a point which he routinely advocated for in his presidential campaign.
The Trump administration is touting that the agreement will include record protections for labor and environment, but no details have been released. At least one labor group voiced opposition to the new agreement. On Labor Day, President Trump blasted AFL-CIO President, Richard Trumka for disputing his strategy on the NAFTA renegotiations and for stating that Trump had “done more to hurt workers than to help them,” during the course of his administration. Stated Trump, “Trumka, the head of the AFL-CIO, represented his union poorly on television this weekend. Some of the things he said were so against the working men and women of our country, and the success of the U.S. itself, that it is easy to see why unions are doing so poorly.”
Whether the Trump administration can move forward on a trade agreement with Mexico, even though it was authorized to renegotiate NAFTA with Mexico and Canada, is unclear. However, on August 31, U.S. Trade Representative Robert Lighthizer announced, “Today the President notified the Congress of his intent to sign a trade agreement with Mexico – and Canada, if it is willing – 90 days from now.” He stated that during the next few weeks, the agreement will be available for review by Congress and the private sector.
Most people whom I deal with who depend on NAFTA for their operations seem to be relieved that the renegotiations are coming to an end and that a set of rules apparently has been crafted. The uncertainty of whether the Trump administration would rescind the agreement caused many firms to avoid establishing new operations, expanding existing operations or hiring new employees. I have worked on four projects that have been spooked by the anti-NAFTA rhetoric espoused by the White House, which never materialized. These have resulted in loss of investment and lost jobs.
Without very many details being released, it is hard to understand what specific areas have been renegotiated, added, removed or improved. However, it appears that at least Mexico and the U.S. have come to an agreement on all issues that were on the negotiating table. Companies conducting cross-border trade can now refocus their efforts on their business.
Whether the new agreement will benefit the U.S. and Mexico more than NAFTA will not be known for many years. However, having a road map in place that firms can follow is a welcome development.
Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at firstname.lastname@example.org.