Report

Will Trump’s New Mexico Deal Save NAFTA—or Kill It?

The agreement that purports to replace NAFTA does not include Canada for now.

U.S. President Donald Trump speaks by phone with Mexican President Enrique Peña Nieto about a new bilateral trade agreement at the White House on Aug. 27. (Win McNamee/Getty Images)
U.S. President Donald Trump speaks by phone with Mexican President Enrique Peña Nieto about a new bilateral trade agreement at the White House on Aug. 27. (Win McNamee/Getty Images)

The Trump administration on Monday announced what it called a breakthrough in talks with Mexico to fix NAFTA, but it’s not at all clear if Canada—or the U.S. Congress, for that matter—will support the outlines of the new trade deal.

Representatives of all three parties to the North American Free Trade Agreement had been trying for more than a year to renegotiate the deal. But in recent weeks, Washington and Mexico City decided to tackle their own bilateral issues first.

The agreement they reached Monday updates the trade relationship between the two countries, a necessary step on the road to a new three-way NAFTA deal. Trump administration officials said it includes updated terms on contentious areas such as auto manufacturing, dispute settlements, and labor protections.

But it could potentially leave Canada out in the cold and put the White House at odds with lawmakers in Congress who want to include America’s northern neighbor. It could also end up being little more than a public relations stunt by an administration desperate to secure a win after more than a year of failures on trade, according to analysts.

“This is a president with a tendency to take the sketchiest of preliminary agreements and tout them as done deals,” said Phil Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs. “This doesn’t seem like a well-thought-out plan that leads anywhere sensible.”

In announcing the “United States-Mexico Trade Agreement,” U.S. President Donald Trump declared the current NAFTA dead and threatened Canada with tariffs if it didn’t sign on to the revised terms worked out with Mexico. U.S. trade officials described the agreements reached over the weekend with Mexico as a big improvement over the current free trade pact between the three countries.

It would increase the share of automotive components made in North America, strengthen labor provisions, and update the 24-year-old pact to reflect the growth of the digital economy. It would also include a periodic review of the agreement to allow countries to address problems every few years, something the current NAFTA lacked.

“We had a NAFTA agreement that had gotten out of whack, that needed updating and modernizing,” said U.S. Trade Representative Robert Lighthizer in a call with reporters. “We’ve now come out of the other side of that process with Mexico, and we hope Canada can now join that process.”

One breakthrough seems to have come in U.S.-Mexico energy trade, a sticking point between the two sides until as recently as last week. Mexico recently opened its oil and gas sector to foreign investors, including many from the United States. But incoming Mexican President Andrés Manuel López Obrador has long opposed opening the country’s energy sector, and his negotiators had pressed to revise the energy parts of the agreement with the United States. Ultimately, the framework agreement reached between the United States and Mexico seems to enshrine the opening of Mexico’s oil patch and provide guarantees for foreign investors.

“They recognized that NAFTA is critical for Mexico,” said Duncan Wood, the director of the Wilson Center’s Mexico Institute. “So if they had to compromise on energy, so be it.”

Although Trump threatened to slap additional tariffs on Canada if it didn’t come to terms on a new pact this week, administration officials said the side agreement with Mexico wasn’t meant to put pressure on Ottawa. “It’s not part of a negotiating strategy,” said one administration official. “Ideally Canada will be in; if not, we will notify Congress of a bilateral trade deal with Mexico.”

Despite the administration’s triumphant tone on Monday, there are numerous legal, legislative, and economic problems with the proposal.

First, though Trump declared NAFTA dead, only Congress can actually undo the legislation that created the three-way trade bloc in 1994. And lawmakers from both parties have been eager to update and preserve—not scuttle—a deal that has turbocharged trade between the three countries in the last quarter-century.

It’s also not clear that Mexico has much interest in a bilateral trade deal with the United States that excludes Canada. Outgoing Mexican President Enrique Peña Nieto, in a televised phone call with Trump on Monday, stressed Mexico’s desire to include Canada in the pact. Peña Nieto reiterated on Twitter his desire for a full update of NAFTA, rather than a bilateral trade deal.

“There is so much work to be done to make it a three-way deal, and a three-way deal is critical,” Wood said. But Mexico’s foreign minister on Monday suggested a bilateral deal without Canada could be acceptable.

U.S. officials, when asked by reporters for clarity, could not say if Mexico is comfortable with a bilateral trade deal instead of the three-way accord they have been seeking for almost two years.

If there is to be an update of NAFTA, Canada will have to agree to the new provisions announced by the United States and Mexico. Canadian Foreign Minister Chrystia Freeland said early Monday that Canada must sign off on any new three-way trade agreement, and she cautioned that it would only sign a new agreement that was good for her country. She will start talks on Tuesday on the revised pact in Washington.

The Trump administration’s Mexico-first approach could also run into problems on Capitol Hill, Levy noted.

Under the president’s trade promotion authority, the White House notified Congress last year that it was renegotiating NAFTA, not seeking a new bilateral pact with Mexico. That means it would have to start from scratch with lawmakers on a U.S.-Mexico trade pact, which would push any deal well into next year. Alternatively, the White House could just ship the new Mexico deal to Congress—but then lawmakers would be able to substantially rewrite the pact, which could scuttle all the agreements already reached with Mexico.

And even if Congress signed off on a trade agreement with just Mexico while nixing the free trade deal with Canada, there would be costs for the U.S. economy. Two-way trade between the United States and Canada, at $673 billion last year, is larger than that between the United States and Mexico, which came to $616 billion. Many key sectors, especially the automotive industry, have supply chains that snake across all three countries. Reaching a deal with only Mexico would throw that industry into disarray, experts warned.

Trump’s threats to slap tariffs on imported cars from countries like Canada (and some factories in Mexico) would cause further uncertainty for businesses that have spent the last two years wondering if NAFTA will survive. The administration’s tariffs on steel and aluminum have already raised prices for consumers and hammered many manufacturing industries in the United States. A fresh round of tariffs on autos would be more painful.

“Companies have no idea what the level of tariffs will be, if we will have free trade or a complete breakdown,” Levy said. “We’ve gone through all this with steel and aluminum, but the auto industry is a lot bigger.”

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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