What’s Happening with NAFTA?

Screen Shot 2019-03-25 at 11.12.09 PMBy Jan Chaiken and Marcia Chaiken

The North America Free Trade Agreement (NAFTA) is hanging over a precipice and dangling from a very thin and fraying cord.  Will someone cut the cord and send the 26-year agreement between Canada, Mexico, and the US crashing to its death and replace it with a new treaty?  As of this date, it appears that the answer is “Yes,” but given the uncivil war between the branches of government in the US, a new administration in Mexico, and a prime minister under siege in Canada, all deals are at best uncertain.

News photos from November 30, 2018, showed the President of the US, the President of Mexico, and the Prime Minister of Canada signing a new trilateral trade agreement intended to replace NAFTA. The date was chosen deliberately because on the next day the new president of Mexico took office – Andrés Manuel López Obrador (known from his initials as AMLO).  He had long been an opponent and critic of NAFTA, because the treaty had not actually improved the economic condition of Mexican workers as originally anticipated. The other negotiating parties assumed he would also be opposed to the new trade agreement.  Four days later, in one of the earliest announcements of his administration, AMLO stated that he would accept the new agreement, but only if it was ratified by all three countries without modification.  He specifically mentioned that modifications by the US Congress would not be acceptable.

Whether this announcement was the first sign that AMLO intended to scuttle the agreement we will eventually find out.  Elections that changed the party in power in the House of Representatives in the US had already taken place when the treaty was signed, and AMLO’s advisors knew full well that incoming Democrats as well as Republicans in the US Congress had reservations about portions of the treaty as negotiated, albeit each party found different sections problematic.  But their objections would not necessarily require changes to the text of the treaty. For the treaty to be ratified, the US Congress would have to pass legislation implementing the new treaty and making necessary compliant changes in a host of US laws.  Possibly the Congress would try to achieve its goals without modifying the actual text of the treaty.

President Trump tweeted (as usual, falsely) that the new treaty, known as USMCA in the US and as T-MEC in Mexico, provided for Mexico to pay for the wall he wanted built on the US southern border.  AMLO later reported that he had spoken to President Trump several times about the treaty, and the topic of a wall had not come up in their discussions.

The new treaty did not say anything about money being spent on a wall because, like most trade agreements, the text of T-MEC is in large part a long list of specific products that might be traded and the tariffs or duties that would apply to each of them, along with procedures for determining, administering, and enforcing the tariffs. President Trump has a fundamental misunderstanding of how tariffs work, and it seems no advisor will ever straighten him out.  He thinks that foreign countries pay the US for the tariffs, whereas actually US customers pay the tariffs or else the amount of trade decreases as a way of avoiding the tariffs. 

The vast majority of items on the new treaty’s list are identical to provisions of the NAFTA treaty, because the negotiators intended for the old NAFTA to terminate, making it necessary for the new treaty to duplicate the many NAFTA provisions that were to continue without change. For example, the new treaty specifically continues the prohibition against foreigners owning residential property within 50 km of the coast of Mexico or within 100 km of an international boundary, reinforcing this prohibition, which is contained in the constitution of Mexico. 

Some of the changes between NAFTA and USMCA can be counted as Mexico successes.  One of Mexico’s main goals in renegotiating the trade agreement was to update and modernize the list of products to include ones that didn’t exist when NAFTA went into effect or that had changed substantially in their nomenclature or mode of manufacture or distribution. Thus the text of the new treaty covers a variety of digital products and intellectual property rights that were not previously included.  

Other changes address problems with complying with NAFTA because people (including us and many we know) have been baffled, confused, or frustrated by its provisions concerning rules of origin for parts and finished products.

NAFTA includes complex calculations to determine how much of a product originated within North America, which are subject to conflicting interpretations, misinterpretations, and extensive delays in assembling the data necessary for the calculations. For example, a metal pump in an automobile had to be traced back to the countries where the ore had been mined from the earth. 

These rules are not only a daily irritant in doing business but are an invitation to corruption as a means of escaping the complex calculations and getting on with one’s business. The new treaty would partially simplify the rules of origin by eliminating the tracing requirements and some of the complex calculations, but it could also complicate the rules by specifying that the entire product (e.g. an automobile) cannot be deemed as originating in North America if a major part (e.g. the motor) is not deemed as originating in North America.

The US negotiators, attempting to draw manufacturing jobs to the US and away from Mexico, succeeded in adding provisions that a minimum amount of the labor used to make parts of automobiles deemed as originating in North America must be performed in factories where the average pay is over $16 (US dollars) per hour (the minimum is 30% of labor beginning in 2020 and rising to 40% in 2023).  This rate is about 4 times higher than the pay in a Mexico factory and so excludes workers in Mexico from doing the specified percentage of this work.  But the $16 figure is not indexed to inflation, so after the passage of some years this provision might not be as onerous as it seems now.  Mexico was none too happy with this provision, but it is also one of the sticking points that could possibly prevent U.S. ratification, as US auto manufacturers do not want to be prevented from continuing to use cheaper Mexican labor.

When Mexico’s trade negotiators had earlier invited suggestions from the public in Mexico, a major stated concern was that the workers who implement and administer the provisions of the treaty in another country would not lose their privileged visa status in the host country.  More bluntly, they wanted to be sure that Mexican citizens could live in the US with their families while doing work related to the treaty, and not worry about chaotic or unpredictable changes in US immigration laws or procedures. This NAFTA provision was carried over into the negotiated version of T-MEC that was signed at the end of November 2018.

What still has to happen for T-MEC to go into effect?  It appears that both Canada and Mexico prefer to await action in the US before attempting to ratify the treaty. In addition, both countries have announced reluctance to proceed until the US lifts tariffs on aluminum and steel that were introduced quite outside the NAFTA structure. As for the US, President Trump stated that he would make a formal announcement that the US is withdrawing from NAFTA, and at the same time he would send the text of the USMCA, along with implementing legislation, to the US Congress.  Congress will undoubtedly make some changes to the proposed implementing legislation and possibly also to the treaty itself.  If the US Congress ratifies the treaty and passes the related legislation, Mexico and Canada may have some new objections, or the timing may conflict with scheduled periods when their legislatures are adjourned.

By announcing US withdrawal from NAFTA, the President would start a countdown period which probably would be intended to pressure Congress to take action rapidly.  But withdrawal from the old NAFTA is not a necessary step, and the government of Mexico is making plans based on the assumption that if the new treaty is not ratified, the old NAFTA will still be in effect.  Nonetheless, given Trump’s penchant for manufacturing crises in democratic nations, he could well be the one to cut the cord and send NAFTA hurtling to its death.  

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