National Security

Trump Unveils New Deal with Mexico to Replace NAFTA

President and Mexican counterpart tout pact, but experts question whether external tariffs are high enough

Image Credit: Presidencia de la República Mexicana

Exit NAFTA, enter USMTA.

President Donald Trump on Monday unveiled a new trade agreement with Mexico, bypassing the circa 1990s North American Free Trade Agreement (NAFTA). In a phone call with Mexican President Enrique Peña Nieto (pictured above left), Trump touted the new U.S.-Mexico Trade Agreement (USMTA).

“We’ll get rid of the name NAFTA,” Trump said from behind the Resolute Desk in the Oval Office. “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.”

For now, the bilateral deal leaves Canada on the outside looking in. But both Trump and his Mexican counterpart said they hope Canada joins the new agreement.

“It’s something very positive for the United States and Mexico,” Peña Nieto said through an interpreter over a speakerphone. “The first reason for this call, Mr. President, is, first of all, to celebrate the understanding we have had between both negotiating teams on NAFTA. It is an interest we have had for quite a few months now to renew it, to modernize it, to update it. And to generate a framework that will boost and potentiate productivity in North America.”

Trump said he would submit to Congress on Friday formal notification to withdraw from NAFTA. That would trigger a 90-day period. U.S. Trade Representative Robert Lighthizer said the administration has targeted November for a signing ceremony.

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Investors reacted positively to the news, sending the Dow Jones industrial average above 26,000 for the first time since February.

At the heart of the new deal are changes to the approach in the auto manufacturing sector. Currently, cars made in Mexico enter the United States tariff-free even if up to 37.5 percent of the parts are made outside of North America. Under the new deal, that percentage would rise.

Andrei Sulzenko, a former trade negotiator and an executive fellow at the School of Public Policy at the University of Calgary, wrote in The (Toronto) Globe and Mail that the U.S. and Mexican negotiators had agreed to impose a 25 percent tariff on cars that do not meet the country-of-origin rules but to apply it only to autos made at new plants.

Other cars that do not meet the content rules would be subject to the 2.5 percent levy.

If true, that might blunt the impact of the new rules, according to some experts.

“To me, the big question is whether the tariffs on automotive and, perhaps, other parts, are high enough from outside North America to give the rules on country of origin teeth,” Alan Tonelson, an economic policy analyst who favors more aggressive trade policies, told LifeZette.

The deal reportedly includes a provision requiring the base pay for automotive workers to be at least $16 an hour in order to get the NAFTA benefit.

“That might make up some of the difference, but I’m not convinced of that yet,” said Tonelson, who blogs about the economy at RealityChek.

He noted that auto companies already have invested billions of dollars in plants and equipment in Mexico to take advantage of lower costs. Costs to companies extend beyond wages, Tonelson said. He told LifeZette that companies have lower costs in Mexico because of lower regulatory burdens.

Auto manufacturers could well decide it is cheaper to keep production south of the border even if they have to pay more in labor costs, Tonelson said.

“There would be no need to negotiate anything with China. They’d have to take it or leave it.”

Concern over running afoul of World Trade Organization (WTO) rules also may have factored into the negotiations, Tonelson said. He added that the Mexican business community generally likes the status quo on trade.

But Tonelson said a high external tariff not only would help workers throughout North America but would also go a long way toward solving problems America long has had with China, Japan, and other trading partners.

“There would be no need to negotiate anything with China,” he said. “They’d have to take it or leave it.”

Trump’s predecessor in the Oval Office, President Barack Obama, originally campaigned as a harsh critic of NAFTA. He bludgeoned his chief opponent, Hillary Clinton, over the issue during their battle for the Democratic nomination in 2008.

“It is absolutely true that NAFTA was a mistake … I think it has been devastating, because our trade agreements do not have labor standards and environmental standards that would ensure that workers in the U.S. are getting a square deal,” he said during a Democratic primary debate.

As president, however, Obama largely embraced the global trade system of which NAFTA was a key cog. There was no serious effort to renegotiate NAFTA.

Related: Commerce Secretary Bullish on Trade Talks with Mexico

Significantly, the new trade deal has buy-in from Mexico’s incoming leftist president, Andrés Manuel López Obrador. Not only has López Obrador traditionally been a NAFTA critic, but he has been hostile toward Trump, whom he called out in a book last year called “Oye, Trump,” or “Listen Up, Trump.”

Peña Nieto said a “highly united front” in his country helped make the deal possible.

“The president-elect has been aware of everything that has been happening, and I have also had the opportunity of talking to him directly and personally on the progress being made,” he told Trump. “You have also had direct conversations with [the] president-elect.”

It is unclear what kind of reception the new deal might get on Capitol Hill. Sen. Patrick Leahy (D-Vt.) threw cold water on it Monday.

“Excluding Canada, NAFTA won’t pass the Senate,” he said on CNN.

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