NAFTA

The New NAFTA: U.S.-Mexico-Canada Agreement

Kevin Lamarque/Reuters
from Corporate Conference Calls

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On Sunday evening, the United States, Canada, and Mexico agreed to revisions of the North American Free Trade Agreement, now known as the U.S.-Mexico-Canada Agreement.

Speakers

Edward Alden

Bernard L. Schwartz Senior Fellow, Council on Foreign Relations

Shannon K. O'Neil

Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies, Council on Foreign Relations

Presider

Peter Coy

Economics Editor, Bloomberg Businessweek

COY: Hello, everyone, and welcome to the Council on Foreign Relations Corporate Program Conference Call on the U.S.-Mexico-Canada agreement, the successor to NAFTA. I’m Peter Coy, the economics editor of Bloomberg Businessweek magazine. I’ll be the moderator.

We have two panelists, both of them Fellows at the Council on Foreign Relations—Ted Alden and Shannon O’Neil. I want to remind everyone that this call is on the record and we’re going to jump right in. We’ll go to—we have a lot of people on the line who want to ask questions so we’re going to keep the first part brief and go to Q&A relatively soon.

And so Ted and Shannon have complementary expertise on this—Ted on Canada and Shannon on Mexico. I’d like to start with Shannon, please.

How is this deal being viewed from the point of view of Mexico?

O’NEIL: Sure. Well, thanks, Peter, and hello, everyone. Thank you for joining us.

You know, I think, overall, in Mexico there’s a big sigh of relief. This has been a saga for Mexico—the renegotiation of NAFTA and the worries about what would happen with the future of NAFTA—and we’ve seen it in the economic data of Mexico over the last, you know, year or eighteen months where we’ve seen foreign direct investments stall or even slide—general investment in the economy fall as well. And so this ends that uncertainty. We have a deal, it seems—one that Mexico feels it can live with and now companies at least know what the baseline is.

I would say the other win for Mexico here is that there have been—given that they opened up this deal again, there have been some updating of the agreement between the three countries, some things that were in TPP originally. So you have some intellectual property issues, digital issues, and the like that are now included, and you also have a chapter on anti-corruption, and when you read that chapter, U.S. and Canada doesn’t change much of the status quo there but it does, presumably, push the Mexican government and open space for civil society and others to improve transparency, at least giving a treaty-level recognition of anti-corruption issues.

So I think those are the successes for this new NAFTA for Mexico. But I will say that I think Mexico, of the three countries, actually had to give the most away. So let me just talk a little bit about where Mexico gave to the United States, and I think the biggest give was on the dispute settlement mechanism.

So Mexico—the dispute mechanism between investors and the state was one that was really fundamental to the benefits of NAFTA to Mexico over these last twenty-five years. So this meant that people who came in, invested in Mexico, if something went wrong they could appeal to these international panels and not have to go through the Mexican court system.

And so now that particular mechanism has been—it hasn’t been eliminated but it’s been reduced to cover just a couple of sectors—energy sector, telecom sector—there’s a couple others. But it won’t be this blanket protection for investors in Mexico, which, frankly, makes them less competitive vis-à-vis other countries where rule of law is seen—like the United States or Canada, where rule of law seems stronger.

There is a little bit of an amelioration of this in that Mexico has updated recently its agreement with the EU, and that agreement between the EU and Mexico provides a lot of these settlement dispute guarantees. And so multinationals that have European branches or European companies will get guarantees that companies that are part of NAFTA—U.S. companies—alone will not get, at least in many sectors. So that, I think, is something Mexico had to give up.

Another thing Mexico gave up was access to U.S. government procurement contracts. Now, this is something that Mexico actually has never really done. So there’s no immediate loss here for companies in Mexico. But it does preclude many of them in the future from perhaps bidding on contracts in the United States and moving into the EU-U.S. market, and that’s different than what Canada gave up.

And then one of the other big issues is the auto restrictions, and so we now have quotas on the number of cars that will come—that can come into the United States tariff free, especially if the United States does increase tariffs on cars.

That quota is higher than U.S.—the Mexican production that comes into the United States today, so there’s no immediate effect. But there is this idea of limiting the future exports of Mexico into the United States on cars as well as on auto parts. So, you know, overall, I think for Mexico the feeling there is you get this uncertainty behind you and then you allow the economy to go forward, and that is a good thing.

But I do think that there were some drawbacks and I think the biggest one here to take away is on this dispute settlement mechanism, which, you know, limits the ability of investors to appeal to what many would see as a more independent and stronger court of law in the case of a dispute.

COY: Shannon, how will Mexico be affected by the raising of the standard for how much North American content has to be in cars to qualify for tariff-free treatment and the higher demands on high-wage labor content?

O’NEIL: So they have increased it from—they will over the next couple of years increase from 62.5 percent North American content to seventy-five percent content. You know, in many ways, this won’t change much for Mexico. When you look at what goes into cars, it won’t change the overall makeup very much because it’s almost there already, and in some ways, it will slow down the entrance of cheaper parts from China or other places that actually affect Mexico more than they affect the United States or Canada because they are the cheaper-wage country.

So that part is probably less important, at least in the short to medium term. The issue on the wages, Mexican wages are so far below that $16 an hour that I doubt you will see many, if any, of the factories in Mexico raise their wages to try to compete for that. So they will compete for the other sixty percent or thirty-five—sorry, the other part that is not that high wage—the forty to forty-five percent—but compete for the other fifty-five to sixty percent, and then let the United States and Canada compete on the other side to see—for that other part.

But there again, the balance today of what goes into a car is more or less—that’s recognizing the reality of today rather than fundamentally changing it. But it will—it will shape decisions of people investing in factories and others, as they go forward, when they think about those divides, or as GM or other companies choose their various suppliers they are going to have to be careful to make sure that those percentages line up into that final car and so there may be some issues of competitiveness of new plants or new operations in Mexico.

COY: All right.

I’ll turn to Ted now. Ted, what’s the view from north of the border?

ALDEN: I think, in many ways, quite similar to what Shannon described with Mexico. I think, you know, the biggest problem for Canada over the last year has just been this uncertainty about the future of NAFTA, and we’ve seen a similar slowdown in investment in Canada—you saw significant weakening of the Canadian dollar—all the effects of that trade uncertainty.

So the big win is just that this deal has come together and so companies now know, going forward, what the rules will be for North American trade again. So that’s probably 90 percent of the story. Unlike Mexico, I would say Canada made fairly small concessions. It played a weak hand pretty strongly. I think the Canadian negotiators calculated—correctly, in my mind—that Trump’s threat to try to push this through Congress as a U.S.-Mexico-only deal, which is not going to fly in the Congress—there would be too much opposition. And so I think the Canadians guessed correctly that they would have to be brought on board and so they held out pretty strongly right until the very end of the negotiations.

If you look at where the Canadians gave, you know, a little bit more on dairy market access. Hard to believe we talk about it so much because it’s such a tiny sector but it’s, politically, a big issue here for the president in Wisconsin and other places and, politically, a big issue in Canada, particularly in Quebec, which is so important for Prime Minister Trudeau’s reelection prospects.

So there was a little more opening than we saw in the—in the Trans-Pacific Partnership. Canada raised somewhat its so-called de minimis rules for cross-border packages. So if you’re a Canadian ordering from, you know, Amazon in the U.S. or from eBay or something, you’re able to get at least—at least relatively inexpensive shipments in without paying duty or taxes. So that was something that the Canadians gave up.

They didn’t get a bunch of things they wanted like expanded access to the U.S. government procurement market or the easing of rules that allow Canadians and Mexicans to work temporarily in the United States, TN visa rules. And then, finally, Canada held firm on some things that I think, you know, really mattered, particularly what was known as Chapter 19, the dispute settlement procedures that allow the Canadians to appeal to a tri-national panel on U.S. anti-dumping and countervailing duty cases.

This is, basically, about softwood lumber and the long history of the U.S. industry using trade laws to block Canadian exports. You know, this issue was the final one resolved in the original U.S.-Canada free trade negotiations back in the ’80s and the Canadians have stuck stubbornly to it ever since, and a little surprisingly to me, quite honest, because the U.S. Trade Representative, Bob Lighthizer, does not like these dispute settlement procedures. It remains in the—in the new NAFTA.

So I think that would be kind of the highlights from the Canadian—I mean, there’s broader questions we might want to talk about just about, you know, some of the damage in the relationships done by how contentious this has been. I like to think this will blow over fairly quickly, but it may take a while.

COY: Yeah. Actually, I would like to pick up on that last point because Trump has routinely called NAFTA the worst trade deal ever and now he’s calling this one a good deal. Doesn’t seem like it’s so different that you would swing all the way from worst ever to really great, or that we—the torture that everybody went through to get here was worth it.

Either one of you have thoughts about that? Or, more generally, how—we’ve talked about the point of view of Mexico and Canada of the deal. Is it a good deal for the U.S.?

ALDEN: Let me—let me just talk, quickly, and then—and then I’ll turn it over to Shannon. I mean, obviously, you know, we all knew that whatever deal emerged, Trump was going to call it the greatest, most historic deal ever negotiated. So I think we should sort of discount that at the start. The changes, on the whole, are fairly modest.

I think, interestingly, where they all lean—and the politics of this are fascinating—is in the direction of addressing longstanding concerns from the Democrats and organized labor. You know, the weakening or elimination, in the case of Canada, this investor-state dispute settlement provision that Shannon talked about, labor has hated that. Most of the Democrats hate that. They’re—I’m still trying to parse—and Shannon probably knows more than I do—the new labor standards provisions for Mexico—you know, longstanding concern among the Democrats about low wages and lack of union protection in Mexico, and then—and then this auto deal, which at least intends—we’ll see what happens—to try to push more of the auto supply chain to Canada and the United States.

The unions, you know, normally come out very quickly and denounce these deals. The AFL-CIO has said, you know, there’s some progress here—we’re going to have to take a closer look. Chuck Schumer, the Democratic Senate leader, said yesterday he thought that there was some real progress in addressing Democratic concerns. So the politics of this are kind of fascinating here.

COY: Shannon?

O’NEIL: You know, I tend to—I tend to agree with that, and in terms of the United States, you know, there are some benefits here, but I think many of them are after an administration had broken some issues it was putting it back together. So, you know, this administration, on its first few days, pulled out of the TPP—the Trans-Pacific Partnership—and in many ways this renegotiation of NAFTA puts back in some of those issues that the United States had signed onto with the larger group, but within that, Canada and Mexico were the most important partners for the United States, Japan being then the next most important.

So I think in some ways they’re bringing back those issues that—on digital, on intellectual property, on some of the other issues, the different types of regulations—not tariffs, but regulations—the way we deal with sanitary conditions and customs and those sorts of things—were being—are being brought back into this new renegotiated NAFTA. So it’s really putting things back together after they had broken.

And then the other things are these small things that Trump, I think, had focused on rather than the broader relationship. It’s very specific sectors. So, as Ted mentioned, it’s dairy, which is, you know—it’s important on a political level but it’s less than $400 million a year of trade that goes back and forth, you know, in relationships that are worth, you know, a huge amount when you’re talking about the U.S. sending, you know, well over $350 billion. We’re talking $400 million here.

So these are—these are, you know, some wins now. The Wisconsin farmers will be able to send more dairy products up there. But it’s a smaller part, and, similarly, when you—when you look at Mexico and some of these changes that we’ve seen, for instance, in the auto sector, it will limit the growth, going forward. But there’s a real question in the auto sector about whether that will happen in the United States.

And, particularly, look at the U.S. auto industry. This is a very mature industry. You know, the United States sells somewhere in the range of seventeen million cars a year and it doesn’t look to grow, right. Almost every American who wants a car has a car, and the real growth spots around the world are in emerging markets where many fewer people have cars, where you’re going to start seeing more people buy those kinds of products.

And so, for Mexico, limiting the number of cars they’ll sell into the United States, going forward, one, they’re probably betting six or eight or ten years down the road you may have a new administration that is less interested in putting on tariffs on cars and the like, and even if they are, their production will probably go to other parts around the world.

Already, one in four cars goes to a different country than the United States and I think we—as you look at consumer markets around the world, that will continue and that will be, frankly, accentuated if you continue to see steel and aluminum tariffs in the United States, which makes the cost of a car a few thousand dollars more per car because then Americans—the velocity of buying cars will be less. People will wait a few more months or even a year before they replace their car, and so those overall sales go down.

So was this a win? Yes. The Trump administration now has some managed trade on these particular sectors. But, overall, I don’t see it changing the commerce—the real back and forth across the border. So, as Ted says, it does change the politics. While everybody’s signing on to this agreement, it seems, at least on the presidential level—it has to get through the Congresses—there’s some hard feelings there, I think, on both sides of—the other sides of our borders.

COY: Yeah. I have one last question before we open it up to the people on the line, and that is about—I’m in Boston right now at the annual meeting of the National Association for Business Economics and there was a panel on this topic yesterday. Catherine Mann, global chief economist at Citigroup, and Manuel Balmaseda, who’s the chief economist at Cemex, the big Mexican cement company, spoke about this and they agreed that it’s probably a good idea that the treaty no longer has the phrase “free trade agreement” in it because it’s, in their view, not free trade. It’s more just—Shannon just said managed trade. I wonder if the two of you have thoughts about that and whether this represents the proclivities of Trump and Robert Lighthizer. Any observations?

ALDEN: I’ll just—I’ll answer quickly and then let Shannon. I guess I’ve always thought the free trade versus managed trade dichotomy was a misleading one. I think trade is always managed. It’s managed under rules set by governments and the question is what those rules are and how they work and who they benefit, and this administration has a—has a somewhat different view. It’s, particularly, focused on the manufacturing sector and it wants to skew those rules to try to favor manufacturing investment in the United States. I don’t know if that’s any more or less managed than the old NAFTA was. It’s just managed differently.

COY: OK. Good. Shannon, any thoughts?

O’NEIL: Yes, I would echo that.

COY: OK.

O’NEIL: Well, I would echo that. When you look at the original NAFTA—and, frankly, almost all free trade agreements around the world—there is always parts in for rules of origin, which is, obviously, a management of where things come from. What’s new this time around, I think, compared to the last time is these explicit quotas and that you actually have a particular number that is put there in particular—in particular industries, but which is—moves us away from that free trade ideal, I would say.

But as Ted said, you know, all free trade agreements or any that are these between countries rather than global that come out of the WTO are really about protecting particular markets within a group of countries vis-à-vis other countries around the world, so some management vis-à-vis other trade.

COY: All right. Well, that’s an excellent overview, and now I think I’d like to open the floor to questions. A reminder that this call is on the record, and, operator, would you, please, like to—can I turn it over to you now?

OPERATOR: At this time we will open the floor for questions.

(Gives queuing instructions.)

COY: I’m going to just fill in while people are queuing up—a question maybe for Shannon. Lighthizer—Robert Lighthizer is the U.S. Trade Representative. Does he have Trump’s full confidence? Was he the one steering this process and do you think that his fingerprints are on this deal?

O’NEIL: Well, I’ll say a few words and then—and Ted is down there in Washington so he may have, you know, a closer view on this. But I do think his fingerprints are on here—some of the managed trade and the role with autos. You know, this is something that he worked on in the 1980s vis-à-vis Japan, so there’s some of that there.

But from all the people I have talked to on both sides or on many sides of the border, you know, Trump was really involved here and that he set many of the guidelines. He set many of the red lines, some of which were walked back at various times. But he was definitely involved on these decisions.

And then, particularly, on the U.S.-Mexico side, two other people were very involved. We had the negotiating team from Mexico that were there at the NAFTA table but we had the foreign minister, Luis Videgaray, who is one of the closest advisors of the president, President Peña Nieto, and Jared Kushner, who’s a senior advisor in the White House—obviously, the—Trump’s son-in-law. But Luis Videgaray and Jared Kushner have a very close relationship that’s developed over the last couple of years and they were integral in getting this deal together between—the bilateral deal between those two countries. So they were also in the room not on the technical side but more of the political side in getting the two countries to come to a deal.

COY: OK.

ALDEN: Yeah, just quickly—I would agree with Shannon on all of that. I do think Lighthizer has the confidence of the president. He’s been given a lot of running room. You know, if we just look for a second at the elephant in the room, which is what is going to happen now between the United States and China, I think we will know that the United States is serious about negotiating when Trump puts Bob Lighthizer in charge of the China negotiations and pulls Steve Mnuchin back. I think Lighthizer is his go-to guy on the trade issue, and so I would keep a close eye on when that happens and that will be the signal, I think, that the U.S.-China negotiations will start to get serious.

COY: Fascinating. OK. Questions?

OPERATOR: Our first question comes from James Reinl of Al Jazeera.

Q: Hi. Good morning, guys. Thanks for the briefing. Can you hear me?

ALDEN: Very clearly.

O’NEIL: Yes.

COY: Yes.

Q: Great. Thanks so much. I think Dan (sic) just started edging onto the subject that I was going to ask about and, yeah, that how does what happened over the weekend affect the bigger broader trade row between the U.S. and China. I’ve spoken to a couple of folks and they say that maybe this will free up the Trump administration to focus more heavily on Beijing or that perhaps the deal with Mexico and Canada sends a kind of political statement that the U.S. is really willing and able to do business with the international players here. But what are your thoughts about how what just happened is going to affect this longer trade standoff between the two world’s largest economic powers?

ALDEN: Do you want—do you want me to tackle that one, Peter?

COY: Sure.

ALDEN: Yeah. So I think the most interesting thing that Donald Trump said in his press conference yesterday was he made it very clear that with respect to China and every other country, he sees the tariffs that he has put in place as negotiating leverage.

There’s been a real debate in the trade community over whether, you know, Trump is like Reagan, in that sense—wants to use tariffs to threaten other countries to try to get better deals, or whether he really wants to put permanent tariffs in place in some kind of radical effort to force some of the supply chains out of China and back into North America.

I think it’s pretty clearly the former. This is going to strengthen the president’s confidence that his approach is right—that if he talks tough enough, that if he threatens tariffs, that if he imposes tariffs, he can walk away with a deal he likes. I think we’ll see that played out with China.

The hard thing to predict is the timing. The U.S. is now talking about starting trade negotiations with Japan, again, under the threat of these auto tariffs. So that could be quite consuming for the U.S. Trade Representative’s office. And then, of course, we’ve got the escalation in the China tariffs coming on January 1. I don’t—I don’t have a good sense of when this gets engaged fully with China. But I think this is going to embolden the president that he’s on the right path on these issues and I think he’s going to double down with China.

O’NEIL: Yeah, I would echo that. I would add just that one of the aspects in this new NAFTA is a line that none of the countries can begin negotiations with a quote, unquote, “nonmarket economy,” i.e., China, without informing the others and that if they do so, the others have the right to, basically, pull out of the new NAFTA.

Now, I think that was meant to try to encircle China so that Canada, particularly, or Mexico would not enter into trade negotiations, not the U.S. entering trade negotiations. I can’t imagine Canada or Mexico would pull out if the U.S. and China begin talking. But I think that is a—there was a step up in here to take away potential allies or outlets that China would look for as these—as these negotiations or the fight heats up.

COY: OK. The next question.

OPERATOR: Our next question comes from Lee Cullum of public media of North Texas.

Q: Thank you very much, and thank you for a really excellent presentation from you both. I must say, Shannon, we in Texas are as relieved as they are in Mexico. NAFTA is very important to us.

This is a political question. As we get rid of these worst deals that have ever been made in history and replace them with new deals, perhaps, do you think that trade will somehow stop being so virulently opposed by many in both parties and many around the country?

COY: Does either one—

O’NEIL: Well, I’ll start and then, Ted, if you want to chime in.

ALDEN: Sure.

O’NEIL: You know, when you look at the polling that is done over the last couple of years, Americans in general have become more openly—open to trade and so, you know, a slim majority in many of these polls are open to trade, see it as a good thing rather than something that harms them.

So I do think the overall U.S. population has moved to a recognition of some of the benefits of trade. I mean, I do think the question—and, Lee, the one that you put out there—is now that we’ve fixed the worst agreements and now they’re the best agreements, who do we blame—who do we blame if and when the United States goes into a recession—who do we blame when factories end up closing because inputs cost much more and those products are no longer competitive either in the United States or, more importantly, on the international market vis-à-vis products that are made in Europe or in Asia and other places.

I think there will be a question there of where the politics go when the challenges for many U.S. manufacturing workers don’t disappear because they weren’t actually related to these free trade agreements.

ALDEN: Yeah, and just, you know, a similar point—you know, who gets the blame when manufacturing employment doesn’t increase because the factories continue to automate, and that’s only going to accelerate—some of the new technologies. I do think, Lee, that the politics of trade are in tremendous flux right now. You know, we were fixed for sort of twenty, twenty-five years in a position where the Democrats were, largely, skeptical of these agreements because, I think, of the role of organized labor and their support for the party, and the Republicans were, largely, supportive because of their ties with multinational companies.

All of that has been shaken up now. As Shannon says, the polls suggest Democratic voters are generally pretty pro-free trade more than Republican voters are. We’re in the midst of a realignment on this issue. I don’t know how long that’s going to take. But I think when the dust settles the Democrats in particular are going to be less opposed to trade than they have been for many years. Certainly, their voters are telling them that.

COY: Well, actually, before we go to another question on the line, there’s a big question which we haven’t directly addressed, which is how likely is this deal to pass. It has to pass in the legislatures of all three countries. Does that look like it’s likely to happen?

ALDEN: Let me just, quickly—I think in Canada, yeah, because Trudeau has a majority government so and it’s, broadly, popular there. I also think it passes the Congress here, even if the Democrats take the House back. I just think the—it doesn’t make a lot of political sense for the Democrats to oppose this, and Trump has gone farther in addressing some of their concerns than previous presidents, if you look, particularly, at Chuck Schumer’s comments yesterday. So I think—I think this gets through the Congress here in the U.S., too.

COY: And Mexico?

O’NEIL: In Mexico, it gets through the Congress there as well. I mean, the—one of the reasons for this the deadline of September 30, this race to Sunday, was the Mexican political calendar. And so the Mexicans were desperate to have the current president, Peña Nieto, sign it on his last day in office. So that allowed him to claim the win and for his legacy to cement NAFTA and it also allowed the new incoming president, Andrés Manuel López Obrador—allowed him not to sign the agreement, because while he has backtracked from statements that he’s made in previous decades that were less than favorable towards NAFTA, this is not his issue. He has other issues that he wants to focus on, and I think the last thing he wanted was that one of his first acts of government would be to sign a free trade agreement, or no longer a free trade agreement but a—but an agreement with the United States and Canada. So that said, the presidents will probably get their wish there where the old president will sign it and López Obrador can just—it’s a fait accompli.

But then the Congress, which is his Congress—he controls the majority in that Congress, that’s already in place today—I do think they will pass it because they want this issue behind them—they want the certainty that will come for investment—because they have a very ambitious domestic agenda that they want to push through and they don’t want to be distracted with these international things.

COY: Great. Great. OK. Another question from the line, please.

OPERATOR: My next question comes from Jim Puzzanghera of L.A. Times.

Q: Hi. Thanks. I’ve got a couple questions specifically on the auto industry and the impact there. First, I’m wondering how closely was the administration coordinating with the major U.S. automakers to make sure that these new provisions wouldn’t be too burdensome for them.

And then—and then I had a particular question for Shannon on the—on the high-wage component and what you meant by the U.S. and Canada will compete for one part of the vehicle and Mexico will compete for the other. I’m a little unclear on that.

O’NEIL: Sure. So what I meant by that is that you have somewhere between forty and forty-five percent that will have to come from high-wage factories of $16 or more, and what I don’t see is Mexican factories raising their current wages, which are so much lower than that, to try to compete for that percentage of the overall content.

So as a GM or a Ford or pick your company—as they look to meet these requirements in the final vehicle, I don’t see the Mexican companies or factories pushing for those. And so it would be either Canadian or U.S. factories that would be pushing for those. I do see, you know, potentially, a challenge in the United States because many of the factories—auto factories—that are in the United States making cars in the United States, particularly the ones that are in the southern states, in Alabama and others that—you know, that have many of those factories are not unionized and the like, the last numbers I saw is that the average wage for those factories was $14 an hour. So that—those factories would actually not meet that forty to forty-five percent, right. They would either have to increase wages for those factories or some of that would have to move elsewhere.

So I think there’s even a challenge or some changes that would have to happen in the United States vis-à-vis wages. But that’s what I was considering is that both the United States and Canada have somewhat similar profiles in terms of the overall average wages of workers.

ALDEN: The only thing—

COY: (Inaudible.)

ALDEN: Sorry. I was going to say the only thing I would—

COY: And the other thing that I was—if I could just jump—I think the fellow also was asking about the contact between the automakers and the administration—whether the administration did enough to assuage their fears about disruption of their supply chain.

ALDEN: I think the answer is yes. I mean, Ford and GM have both come out supporting the agreement and I think they were consulted quite closely. My broad reading is that this is going to be more challenging for the foreign companies—the Toyotas, Hondas, Hyundais, and others—operating in the United States, that have factories in the United States—if they’re producing for the U.S. market as opposed to export.

Generally, those factories have somewhat higher non-North American parts content. So I think it’s going to be more of a challenge for some of those companies than for the Big Three U.S. makers.

COY: So, actually, another call—another question from me before we go back to the line is there have been people who have said that a lot of automakers would prefer just to make stuff outside of North America and pay the WTO tariff than to bend over backwards to comply with the provisions of the USMCA. Any thoughts about that?

ALDEN: Just quickly—I don't think this administration, you know, to the extent that they can control is going to let that happen. First, you've got this looming 232 case, which is still out there, and that could be used in various ways to go after that sort of import. There’s also a clause—I don’t have it right in front of me here—I can probably dig it up—that, with respect to the quota limitations, that sort of hints that the U.S. is open to the idea of increasing its 2.5 percent bound tariff under the WTO.

That’s not a step the United States has taken on any product yet. But we do know this administration does not have a huge amount of respect for WTO rules and I think under certain circumstances might well be prepared to do that. So I think if companies are betting, well, we’ll just eat the 2 ½ percent tariff and avoid the content requirements, I think that’s a somewhat risky bet, at least as long as this administration remains.

COY: That’s fascinating. Thanks a lot.

O’NEIL: I agree. One thing I—one thing I would add to that is, you know, the U.S. market is a light truck, of which SUVs are included, and not a car market. So that 2.5 percent applies to cars. But for light trucks, it’s twenty-five percent, and that is a much bigger hurdle for someone importing to overcome. That’s assuming that Trump does not change the WTO levels, as Ted was just alluding to.

COY: Got it. OK. Back to the line, please.

OPERATOR: Our next question comes from Luis Arcentales of Morgan Stanley.

Q: Yes. Hello. Since my question about the approval in Congress was already addressed, can you touch on the potential implications for Canada and Mexico of this restriction about negotiating trade deals with nonmarket economies, specifically China? China is already Mexico’s second largest import partner—you know, what the implication of that, going forward, may be.

O’NEIL: Sure. I’ll take the Mexico one and then—and then, Ted, if you want to say a few comments.

You know, Mexico and China—we have seen the—President Peña Nieto go many times to China to try to talk with the Chinese and drum up investments and the like. But what we have really not seen is an interest in the Chinese in doing a free trade agreement. And as—you know, as President Xi went to Davos and was the, you know, defender of globalization, he has not reached out and really thought about a free trade agreement.

So the reality of a Mexico-China free trade agreement I think is one that would have been far in the future if, really, ever because China actually has—as you say, they’re now the second largest importer into Mexico. They’ve been able to conquer many parts of that market without any agreement whatsoever. So I don’t see that really being a reality or Mexico giving up too much by saying that.

Now, one thing that is a little bit interesting here is that López Obrador, the incoming president, has talked very fondly about China in the campaign and then in this transition period—has talked a lot about going to China to search for investment for refineries he wants to build, a train he wants to build, other kinds of things.

So I do think, at least at the start, we’re seeing an initial proclivity to be open to China in the new government, and so this agreement and putting that in there would tie their hands a little bit in terms of a free trade agreement. But I just don’t see that actually being something that either government could actually come to a real understanding and treaty over.

ALDEN: Just quickly—I think potentially this is a bit more of a constraint for Canada. I mean, the Trudeau government has explored, in a preliminary way, the idea of a trade agreement with China. It’s controversial in Canada. I think the Chinese would like it as a way, in part, to do a kind of end run around the United States.

So this could actually be a constraint on Canada. I mean, if you get technical about it, there’s a WTO case going on right now that will decide the question of whether China is no longer a nonmarket economy. China argues that they were supposed to graduate fifteen years into the WTO agreement, which was 2016. So depending on the outcome of that case, Canada might be able to take the legalistic position that China is now a market economy and no longer qualifies.

But I think by signing on to this, I think both Canada and Mexico have acceded to the notion that their trade relationship with China is only going to move in ways that are sanctioned by their largest trading partner, which is the United States.

COY: So that would make this one of the key victories for the Trump administration then, right?

ALDEN: I mean, I guess. You know, I don’t know how serious the likelihood of a deal like this was. But it, certainly, does—you know, it certainly does help build this, you know, sort of—I don’t exactly want to call it an anti-China alliance but an alliance of countries that are—that are going to negotiate pretty strongly with China on trade.

COY: Mm hmm. Next question from the line, please.

OPERATOR: Our next question comes from Gary O’Donoghue of BBC.

Q: Hello, and thanks very much for doing this briefing.

I had a question about the sunset clause. Firstly, how significant do you think it will be in terms of any kind of break on the willingness of investors to invest in Mexico, perhaps less so in Canada, et cetera, and secondly, will this sort of recurring review—I think it’s six yearly—will that have an impact in the electoral cycles in each country and potentially become an issue for opposition parties to take up and cause some difficulty over?

ALDEN: I’ll answer quickly, Shannon, and then turn it over to you.

I’m actually going to take an optimistic view of this, which is, you know, the five years that the U.S. originally called for I think would have been very disruptive. But, you know, if this set of negotiations has showed us nothing else it’s that if these trade agreements are going to survive they have to be living documents both economically and politically.

They have to be updated as circumstances change, and I actually like this provision because, in effect, it’s going to force the governments every six years to try to deal with, you know, how are things going under the new NAFTA—what needs to be changed—what would we like to change. That was a real problem with the original deal. There was never any forcing mechanism to update the agreement. So I’m actually kind of a fan of the current provision.

O’NEIL: I agree with that. I think the fact that they extended it to sixteen years and even the first—the first renegotiation or rethink happening after Mexico will be hitting a new president then—the United States will have a new president by then or be in—you know, moving on to a new president, whatever happens, so you’ll have a new set of actors.

And then the other thing that I think is interesting, and echoing Ted’s part, is, if people are unhappy with it, you have over a decade to fix it before people would withdraw. So I think that aspect gives enough time to—for supporters of NAFTA and others to make the tweaks or the more substantive changes that need to happen in order to keep the agreement.

So given that this was one of the main issues that Trump put on the table and for many, many months it was a red line—there has to be a sunset clause—I think that this compromise that came out actually is probably the best that they could do to get around the sunset clause and, as Ted said, you know, perhaps this keeps some vitality in this agreement that allows it to stick around for longer than a much more rigid agreement would.

COY: Great. Next question, please, from the line.

OPERATOR: Our next question comes from Rubén Kraiem of Covington.

Q: Yes. Hello.

COY: Yes.

Q: This is a question, I guess, for Shannon.

Shannon, there was a hope at one point that an eventual NAFTA 2.0, or whatever got negotiated, would somehow cement the provisions of the energy reform in Mexico. As I read this very brief reference to the inalienable ownership of the state of hydrocarbons, it seems like they went in the opposite direction. I wondered if you had any thoughts on that.

O’NEIL: Thanks, Rubén, and I agree. The fact that they reasserted this patrimony of energy is an interesting, very short chapter—many of the other ones are very long—this is half a page long—but sort of this statement.

You know, the way I read this, and particularly since energy was included in the very few sectors that remain under this international dispute mechanism for investors, is that all of the contracts that have been signed or negotiated or auctions that have occurred, that those are safe; that those can—will continue. But a question about the future of some of this investment.

And so for international investors one way to ensure that perhaps new investment will be safe is to do it through the European Union and not through the United States. So I do think this gives a leg up to—because the EU-Mexico treaty does not have some of those limitations and, as you know, Rubén, treaties in Mexican law are above normal law. So those would hold pretty strongly.

But it is interesting that that was inserted and if I had to guess—I don’t have any inside information exactly how that came about—if I had to guess that that came from the new government and their wishes because it was not in the talking points before the election happened in July.

Q: That would certainly be my guess as well. Thank you.

COY: Next question.

OPERATOR: Our next question comes from Guy Erb.

Q: Thank you. My question relates to the sunset clause of this revolving six-year system. Isn’t it the case that every time you review the market—review the agreement—the term of the agreement stretches out another sixteen years? And if that’s the case, it really is almost an evergreen agreement.

ALDEN: Yeah, quickly—I would agree with that reading. I mean, there always is, you know, still there at these sixteen-year trigger points, you know, a requirement to approve the agreement, which is—which is a little more—you know, which is a little more onerous than just having a withdrawal provision as already exists. But, you know, I mean, I think the notion that this somehow, you know, ends up in a situation where you have an automatic sunsetting of the agreement, it really doesn’t. I think it actually creates a mechanism for the agreement to go on indefinitely.

COY: OK. Next question.

OPERATOR: Our next question comes from Mara Lee of International Trade Today.

Q: Hi. My question is for Shannon and it has to do with the constitutional change to workers’ rights and what the summit needs to do to implement it. Democrats in Washington have said that they don’t really believe that the language on labor is real until the Mexican Senate passes a bill that really follows International Labour Organization. What do you see as the possibility that the new Senate that took office would do so sometime between now and March?

O’NEIL: Sure. So one of the big complaints—there’s many complaints about Mexican labor and wages and the like—but one of the big complaints is also an issue of unions that are, basically, set up by companies so they can say that they have a union and they can keep out other unions but they’re very much controlled by the company—the factory—rather than the workers, and when you look at the language of the labor clause of the new NAFTA, you see that there’s a lot of aspects addressing that—that lots of different steps have to be done by secret ballots and workers have to be given information about the union—sort of things that would make it much harder for these sort of sham or company-controlled unions to be within factories.

So I do think that that is there, and the question is, right, does Mexico pass the legislation to support these treaty clauses, and that, I actually think—with the López Obrador government, with his party in the majority in both houses of Congress, I do think that the likelihood that that will—I do think that there’s a higher likelihood we’ll see that legislation move forward.

Q: Do you think that could happen before March?

O’NEIL: I think it’s possible. Yeah, I think that would be possible that we would see that move forward, and, particularly, if it mattered to—if it mattered to moving NAFTA within the U.S. Congress, I could see some coordination where the López Obrador government and the MORENA caucus within—or the MORENA coalition within the Congress pushing it to a higher priority.

COY: OK. We have about ten minutes left, at most.

Operator, can you repeat the instructions for anybody who wants to ask a question?

OPERATOR: Our next question comes from Paul Sheard of Harvard Kennedy School.

Q: Thank you very much. I’d just like to pick up on the high-wage content issue. How common is this or how much precedent is there in other trade agreements around the world for this kind of provision? Was it relatively unique? And the $16 an hour, is that indexed to inflation or is that something that is more likely to be revisited in the light of the six-year reviews?

And then, just finally, are there any—how do you see the compliance issues—the enforcement—the compliance costs and the enforcement of that particular provision?

Thank you.

ALDEN: Let me take the first part. I’m actually not sure about indexing. I think no, but Shannon may—Shannon may know otherwise.

But on the question of sort of the precedent here, you know, whatever one thinks of this, it was a reasonably creative way to try to get at a longstanding problem, which has been, you know, stubborn low wages in Mexico and the feeling, particularly, as I said, from the American labor unions, that this was a competitive disadvantage—that they just had no way of overcoming.

I mean, this is the origin of the whole labor standards agenda—why the United States has insisted on putting labor rights into trade agreements. Some of that was about trying to improve conditions in the developing countries themselves but a lot of it is about trying to force up wages to lessen the competitive pressure on U.S. workers.

We’ll have to see how this works in practice. But it’s, you know, to my mind, at least a creative response. It’s sort of, you know, the international equivalent to what’s happening now domestically with a push for a considerably higher minimum wage. You know, you all saw Amazon announce that it was going to $15 in all of its factories.

I think wage growth has been so stubbornly low in the United States for so long now that I think governments are becoming more open to the idea of trying to do things by fiat to address that problem.

COY: OK. Shannon—

O’NEIL: Yeah. I have not seen anything on indexing in the texts that I have read. So I’m assuming then it is not part of it. But I have yet to see that. And then on the compliance, I mean, this is a challenge. But there is significant language in many of these sectors and chapters within the new NAFTA on documentation and what you need to keep and how long you need to keep it—most of it’s for five years—and that it could be called on both by governments.

So, you know, U.S. Commerce or—could go and ask a company to provide documentation that they were meeting some of the rules of origin requirements or, you know, perhaps it’s companies that other competitors who are—who are questioning through the U.S. government. So how exactly does that mechanism work I don’t—I’m not clear yet. But there is a lot of stipulation on the kinds of documentation that you need to provide and keep and submit in order to apply for the rules of origin. So that is laid out pretty clearly.

COY: All right. I’m really impressed by all the questions that are coming in, both in quantity and quality.

Operator, do we still have some queued up?

OPERATOR: Yes, sir. We do.

COY: OK. Well, let’s just keep going then. What’s the next one?

OPERATOR: Our next question comes from Sean Higgins, the Washington Examiner.

Q: Yes. I was just sort of curious as to—if you could speak a little bit more about how the deal is being perceived in Canada. While they did make some concessions, they were relatively modest. But the things that they, basically, got the Trump administration to back away from were the sort of more extreme changes they wanted to make.

I wonder if this is being viewed as sort of a victory for Trudeau, in that sense, or more sort of a letdown in terms of, you know, how the hand was played.

ALDEN: I mean, the early reaction I have seen has been pretty positive. I mean, given the threats that were on the table—the worry about NAFTA disappearing—the Canadians have managed to preserve NAFTA and the concessions are fairly modest. I mean, we’ll see what their reaction is in Quebec and Ontario over dairy. It’s, again, small numbers but, politically, pretty sensitive.

There was an election in Quebec yesterday and the equivalent—the Quebec equivalent to the conservative party won. So the liberals had a setback in that election. I don’t think it was particularly about this issue, but Trudeau is definitely worried about his political future. I don’t think this is going to hurt him at all. I think—I think the consensus will be that the Canadians played a bad hand pretty well and came out with most of the agreement intact and a fairly small set of concessions.

I don’t think that’s going to, at least, quickly smooth over the bruised feelings. I think, you know, a lot of Canadians have been very offended by the way this administration has approached its trade policies, particularly the tariffs on steel and aluminum in the name of national security. If there’s any blowback in Canada on this, I think it’s going to be over Trudeau’s failure to get the Americans to lift those steel and aluminum tariffs, not about the content of the new NAFTA.

COY: Hey, Ted, before Shannon—there’s been some talk that there still could be something done about steel and aluminum tariffs for Canada and Mexico. Do you hear that? Is it possible that Trump might end up reeling those back?

ALDEN: I mean, I’d just say I haven’t heard anything and it would surprise me a little bit. I mean, tariffs are easier to put in place than they are to remove, and you have steel companies and some aluminum companies that have made investments in light of the tariff protection they now have. I think that’s going to be hard for Trump to walk away from. I think if he was going to bargain it away, this was the chance. I think they’re probably—

COY: Uh-huh. Yeah.

ALDEN: —going to be in place for a while.

COY: Makes sense. All right. I think we probably have time—

O’NEIL: Could I—I tend to agree, but let me just say one thing is that Mexico has retaliated and hit the agricultural sector. So pork producers and others, they’ve been very targeted in particular districts that are Republican districts. And so I do think there will still be some pressure from those agricultural producers and their representatives, who are not going to get the benefit of this new NAFTA because they’re still going to have these retaliatory tariffs that relate to steel and aluminum.

COY: All right. So we’re almost up on 12:30, when we promised to finish. So I think maybe just one quick last question and quick answers.

OPERATOR: Our last question comes from Lilia Ramirez of U.S. Naval Academy Foundation.

Q: Hi. This is Lilia. I wanted to find out if there was anything significant in the section on rules of origin. Any significant changes in that area?

O’NEIL: So with Mexico, the biggest changes there are on the—on the cars, so this increasing the percentage from 62.5 percent rules of origin within North America to 75 percent over the next several years. That’s one of the biggest changes.

ALDEN: My understanding, too—and I don’t remember chapter and verses—there were some small changes to the textile and apparel rules as well, particularly, reducing some of the quotas for foreign fabric coming into North America. But I can’t—I can’t quote you chapter and verse on that. If you want to email me I can—

Q: OK.

ALDEN: —probably find the spot in the agreement where that is.

Q: OK. Yeah, I was just—you know, I was wondering—even, like, medical devices or things like that, if you remember that being impacted.

ALDEN: I don’t think so. I don’t know. Shannon—I don’t—I think textiles in cars are the only places where there were some changes to the rules of origin. But it’s a big agreement, so we may have missed something.

Q: OK.

O’NEIL: Yeah.

Q: Thank you.

O’NEIL: There were some introductions of scientific panels and others that are some of the nontariff regulatory aspects and some of those cover—they definitely cover some of the pharmaceuticals and they may cover some of the medical devices, I think, depending on their composition. So there is—there is a whole language about that and how you determine sort of equivalencies in terms of FDA approvals or other kinds of approvals. There’s language on that to try to bring those more closely in line with each other.

Q: OK. Thank you.

COY: All right, then. Thank you.

I would like to thank CFR Fellows Ted Alden and Shannon O’Neil as well as all the callers for—who asked questions or didn’t get to ask questions for participating in this CFR Corporate Program Conference Call.

I’m Peter Coy, the moderator, and we’re done. Thanks very much. All may disconnect.

(END)

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