After the US and Mexican presidents celebrated a breakthrough in the arduous renegotiation of the North American Free Trade Agreement (Nafta), analysts claim that the pressure is now on Canada to save its place in the deal.
Earlier this week, US President Donald Trump announced that a deal had been struck with its neighbour to the south.
The deal resolves long-standing sticking points in the automotive sector, where the US has negotiated a requirement that 75% of a vehicle be made in North America (a hike from the previous 62.5%). Of that 75%, between 40% and 45% must be made by workers earning at least US$16 an hour – placing the benefit firmly in US hands, where workers earn a higher wage.
Furthermore, the US has agreed to a more relaxed 16-year lifespan, with a review every six years. Previously it had insisted on a five-year renewal clause, a scenario both Canada and Mexico have been keen to avoid, due to the uncertainty that would bring.
Trump has suggested that the “US-Mexico trade agreement” replace Nafta, while his Mexican counterpart Enrique Pena Nieto has said he hopes that Canada could be included. Either way, the onus has shifted to Canada, with foreign minister Chrystia Freeland cutting her tour of Europe short for trade talks in Washington DC.
“This agreement puts Canada under pressure and brings a breakdown of Nafta a step closer. Pena Nieto will gain nothing politically from the deal which, if ratified, may prevent meddling by Mexican President-elect Andres Manuel Lopez Obrador, but will also absolve him of all responsibility for any of its negative impacts for his entire six-year term, which starts in December,” reads a note from research firm Oxford Analytica.
Trump has said that talks with Canada are “going well” and expressed confidence that a Nafta deal could be concluded this week. Canadian Prime Minister Justin Trudeau, however, was less effusive about the progress, saying that his negotiating team would hold out for an agreement that suits Canada.
“We’re seeing if we can get to the right place by Friday. We’re going to be thoughtful, constructive, creative around the table but we are going to ensure that whatever deal gets agreed to is the right deal for Canada and the right deal for Canadians,” he told reporters.
Other analysts have downplayed the significance of the US-Mexico deal, saying that while the reaction of the financial markets has been positive, thus far, it does not alleviate wider concerns about the protectionist bent of the US government.
They point to the ongoing trade war with China: on August 23, the US began implementing an additional 25% tariff on a second list of Chinese products.
“At the same time as US negotiators were formalising the pact with Mexico, trade talks with China came to nothing and no dates were announced for further talks. Public hearings on proposed US tariffs on US$200bn of Chinese imports also ended yesterday. And our working assumption is still that the US will ultimately go ahead and impose these tariffs,” says Oliver Jones, markets economist at Capital Economics.
He added, however, that the fact that the US administration is willing to negotiate and accept a compromise on trade will be welcomed in China.
It is also likely that should this deal see the light of day, it will force auto manufacturers to rejig their supply chains if they wish to operate tariff-free in the region. The Mexican government estimates that 30% of the cars it makes and sells to the US would not contain sufficient North American content to meet the requirements.
“They [manufacturers] will have to take on new costs — which cars made outside the region will not — whose only benefit is continued access to the zero tariff. And these are not the kinds of costs leading to tangible consumer gains — ie, don’t expect increased fuel efficiency, safer vehicles, or additional creature comforts,” writes Chad Bown, senior fellow at the Peterson Institute of International Economics.
Bown predicts that some manufacturers in the US may benefit from less direct competition from makers in Europe and Asia. However, the downside may be passed onto the US consumer.
“But these ‘gains’ are more than likely offset by their economic downside. Rising costs imply higher prices for American consumers. Equally important is North America’s deteriorating competitiveness as a global export platform for carmakers. As consumer growth in North America slows, these companies are evaluating where they can produce competitively in order to access emerging markets in Asia, South America, and elsewhere. Clunky new rules and higher costs make America, Mexico and Canada a considerably less attractive hub,” Bown says.