Mexico Won Bigly on NAFTA Deal

Donald Trump is lying to you about the “new” United States-Mexico Trade Agreement. I know, what a shocker. The reality is that the bilateral trade agreement is NAFTA 2.0. Let me explain.

There is a lot of spin, especially from Donald Trump but also from special interest groups like the automotive unions about the revised NAFTA agreement. The proposed agreement still needs to be approved by the three governments, Canada, México and the United States, thus it remains “proposed” and not set in stone. Trump and the news media have been suggesting that Canada, may or may not be part of the final agreement.

The fact is that, although Canada did not participate in the final weeks of the negotiations, it was very much in the loop because the Mexican side kept the Canadian government updated. The Mexican negotiators and the Mexican government have been clear that they see Canada as part of the final agreement.

As a matter of fact, Mexican president, Enrique Peña Nieto is clear to point out that he understands Canada remains part of the agreement. Peña Nieto also makes the point that the agreement is still NAFTA.

The problem for Donald Trump is that the updated NAFTA agreement, or NAFTA 2.0 remains substantially the same as the original agreement, making Trump’s promise to rid America of the “worst” trade deal moot. Trump was unable to deliver on the promise to make the original NAFTA a better agreement. Trump clearly understands this as he tries to rename it to argue that the new agreement is a bilateral one, instead of the original trilateral NAFTA.

As Canada will likely be included in the updated version, the agreement remains a trilateral one.

Whether Canada is part, or not, of the proposal put forth to Congress on Friday is immaterial in that the proposed agreement only updates four items – far short of Trump’s promise to revamp the whole thing. Let’s break them down.

The first change is that instead of an automobile having 62.5% of its components made in North America, i.e. Canada, México and the United States, it must now contain at least 75%, an increase of 12.5%. Trump demanded at least an 85% content requirement but settled on 75%.

Here’s the subterfuge about the content requirement. The National Highway Traffic Safety Administration (MHTSA) publishes the content list of most cars sold in America. Only one car with any significant market penetration, the Nissan Versa does not meet the requirement today. The other cars imported into America meet the 75% component requirement.

Clearly, nothing changed in that regard.

The obvious change that most will focus on is the requirement that 40-45% of the car’s content must come from a factory where workers are making at least $16 an hour. Sounds like a win for the American worker.

But specificity is the problem here.

The definition of content has not been clearly defined in what has been released to date. Most of the cars made in México and exported to the United States contain parts made predominantly (i.e. 75% rule) in Canada, México or the United States. The other components come from Germany, Japan or South Korea, whose workers make at least the $16 per hour rate.

On the other hand, if the proposed agreement specifies that the hourly rate is for the components made in the NAFTA countries, then that would only apply to vehicles whose components are 55% or more Mexican, as México’s wages are clearly the lower of the three countries.

In this case, the affect on the Mexican manufactured cars would only apply to the Ford Fiesta and Fusion, both of which have been discontinued. The wage rate would also affect Mazda and Nissan cars to a smaller extent but in the long run would benefit México. Only 30% of México’s car exports are affected by the wage hike. Even then, there is a five-year delay in imposing any tariffs.

If Mazda and Nissan refuse to absorb the costs of the tariff because of the wage disparity, then one of two things may happen. The first is that consumers would gravitate to cheaper cars, likely Mexican ones. Or, Mazda and Nissan may decide to shift those components to factories in the NAFTA countries that pay higher wages, maybe even updating specialize Mexican factories for higher-paid wage earners to meet the requirement.

Two vehicles that may see a price increase, because of the wage requirement are the Audi Q5 and the Lincoln MKZ but they will likely not be affected as the buyers of these two cars are higher wage earners unlikely to be affected by price hikes.

In the end, over 2 million Mexican cars annually will continue to dominate the American market.

This is a clear win for México.

This brings us to the most contentious part of the NAFTA deal Donald Trump was demanding, the so-called “sunset clause”. Trump demanded a five-year window for the new trade agreement, where any country could choose to abandon the agreement. Canada and México refused the five-year window.

The proposed agreement offered by Trump replaces the “sunset clause” with a six-year window where each country could propose changes to the ongoing agreement. But, the important part is that the agreement remains in force for 16 years, even of the countries cannot agree on the six-year change requests. Every 16 years, the agreement renews if there are no pending disagreements proposed during the first six-years of each renewal period.

The “sunset clause” does not exist in NAFTA 2.0.

There are other changes to the agreement that were needed, such as in intellectual property and resolving NAFTA disputes. The intellectual property serves México’s interest in that it forces the United States to offer shorter protection windows for drug knock-offs that México would like to produce for the generic market.

Currently, the United States patents drugs, such as Viagra for only 12 years. During that time, generic versions of the drug cannot be produced and sold. Viagra just entered the generic market and thus off-label blue pills are being peddled.

Most of the world only allows 10-year patent protections on drugs. The proposed agreement forces the United States to limit its patent protection to ten years. The México pharmaceutical industry will benefit from this new scheme.

Donald Trump called it the “worst” deal ever. Donald Trump promised his voters that he would scrap NAFTA for the benefit of American workers who bought into his rhetoric. Trump demonized México.

What NAFTA 2.0 delivers is nothing short than a bigly win for México, and a complete turd for Trump’s promises to his base.

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