Call it the trade deal formerly known as NAFTA.
On Monday, President Donald Trump and outgoing Mexican President Enrique Peña Nieto announced a bi-lateral deal between the two countries that could replace the 24-year-old North American Free Trade Agreement (NAFTA). But there are still critical unanswered questions about Canada's potential inclusion in the new agreement and whether Congress will consent to a two-party deal if Canada is indeed excluded. The deal also faces a ticking political clock that gives all three nations only a few days to get it finalized.
"They used to call it NAFTA. We're going to call it the United States-Mexico Trade Agreement," Trump said during a conference call Monday announcing the agreement. "We'll get rid of the name NAFTA. It has a bad connotation because the United States was hurt very badly by NAFTA for many years. And now it's a really good deal for both countries, and we look very much forward to it."
The agreement's framework would see stricter rules for the manufacturing of automobile parts in the U.S. and Mexico, and would require that lawmakers in both countries review the pact every six years. Details of the deal remain somewhat scarce, but the announcement is a major breakthrough that potentially hands Trump an important political victory—and markets responded positively Monday to news of the deal.
A major component of the deal would require that automakers build up to 75 percent of their cars in the U.S. or Mexico to avoid paying tariffs on cars and car parts—up from 62.5 percent required to trade duty-free under NAFTA. The new deal would also require that auto workers in the two countries be paid at least $16 per hour, which is meant to induce car companies to avoid moving jobs to Mexico in search of cheaper labor. Those stricter rules will likely drive-up costs for consumers and may encourage automakers to simply pay the 2.5 percent tariffs on car parts rather than reconfigure complex global supply chains to meet the new requirements.
Those details aside, a looming deadline is probably the biggest threat to getting the new deal completed.
U.S. Trade Representative Robert Lighthizer says he will present the U.S.-Mexico deal to Congress on Friday, regardless of whether Canada is included. That official presentation starts a 90-day clock for Congress to review the deal and give a simple up-or-down vote. Because of that 90-day review period, any deal offered to Congress after Sept. 1 would not go into effect until after December 1, the date when Peña Nieto will step down as Mexico's president. Incoming Mexican President Andrés Manuel López Obrador would likely want to renegotiate the deal if it is not completed before he takes office.
Clearly, Friday is an important deadline. Trump and Lighthizer seem ready to press forward even if Canada is not on board, Mexican officials seem to have a different perspective. In a tweet, Peña Nieto emphasized the importance of having Canada be a part of the deal, and Ildefonso Guajardo, Mexico's economic secretary, told Politico that details of the trade deal would not be disclosed until "we finish with the position of Canada."
Trump's rhetoric during Monday's conference call and Lighthizer's determination to bring the deal to Congress on Friday seem like attempts to put pressure on Canada. "The Trump administration is trying to squeeze Canada by saying 'the train is leaving the station with Mexico, get on board or don't," tweeted Daniel Dale, the Toronto Star's Washington corespondent. But, he adds, it is "not clear Mexico has agreed to have the train leave the station without Canada."
Exactly. It seems pretty unlikely that Canada will agree to join this trade deal by Friday. Even though Canadian officials surely have followed the U.S.-Mexico negotiations from a distance, Prime Minister Justin Trudeau would seem to have little to gain by jumping on board after deliberately sitting out five weeks of negotiations. Doing so would appear to be giving into Trump's bullying and would be unlikely to play well in Canada, where Trump is deeply unpopular and Trudeau's willingness to push-back against the American president has won him plaudits.
That game of chicken gets more interesting because it's not clear whether Congress will sign-off on a two-way deal between the U.S. and Mexico. The U.S. Constitution gives Congress the authority to negotiate trade agreements, but Congress can grant the president what's known as Trade Promotion Authority" to negotiate deals like NAFTA. Under TPA, the White House is authorized to fast-track trade deals with other countries by negotiating them without congressional interference. Congress pledges to hold a straight up-or-down vote on the final product, essentially promising that it won't try to alter or undermine whatever deal the president makes.
Congress granted TPA for Trump to renegotiate a three-party trade deal. Trump might bring them a two-party deal and ask that they accept it instead.
"The agreement needs to include Canada as well," says Clark Packard, trade policy counsel at the R Street Institute, a free market think tank in Washington, D.C. "It's obvious that the chairmen of the relevant committees, Senate Finance and House Ways and Means, agree."
Unless Canada suddenly jumps on-board, it's virtually impossible for this trade deal to be ratified by Congress before López Obrador becomes Mexico's president. There are also the upcoming mid-terms in the United States, where a Democratic takeover of Congress would likely change the political calculus for any trade deals.
In short, Trump's agreement with Mexico is a step in the right direction—but is far from being a done deal, and doesn't seem to do much to make trade any more free than it was under NAFTA.
"It shows the Trump administration is willing to negotiate, which hasn't really been apparent until now," Dan Ikenson, director of trade policy studies at the Cato Institute, a libertarian think tank, tells Reason. "But in the end, it will be a deal reached to end this extended episode of uncertainty rather than one that makes the region or the United States better off in any measurable respects."
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