What’s next for NAFTA

What’s next for NAFTA
United States has outlined its plans for the re-negotiation for the North American Free Trade Agreement (NAFTA). Its main agenda will be to reduce the trade deficit with Canada and Mexico. The 18-page document has called for “fair and reciprocal” trade. NAFTA, which came..

United States has outlined its plans for the re-negotiation for the North American Free Trade Agreement (NAFTA). Its main agenda will be to reduce the trade deficit with Canada and Mexico.

The 18-page document has called for “fair and reciprocal” trade.

Background

NAFTA, which came into force in 1994, is an agreement signed by Canada, Mexico and the US. This trilateral trade bloc eliminated nearly all tariffs on Mexico’s exports to the US and vice versa. Most of US-Canada trade was already duty-free before the agreement was signed.

Attitude towards free trade has significantly changed since the agreement 23 years ago. In 1988, Canada’s Prime Minister, Brian Mulroney, won his election by fighting for Canada-US trade deal (this was replaced by NAFTA). He had had the backing of Republican presidents like Ronald Reagan and George H W Bush, who were pro-free trade.

Protectionism has become a defining theme for world leaders, especially US President Donald Trump. He pulled US out of the Trans-Pacific Partnership, details of which can be found here. He was also a vocal critic of NAFTA while campaigning. He said, “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” He said he was in favor of terminating the agreement entirely. Ties between Mexico and the US have deteriorated with Trump promising to build a wall between the US and Mexico to curtail illegal immigration. 

Analysis

Until April 2017, US’ future in NAFTA was still unsure. Trump, after a conversation with the leaders of Mexico and Canada, promised to not withdraw from the agreement, yet. He said that US would re-negotiate the terms and conditions. If he concluded that the pact wasn’t fair after negotiations, he would end it.

The Office of the U.S. Trade Representative (USTR) has said that terms must be re-worked to ensure reciprocal trade. The document is currently vague but asks for a new chapter on “digital economy” and the scrapping of unfair subsidies. Both Mexican and Canadian governments have issued statements noting that they too shall be pursuing their own agenda in the process.

No date has been set for renegotiations but are expected to happen in August.

Just a few days earlier, Canada agreed to a free trade agreement with the European Union and Canada. The Comprehensive Economic and Trade Agreement (CETA) is being construed as a challenge to protectionist rhetoric. Mexico has also strengthened its trade ties to Portugal.

Assessment

Our assessment is that the US will do its best to negotiate a better deal with Mexico and Canada. According to us, there would be a give and take by all the three countries. It will be a soft bargain. Trump would necessarily want to have good relations with both his immediate neighbors.  

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