Trump “terminating” Nafta as U.S. works out unilateral trade deal with Mexico

President Donald Trump says the 24-year old Nafta agreement will be going away (Photo: Wikimedia Commons)

President Donald Trump says the U.S is reworking the landmark treaty that opened tariff-fee trade between the U.S, Canada and Mexico, with a new set of agreements that will be worked out directly with each country. 

The development comes as the U.S and Mexico appear to be closing in on a deal that would aim to ease disputes on one of the largest sources of trade between the two countries, automobiles. 

“I will terminate the existing deal,” Trump said during a White House press briefing.  “When that happens, I can’t quite tell you; it depends on what the timetable is with Congress.  But I’ll be terminating the existing deal and going into this deal.”

In the White House event, President Trump spoke to Mexican President Enrique Pena Nieto on the phone congratulating Mexico’s trade representatives for coming to an initial agreement that would rework the now 24-year old North American Free Trade Agreement (Nafta) that helped open trade between the two countries.

“Your brilliant representatives are sitting right in front of me and I want to congratulate each other,” Trump told Pena Nieto. 

For his part, Pena Nieto said the two countries have been discussing Nafta “to review it, to modernise it, and to update it and generate a framework to boost the productivity of North America. He added that his hope is “now Canada will be able to be incorporated in all this.”

But Trump initially just touted the bilateral agreement with Mexico, saying that Nafta was in some respects going away. 

“They used to call it Nafta, we’re going to call it the United States, Mexico trade agreement. We’ll get rid of the name Nafta. It has a bad connotation because the United States was hurt very badly by Nafta.”

 

The U.S. Trade Representative (USTR) says one of the major aspects of the new trade deal is 75 percent of the content of autos and light trucks be made in U.S. and Mexico. 

Since reopening talks on Nafta with Mexico and Canada last August, the U.S has sought a concession that cars built in Mexico and shipped to the U.S have at least 75 percent of the value of their parts come from North American suppliers, up from a current level of 62.5 percent. 

The USTR says the new rule will help to “preserve and re-shore vehicle and parts production in the United States.”

The two countries worked on new wage requirements that between 40 and 45 percent of the content going into vehicles be made at plants that pay a minimum $16 per hour.  

Along with automobile components, the new U.S.-Mexico trade agreement also includes stronger “rules of origin requirements” for chemicals, steel-intensive products, glass and optical fiber.

Clothing was also singled out in the new agreement, which will promote greater use of U.S.-made textiles, the USTR said. Non-Nafta sources of textile will be limited, and that certain items used in garments be specifically manufactured in the country they are sold to qualify for trade benefits. 

Industry trade groups had varying reactions to the announcement from cautious optimism to concern that upsetting the existing agreement would cause uncertainty for U.S. businesses.

The Auto Alliance, a trade group that represents the largest car manufacturers in the world, sounded an optimistic note on the deal, saying it helps give car makers a clear path forward. But it also wants to see Canada included in any new trading  bloc that would develop.  

The Auto Alliance said it is “pleased to hear that the U.S. and Mexico have reached a consensus on several issues, including automotive rules of origin, and we look forward to learning more.” 

“Automakers urge the U.S. and Mexico to quickly re-engage with Canada to continue to build on this progress.”

Other trade groups sounded a more cautious note that any reworking of Nafta would hinder trade and raise costs. The Motor & Equipment Manufacturers Association, which represents parts suppliers, said the preliminary deal would include a “potential cap of Mexican motor vehicle parts exports into the U.S.

The group “is concerned that this may serve to decrease American manufacturing jobs and exports and put U.S businesses at a global disadvantage — all while increasing costs to consumers.”

The National Retail Federation said 

The National Retail Federation’s chief executive Matthew Shay said “coming to terms with Mexico is an encouraging sign, but threatening to pull out of the existing agreement is not.” He says it will be important to bring Canada back into the fold to “protect complex, sophisticated and efficient supply chains.”

But the lifting of some at least some uncertainty related to trade between the U.S and Mexico helped buoy investor sentiment with U.S equity markets rallying on the news. 

The Dow Jones Transportation Index rose 1.1 percent by mid-day, slight outperforming the broader equity market with the Dow Jones Industrial average up 1 percent. 

Kansas City Southern (NYSE: KSU) saw the best gain, rising 3.5 percent, largely due to its exposure to the U.S-Mexico automobile trade.