North America August 27, 2018 / 07:06 pm UTC

NAFTA “Deal” With Mexico Is No Deal at All

By Kevin Harris, Pedro Tuesta

Bottom line: The announcement today of a “trade deal” between Mexico and the U.S., with Canada invited to join in, amounts to political theater and a negotiating tactic. There is a timing conflict between the need for U.S. Congressional review of any new trade deal and the inauguration of Mexico’s President-elect Andres Manuel Lopez Obrador (AMLO), which can only be resolved by completing the deal by Friday, and perhaps not even then. Realistically, there is no “deal”.

Figure 1: Bilateral Trade Balances: One Reason to Deal With Mexico First ($, billions, 2018 data extrapolated)

Source: U.S. Census Bureau, Continuum Economics

Scant details given to the press by “official sources” indicate that today’s deal has revamped only the auto chapter. There are also “source” headlines indicating that the U.S. and Mexico agreed to a 16-year sunset clause with a review of the agreement every six years. U.S. Trade Representative Robert Lighthizer also said that Mexico agreed to scrap Chapter 19, the dispute settlement chapter. Both issues will bones of contention for Canada.

Canada and the U.S. are expressing two different views about the state of play in the negotiations. Trump claims there is a U.S.-Mexico deal that can be signed with or without Canada. Canadian Trade Minister Chrystia Freeland’s office responded that “Canada’s signature is required”. Freeland is right, unless there are to be only bilateral agreements—a return to the “noodle bowl” theme of our 2018 outlook. 

Behind this disagreement lies a timing problem. Congress gets 90 days to review any new deal before approving it. If a deal is reached by Friday, Congress will have time to complete its review before AMLO takes office on December 1. (In theory, at least. Congress does have other business to attend to.) AMLO is willing to administer whatever deal is reached under his predecessor, but if he is to sign the deal himself, he may demand changes. 

Trump apparently intends to sign a deal by Friday, with or without Canada, in order to get a deal approved before December 1. However, delay beyond Friday is likely. The Trump administration has never informed Congress of his intention to engage in bilateral trade negotiations, which could mean a 180-day delay—the notice period required by law for new trade negotiations.

Even ignoring the Trump administration’s failure to properly notify Congress, there are reasons to doubt Congress will play along with today’s deal. There are reports that a “handshake” deal is all that the U.S. side expects by Friday. If so, that means the White House would initially submit a document for Congressional review that is missing detail. Whether Congressional leaders would be willing to review an incomplete document is unclear. If they do agree, it will be because they are aware of the timing problem. 

A bilateral Mexico-U.S. deal would be a new agreement, not a revamp of NAFTA; we doubt Congressional leaders would agree to review a new agreement based on an incomplete document, especially when mid-term election campaigns are under way. 

Mexican officials have said they are willing to proceed with a bilateral deal, if it proves impossible to strike a trilateral deal including Canada. That statement is certainly aligned with Trump’s effort to pressure Canadian negotiators, but aside from that, it is simply a statement of reality. It does not presume a deal with Canada will not be struck, but recognizes Mexico’s need for a deal with the U.S.

If the motive for reaching a deal this week is to allow Mexico’s current president, Enrique Peña Nieto, to sign for Mexico, then urgency dies as of Saturday. Canadian negotiators are certainly aware of that fact. To the extent that today’s announcement was intended to pressure Canada to make concessions, the announcement is unlikely to succeed. 

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I, Kevin Harris, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.