U.S., Mexico reach NAFTA deal, turning up pressure on Canada

The United States and Mexico reached a deal on Monday to replace the North American Free Trade Agreement (NAFTA), and talks with Canada were expected to begin immediately in the hopes of reaching a final agreement by Friday, a senior USA trade official said.

Mexican President Enrique Peña Nieto joined Trump by speakerphone, saying through an interpreter that the deal “is something very positive for the United States and Mexico”.

Trump said he was open to including Canada – “if they’d like to negotiate fairly”. Despite Trump’s warnings to Canada, the Mexican peso and the Canadian dollar both jumped on the announcement, a “curious reaction” given Trump’s tough talk on Canada, said Doug Porter, chief economist at BMO Financial Group.

The deal with Mexico and Canada’s likely about-face puts pressure on Europe to level the playing field for trade or face higher tariffs.

The move, sought by the United States, puts Canada in a hard position because Prime Minister Justin Trudeau had insisted on maintaining Chapter 19 as a way to fight U.S. duties on softwood lumber, paper and other products that it views as unfair. Auto makers also will have to ensure 40% to 45% of that vehicle’s content is produced by workers earning. However, President Trump considers NAFTA “one of the worst deals” in trade history, and in his ongoing global trade war, he has mentioned wanting to rewrite the deal.

The White House is planning to submit a letter to Congress on Friday outlining the trade deal with Mexico – and with or without Canada.

This does not have a bearing on the Chinese trade negotiations (which do not appear to be going that well).

“It’s been too one-sided for too many years, for too many decades and so it’s not the right time to talk”, he says, “But eventually, I’m sure that we’ll be able to work out a deal with China”.

In the past, Mexico has insisted that any NAFTA deal be trilateral, and Peña Nieto seemed to suggest a similar vein of thinking Monday, repeatedly telling Trump that he wanted Canada to be a part of the new deal.

The new deal will keep tariffs on agricultural products traded between the United States and Mexico at zero and seeks to support biotech and other innovations in agriculture.

He has repeatedly demanded renegotiation of the 1994 agreement, which he blames for a decline in U.S. manufacturing jobs, especially in the auto industry.

That measure could move some production back to the United States from Mexico and should lift Mexican wages, the White House official said.

Canada, Mexico and the United States implemented the North American Free Trade Agreement, known as NAFTA, in 1994. “There is still some way to go before the deal is concluded, including political hurdles in both the the U.S. and Mexico and the question of how Canada will be added to a broader deal”.

Lawrence Herman, a veteran Toronto trade lawyer with long experience in Canada-U.S. relations, says Trump doesn’t have that power.

NAFTA reduced most trade barriers between the three countries.

For example, the U.S. had hoped to include a provision that would require Nafta to be reviewed every five years and wanted to scrap the existing system that settled disputes. “A trilateral agreement is the best path forward”, he said, adding that millions of jobs are at stake.

“Unsurprisingly, the Mexican peso gained as did the Canadian dollar too to be fair, and even the euro strengthened as it perhaps signals greater odds of a trade breakthrough between the U.S. and European Union (although a stronger IFO probably helped too)”. The new deal with Mexico would be signed in November.

“It was indeed a point of tension, of public and notorious differences between Mexico and the United States, but I think that the decision we made not to allow a difference to define the rest of the relationship, that we could see beyond that difference, today is giving very obvious results”, Mr Videgaray said in an interview with Bloomberg in Washington.

Canada plans to continue to negotiate, but would only sign a new agreement that is good for the country, a spokesman for Canadian Foreign Minister Chrystia Freeland said.