Mexico and U.S. Are Back in Business

Latin America Alert | August.29.2018

The United States and Mexico reached a preliminary agreement on revisions to the North American Free Trade Agreement on Monday, ending months of political uncertainty and threats of harsh international trade policies between the two countries. There is no deal reached yet with Canada, but yesterday Canada's trade negotiators rejoined negotiations with the U.S. and Mexico in Washington. Most commentators and analysts expect Canada to accept most of the terms agreed upon by Mexico and the U.S. in their bilateral discussions.

On the Mexican side, the Mexican negotiators have expressed the need to have the deal approved by President Trump and President Peña Nieto before the latter leaves office on December 1. To that end, U.S. Trade Representative Robert Lighthizer noted during the press conference that, depending on the progress with Canada, he could provide the required notice to the U.S. Congress about an updated NAFTA as soon as this week.

While President Trump said he intends to rename NAFTA as "The United States/Mexico Free Trade Agreement," the agreement reached with Mexico is a revised version of NAFTA, with updates to certain provisions related to digital trade, local content of auto parts and automobiles, agriculture, and labor. For the most part, American and Mexican companies will continue to trade without tariffs. While the final text of the new agreement has not been released yet, the following is a summary of some of its key terms:

  • Autos: At least 75% of an automobile's value would have to be manufactured in the United States or Mexico to qualify for lower-tariff import into the U.S., up from the NAFTA threshold of 62.5%. Also, 40-45% of auto content must be produced by workers earning an average base wage of $16 per hour.
  • Intellectual Property: A new chapter on Intellectual Property provides stronger protections for U.S. copyright holders. The deal establishes a zero-tariff level for digital content such as e-books and software, and strengthens distributor and consumer protections for digital goods.
  • Labor: The deal also creates a separate chapter for labor that requires all parties to adhere to the International Labor Organization's standards.
  • Agriculture: Tariffs on agricultural products traded between the United States and Mexico will remain at zero, and provisions were added to enhance information exchange and cooperation on agricultural biotechnology trade-related matters.
  • Disputes: The U.S. and Mexico agreed to eliminate a NAFTA provision that created an independent review process for resolving anti-dumping disputes, NAFTA's Chapter 19.
  • Investor Protections: The new agreement limits the kinds of legal challenges that investors can make against foreign governments under NAFTA. The oil and gas, infrastructure, energy generation and telecom industries are exempted from these more restrictive rules.
  • Sunset Clause: Departing from its original position, the U.S. dropped its request that NAFTA expire if it is not renegotiated every 5 years. The two countries agreed to a review of the trade pact every six years that would extend its life span for more than 16 years.

Overall, this looks like a good agreement, and we expect an uptick in cross-border transactions between both the U.S. and Mexico as a result of it. A fog of uncertainty as to the legal regime applicable to cross-border production chains is now lifted, which should unlock opportunities across the manufacturing sector that were previously put on hold due to the harsh rhetoric and political uncertainty about the life of NAFTA.