12102018Mon
Last updateFri, 07 Dec 2018 11am

Mexico & United States agree on new free trade deal

Spinmeisters on both sides of the border have been busy this week extolling the virtues of a new trade deal agreed between Mexico and the United States after 18 months of negotiations.   

The world’s most virtuoso spin doctor and showman, President Donald Trump, was among the deal’s most ardent champions, viewing it as a viable starting point in his quest to reduce the United States’ $US70 billion deficit with its southern neighbor.

“I think it is one of the largest trade deals ever made — a really good deal for both countries,” he boasted at an Oval office press briefing with Mexican officials, that included Foreign Minister Luis Videgaray and Economy Secretary Ildefonso Guajardo.

After making the renegotiation of the North American Free Trade Agreement (NAFTA) — “the worst trade deal ever made,” was how he described it on multiple occasions — a core part of his presidential campaign, Trump was never going to settle for anything less than a perceived “victory” from the trilateral talks.

Trump also vowed to ditch the Nafta name, even suggesting a new one: the U.S-Mexico Trade Agreement. “It has a bad connotation because the United States was hurt very badly by Nafta for many years,” the president said.

Without admitting that Mexico had made considerable concessions to the United States, Videgaray said the most significant part of the agreement was that it ended the uncertainty for his country. However, he stressed the deal should include Canada — something Trump seems ambivalent about (he has suggested a separate deal with Canada might be preferable) — and was noncommittal about a change of name.

Among the key sticking points during the 18 months of haggling that now appear to have been resolved are the amount of regional content in automobiles manufactured in the three countries.

The new deal will require that 75 percent of the value of a car — up from 62.5 percent — be made from regional content to be able to cross the border from Mexico into the United States tariff-free. In addition, the two countries agreed that 40 to 45 percent of the value of a car will have to be produced by workers earning at least US$16 per hour.

On paper this sounds like a plus for the U.S. economy,  since in theory more U.S. content in cars should translate into more jobs at home, and higher wages in Mexico result in some U.S. carmakers moving production back north. However, as some experts have pointed out, the strategy might backfire, with the carmakers deciding that more local content is not worth the trouble of disrupting existing supply lines and preferring to accept the 2.5-percent tariff — thus passing on the extra cost of the car to the consumer.

Such a scenario could give Europe and the Pacific Rim a competitive edge and push Trump into more drastic measures, such as implementing a 20- to 25-percent tariff on imports from outside the region — a possibility he has previously raised and something economists believe would be detrimental to the United States.

Canada’s preference whether to subscribe to the new arrangement or make separate deals with its neighbors remains up in the air. Some commentators believe there is annoyance that Mexico “went it alone” with Trump, after initially showing so much solidarity with Canada around the negotiating table.

The Canadians may also be irked that while Mexican negotiators did not accede to U.S. demands to insert a “sunset clause” into the trade deal, they did consent to keeping the revamped treaty in effect for 16 years, while permitting a review every six years for updates and changes, with the proviso that it could be terminated if no agreement was found.

When Canada and the United States start face-to-face meetings to discuss the new deal, the Canadian side is expected to make a key demand that the Trump administration walk back on the hefty tariffs on steel and aluminum imports imposed earlier this year for supposed “national security” reasons.   Prime Minter Justin Trudeau has labeled these taxes “totally unacceptable,” and criticized the U.S. president for lacking “common sense.”

While the preliminary Mexico-United States trade deal has been largely welcomed by the Mexican business sector — the Bolsa de Valores (stock exchange) spiked this week — there is caution regarding Trump’s unpredictability and his penchant for muddying the bilateral waters with other contentious issues.

This was highlighted perfectly a day after the trade deal announcement when Trump once again declared that Mexico would eventually pay for his polemic border wall, at an estimated cost of some $US35 billion.

The Mexican Foreign Ministry immediately issued a statement, stressing that this country “will never pay for a wall” dividing the two neighbors.

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