The U.S., Canada and Mexico may have made an eleventh-hour trade deal, but experts aren’t holding their breath for President Trump to reach an agreement with China anytime soon.
After a year of torturous negotiations and a threat by the U.S. and Mexico that they would go ahead as a twosome, Canada finally surrendered late last night just before the official deadline passed.
In a surprise turn, it joined a pact that was provisionally drawn up by the U.S. and Mexico and will be known as “the United-States-Mexico-Canada-Agreement,” or USMCA, effectively replacing the 25-year-old North American Free Trade Agreement, NAFTA.
Trump pledged to pull out of the latter on the campaign trail and has sought to renegotiate its terms since entering the White House, labeling it “the worst trade deal in history” and arguing that it has moved vital jobs out of the U.S.
In a press conference on Monday, he said the new landmark agreement would “send cash and jobs pouring into the United States and into North America,” arguing that his use of tariffs was the reason a deal was secured.
Investors were buoyed by the trilateral deal as it dampened some of their fears over a full-blown trade war, with the S&P 500 up 0.4 percent to 2,924.59 and the Dow Jones Industrial Average 0.73 percent higher at 26,651.21.
Retail trade bodies also welcomed the move, although they stressed the devil will be in the details as experts sifted through thousands of pages of information on the agreement.
“The administration, as well as officials from Canada and Mexico, should be applauded for months of hard work aimed at modernizing NAFTA for the 21st century — a goal retailers have shared from the start,” National Retail Federation president and chief executive officer Matthew Shay said.
“We will carefully review all the details of the agreement to ensure it promotes U.S. economic growth and maintains access to the products American families need at the prices they can afford.”
American Apparel & Footwear Association President and ceo Rick Helfenbein added that it was reviewing the text in detail with its members and determining the impact it will have on the highly integrated North American apparel, footwear and textile supply chain.
The new agreement follows a deal recently made with South Korea and according to Andrew Hunter, U.S. economist at Capital Economics, provides another example of President Trump backing down from his hard-line protectionist threats in return for modest concessions that allow him to “claim victory.”
“For all Trump’s claims that NAFTA was the ‘worst trade deal ever’ and his threats to walk away from the deal if significant changes weren’t made, arguably the biggest change in the new NAFTA agreement is the name,” he said.
Hunter added that while this will raise hopes in the European Union and Japan that they, too, could secure permanent exemptions from U.S. tariffs in return for relatively minor concessions, there are a number of reasons why a similar truce with China remains unlikely.
“For a start, the U.S. runs a bigger trade deficit with China than it does with all other countries combined. Furthermore, unlike the disputes with Canada, Mexico and the EU, Trump’s aggression towards China has broader support,” he said. “Trade Representative Robert Lighthizer along with members of Congress from both the Republican and Democratic parties share Trump’s hawkish instincts.”
Highlights of the USMCA, which largely brings the NAFTA deal into the digital age, include requiring more auto production in North America in return for waived tariffs, modest increases to labor standards and local content requirements in the auto sector as well as Canada granting U.S. producers access to 3.5 percent of its dairy market, which had been a key point of contention.
After being signed by all three countries on Nov. 30, it will then need to be approved by Congress, which could prove to be no easy task if the Democrats have the majority in the House of Representatives by then.
Indeed, Representative Nancy Pelosi of California, the House minority leader, has already said that the Democrats will “closely scrutinize” the text of the administration’s proposal.
Meanwhile, Victor Rayek, president of Mexico’s main apparel trade lobby Canaive, said the agreement “is positive in general terms” and will strengthen the country’s textiles and apparel supply chains.
He said the new rule of origin provisions were more flexible, lifting the weight threshold to import raw materials outside the region to 10 percent from 7 percent before.
Rayek would not comment on NAFTA 2.0.’s new, $16 minimum wage rule, but one analyst said it won’t have a major impact on lifting the country’s textile wages.
“I don’t think Trump approved that with Mexico in mind,” said textiles consultant Miguel Angel Andreu, adding that wage increases will likely stay limited in Mexico.
He added, however, that the U.S. and Canada’s concession to allow Mexico to maintain the Tariff Preference Level provisions to source scarce feedstocks to make for-export U.S. apparel was a big win for Mexico in the negotiations.