The Fate of NAFTA: Threats and Reality

Posted on August 29, 2018

On Monday August 27th, 2018 the Trump administration announced that it had reached a “preliminary agreement in principle” with Mexico. Hailed as the US- Mexico Trade Agreement, the preliminary deal promotes streamlining certification and verification of rules of origin requirements, particularly in the automotive sector.  Per the United States Trade representative the agreement “will provide greater incentives to source goods and materials in the United States and North America.” Interestingly, the agreement also requires that 40-45 percent of auto content be made by workers earning at least $16 an hour.

 On the day of the announcement the administration threatened to exclude Canada from further NAFTA negotiations, terminate the United States involvement in NAFTA and submit the US-Mexico Trade Agreement for ratification through congress. The comments have left many questioning whether NAFTA will exist as a trilateral agreement heading into 2019.  

The bottom line is that though on life- support, NAFTA as a trilateral trade agreement is not dead yet.  Though the trade community has no crystal ball to look into, Canadian Foreign Affairs Minister Chrystia Freeland’s immediate dispatch to Washington to review the agreement seems to indicate that Canada is very interested in resuming trilateral talks.

Further the administration has several procedural and congressional hurdles to overcome before the US-Mexico Trade agreement ever made its way to congress for ratification.

First, the administration has to wait 90 days to submit a trade agreement to Congress pushing ratification beyond the November deadline and falling squarely in the hands of the newly installed 116th congress. 
Second, it could be argued that submission of a US-Mexico Trade Agreement violates the Trade Promotion Authority that congress granted on the administration’s stated intent to renegotiate NAFTA -a trilateral agreement-a nuance likely to promote lots of heated debate.
Third, it is not probable that Congress ratify the US- Mexico Trade Agreement while the United States is still a member of NAFTA.  To withdraw from NAFTA, a member party has to give six months of advanced notice. During that period should the administration try to hammer through ratification,  it is unlikely that the US Congress support conflicting trade agreements with Mexico to be in existence at the same time.

While it certainly is not wise to write off NAFTA altogether, savvy importers should prepare for NAFTA 2.0 to be very different from its predecessor. If the US-Mexico Trade agreement terms are any indication of the tone and direction of a new trilateral agreement, importers should expect rules of origin provisions to be written in a way to incentivize importers to source North American material.  Now is the right time for multinationals that take advantage of NAFTA to take a look at their supply chains and begin strategizing what resourcing of North American material may look like- especially for the products on their shelves that meet the NAFTA rules of origin according to regional value content or net cost methods.

Contributor: Danielle Brazil Hudson


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