One of the things that Donald Trump took aim at first when he ran for President was, among others, the North American Free Trade Agreement, commonly known as NAFTA. Trump has consistently claimed that NAFTA is not beneficial for the United States and that he, as an experienced businessman, would be able to negotiate better trade deals for the US. It appears that this week the American President finally made good on his promise and we’ve had a variety of news regarding new deals with Mexico and Canada.
The United States’ southern neighbor is one of Trump’s favorite topics, together with China. The US does a lot of trade with Mexico based on the principle of comparative advantage: it is cheaper for Mexico to manufacture certain goods, while American workers specialize in other sectors, which then allows them to exchange complementary goods and services. NAFTA helps each country focus on what it does best and rely on its trade partners for the rest, as the lack of import and export tariffs ensures the goods do not get more expensive because they have to travel across borders.
Experts are saying that the new deal that Trump announced was struck with Mexico on Monday is basically a revision of the original NAFTA, simply adding new clauses for industries and cases that did not exist when the previous version was drafted. There are no significant changes in the general terms that would make this particular deal better than the original NAFTA.
President Trump proposed to call this deal the “United States-Mexico Trade Agreement” which very clearly excludes the third country part of the original NAFTA – Canada.
Even though the original NAFTA is a trilateral agreement, Trump seems happy to run with a deal between the US and Mexico alone. Mexico, on the other hand, has expressed their desire that Canada also reviews the agreement and adds input on it. However, President Trump is in a bit of a rush, so he would like to get a deal, with or without Canada, ideally by the end of this week.
There are two reasons for the rush. One comes from Mexico, where a new President will come into office on December. He might not be as willing to work with Trump as his predecessor, so the US President would like to finish the negotiations before that time comes. However, even before that happens, Trump is worried about the midterm elections in the US in November. With low trust in the Republican party, it is not impossible that Democrats might win a majority, which would then make it very difficult for Trump to pass legislation. That is why it is in his best interest to secure a trade agreement as soon as possible.
Nevertheless, there is a specific disagreement with Canada, which might slow down the negotiations process. The infamous Chapter 19 can be used to protect local businesses and Canada has previously stated that they are not willing to give it up under any circumstances. Still, Canada seemed optimistic about Trump’s success with Mexico and is willing to proceed with the negotiations, so there may be a deal after all.
If Trump somehow doesn’t secure Canada’s approval and decided to run with a simple bilateral agreement with Mexico, this could significantly increase market risks in terms of trade conflicts.