President Donald Trump on Aug. 27 announced an agreement that he said would replace NAFTA, an almost 25-year-old deal that allows most goods produced in North America to move duty-free across the continent.
Pointedly, the deal excludes Canada, one of the three original North American Free Trade Agreement signatories. All three had been working on a new deal since last August, but recently Mexico and the U.S. began negotiating on their own.
Although Trump said he hoped Canada would join the new U.S.-Mexico agreement, he threatened Canada with new auto tariffs if it didn’t “negotiate fairly.”
As an expert on international economic law, I believe there are two key takeaways from this deal.
A tentative deal designed to pressure Canada
First of all, it does not appear that the U.S. and Mexico have actually concluded negotiations.
The United States Trade Representative said only that they’ve reached a “preliminary agreement in principle, subject to finalization and implementation.”
Therefore, details and legal language remain subject to further negotiation – which means the final agreement could change significantly. Moreover, a new trade agreement with Mexico would require Congress to pass implementing legislation by a majority of both houses before it could come into force. Absent a signed agreement, the Trump administration cannot ask Congress for that legislation.
In addition, Trump threatened to terminate NAFTA to clear the way for the new agreement. But it is unclear whether the president has the legal authority to do so without congressional approval, and his lead trade negotiator later said the United States would not withdraw. Even if Trump were to withdraw from the accord, the legislation implementing NAFTA would remain in effect until Congress repeals it.
It’s more likely that the new deal and Trump’s threat to terminate NAFTA are designed to increase pressure on Canada to reach an agreement on his terms.
The agreement does appear to resolve – at least between Mexico and the U.S. – two contentious issues that would represent big wins for the Trump administration.
For instance, under NAFTA, cars exported from one signatory to the next are free of tariffs as long as 62.5 percent of their content comes from a country in the agreement. The new deal would increase that to 75 percent.
It would also require that 40 percent to 45 percent be made by workers earning at least US$16.
Officials have said that the agreement would remain in force for 16 years, with a review every six. NAFTA, in contrast, doesn’t have an expiry date. Mexico and Canada both initially opposed including a sunset provision.
Although much could change in negotiating the final language and Canada’s participation, these compromises would represent significant victories for Trump.