President Donald Trump speaks to Mexico's President Enrique Pena Nieto on the phone as he makes an announcement on the status of the North American Free Trade Agreement in the Oval Office. Photo credit: Reuters
UPDATED: 8/27/18 3:00 pm ET
WASHINGTON -- U.S. officials reached a “preliminary agreement” with Mexico on a framework to rebalance manufacturing in North America after resolving key differences related to the cross-border movement of finished vehicles and auto parts.
The tentative deal, if finalized, would increase the regional content value of passenger cars, light trucks and auto parts required to qualify for duty-free status, create a labor content value rule and tighten enforcement of rules of origin, according to the U.S. Trade Representative's Office.
President Donald Trump, announcing the deal at the White House on Monday, said he would terminate NAFTA and send the tentative bilateral deal with Mexico to Congress for approval, adding that Canada might be incorporated or get a separate bilateral deal. In the absence of a Canadian agreement, Trump threatened to slap tariffs on the country's auto exports.
“We’re going to call it the United States/Mexico Trade Agreement,” he said. NAFTA “has a bad connotation because the United States was hurt very badly by NAFTA for many years.”
A senior U.S. trade official told Reuters talks with Canada were expected to begin immediately in the hopes of reaching a final agreement by Friday.
Auto provisions
The Trump administration's deal with Mexico would require that 75 percent of auto content be made in the U.S. and Mexico, up from the regional requirement of 62.5 percent under NAFTA. It also requires that 40 to 45 percent of auto content be made by workers earning at least $16 per hour, while streamlining certification and verification of rules of origin to make enforcement easier. Passenger vehicles would also need to include a certain percentage of North American-produced steel and aluminum.
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According to press reports and sources familiar with the negotiations, the two sides also agreed that vehicles that did not meet the content requirements would be bound to the World Trade Organization’s 2.5 percent tariff for "most favored nation" countries if made at an existing factory, but for nonconforming vehicles made at future greenfield sites the vehicle would be subject to tariffs of 20 to 25 percent, pending the U.S.’s determination on auto imports posing a national security threat. The USTR statement, however, made no mention of nonconforming vehicles.
The U.S. and Mexico agreed to review the deal after six years, softening a demand by American negotiators for a clause to kill the pact after five years unless it’s renewed by all parties.
'Long way to go'
Eric Miller, a trade and government relations consultant, cautioned that the preliminary deal lacks concrete details and is not yet a legal text that both sides can agree to.
“We shouldn’t exactly send the white smoke up yet," Miller said. “There’s a long way to go in order to get this resolved."
From an automotive perspective, Canada can live with the U.S.-Mexico deal, said Miller, who heads Rideau Potomac Strategy Group and counts Canadian auto interests among his clients.
Canada, which has also expressed concern about lost manufacturing jobs to Mexico, can accept the higher regional content value as well as the $16 per hour labor formulation because it proposed that to steer the U.S. away from its original demand that a certain percentage of each vehicle include U.S.-made components, he said. In addition, Canada produces very few vehicles that don’t conform to NAFTA content requirements, “so it’s not going to be a hill it dies on.”
The American Automotive Policy Council, which represents the Detroit 3, said in a statement “we are optimistic that the new agreement will maintain and encourage the ongoing competitiveness of the United States and North American auto industries . ... We commend the United States and Mexican negotiators for their success and urge them to work with their Canadian counterparts to complete this negotiation.”
Foreign-brand automakers have told lawmakers they do not support raising local content requirements and that smaller companies could have trouble complying.
“We encourage a renewed focus on a three party agreement that includes Canada,” the Motor & Equipment Manufacturers Association, said in a statement. “Furthermore, at the close of the negotiations between Mexico and the United States, the parties agreed to a potential cap of Mexican motor vehicle parts exports into the U.S. MEMA 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.”
Campaign promises
Monday’s developments helped fulfill campaign promises to renegotiate NAFTA or terminate it unless the U.S. received more favorable terms that reduced outsourcing of manufacturing jobs to low-wage Mexico and incentivized more domestic investment. The broad understanding between the U.S. and Mexico also addresses agriculture, textiles, intellectual property, digitial trade and other industry sectors.
How the administration could achieve a separate bilateral deal is uncertain because any new deal would require Congress to ratify it and the president has fast-track authority only to renegotiate NAFTA, a trilateral trade agreement. Ratification would take several months, at a minimum, and by then the House of Representatives could be in Democratic hands, making approval for any trade agreement more difficult.
Mexican President Enrique Pena Nieto participated in the announcement by conference call and said he hoped Canada would be folded into the revised agreement.
Canadian Foreign Minister Chrystia Freeland was reported heading to Washington to begin talks after Canada was sidelined while the U.S. and Mexico resolved their differences.
U.S. Trade Representative Robert Lighthizer said he planned to send the Mexico trade deal to Congress on Friday, triggering a 90-day review period, although that seemed to presuppose that the deal will be finalized by then. Analysts said it was unlikely Canada could sign on so quickly.
“These guys like to use time as their pressure point. What they are trying to do is compel Canada to come back to the table and make a deal quickly, by saying ‘the bus is leaving so you better get on,’ “ Miller said.
Reuters and Bloomberg contributed to this report.
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