Daily Management Review

US and Mexico to conclude a new agreement instead of NAFTA. Will Canada join in?


08/28/2018


After more than a year of negotiations, the United States and Mexico managed to remove major differences in mutual trade, Donald Trump announced yesterday. It is assumed that now two countries will conclude a bilateral agreement that will replace the existing North American Free Trade Agreement (NAFTA). The third party to the former treaty - Canada - is invited to join the deal, otherwise the US can raise tariffs for imports of cars from this country.



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The last round of trade talks between Washington and Mexico was successful, the parties "reached an understanding," and it will be "a very good deal for both countries," Donald Trump announced yesterday, speaking with a joint statement with Mexican President Enrique Peña Nieto. Operation of the NAFTA agreement will be suspended, the current arrangements will be formalized as a bilateral trade agreement between the US and Mexico. Recall, the revision of NAFTA conditions was one of Donald Trump's election promises. In fact, the negotiations began in August 2017.

As for the third member of NAFTA, Canada, it can either join the new agreement, or conclude a separate deal with the US, the American president said. At the same time, he threatened that if there is no agreement with Canada, the US may introduce tariffs for the import of cars from that country. Enrique Peña Nieto expressed hope that tripartite talks will begin and conclude this week.

All the terms of the deal with Mexico have not yet been disclosed, but it is known that Mexico has promised to increase purchases of food in the US. One of the main demands of Washington was also to increase share of auto industry products produced within the zone to insure a possibility of importing duty-free imports from 62.5% to 75% (mainly cars manufactured in Mexico and then exported to the US; initially the American side insisted on raising the threshold to 85%). In addition, the agreement will also contain a proviso that at least 45% of the details should be produced by workers whose pay is at least $ 16 per hour.

In exchange, according to the Mexican negotiators, the US has softened the position on demand for the possibility of reviewing the concluded agreement. The current transaction will allow it to periodically assess its condition, but without mandatory suspension of the automatic regime every five years (unless the review was agreed by all parties). The system of resolving disputes between investors will also be preserved, but now it will not be extended to separate industries.

Completing ratification of the bilateral agreement or signing a new deal with the involvement of Canada after the official notification of the termination of NAFTA should take six months. According to Capital Economics, agreeing on the conditions for importing cars can pass quickly, but the issue of access to the dairy market remains a problem. Note that Canada actually suspended negotiations in early June, after the US raised duties on the import of steel and aluminum from this country. As a result, Canada introduced reciprocal duties on American products for $ 12.8 billion.

According to the Peterson Institute of International Economics, changes in the import of cars can lead to higher costs for end producers within the zone, which will give an advantage to suppliers from third countries who are now subject to an import tariff of only 2.5% without any requirements by the share of local products. To increase the cost of imports, Washington may initiate protective duties or voluntarily restrict supplies by the threat of their introduction, as was done in the case of steel, the institute said. Capital Economics assesses consequences of the deal more positively, indicating that reaching an agreement is a testament to the ability of the Donald Trump administration to make compromises, which can be useful in negotiations with China and the EU.

source: cnn.com






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