Experts react to Nafta replacement deal

Mexican President Enrique Peña Nieto hailed as a "win-win-win" Canada's re-entry into the US-Mexico trade deal that was made on August 27 to replace Nafta.

The US and Canada managed to overcome key stumbling blocks to cement a trilateral pact just under the wire before a September 30 deadline to present a package to the respective legislatures of each nation.

Given a new moniker, the US Mexico Canada Canada trade agreement (USMCA), is now set to be signed on November 29, allowing Peña Nieto a final major legislative act before leaving office, and granting president-elect Andrés Manuel López Obrador (AMLO) a political convenience in not having to sign the treaty himself after taking office on December 1.

REACTION

Manuel Padrón, a trade lawyer and auto industry specialist at law firm Baker McKenzie, provided comments on the deal to BNamericas, saying, "The main challenge ahead is whether the new agreement will pass through the corresponding legislative process of each country. For Mexico and Canada, it does not seem that this is a major obstacle; however, it is unclear what will happen in the US in light of the upcoming elections. The sense is that Canada's presence in the trade deal should make it likelier that the US will ultimately approve the agreement."

"Once the deal is approved and goes into effect, we should be attentive as to how each country would approach compliance regarding the agreement's provisions, particularly in the automotive sector to claim duty preference in a complex and sophisticated environment for rules of origin. Because of this, it is important to mention that companies should be reviewing their day-to-day operations to ensure compliance with the new provisions," added Padrón.

Asked about how Mexico fared in the final deal, Padrón said, "The Mexican government is satisfied with the agreement with the United States. In addition, the fact that Canada continued negotiating relevant topics, such as the Chapter 19 trade dispute system (anti-dumping and countervailing measures), which Mexico was unable to get the US government to accept, will translate into additional benefits that are welcomed by the Mexican government and investors."

"Given the circumstances of how the Trump administration disliked Nafta and the scenario of a trade relationship without an agreement, this outcome is very positive for Mexico because it continues to provide free trade on goods and services for a long period of time," the lawyer added.

Other market comments included those from Atsi Sheth, managing director at rating agency Moody's, who said in a statement, "The new agreement ... increases market confidence in this outcome and is thus positive for the three sovereign credit profiles, but its impact on the credit profile of firms reliant on the regional free-trade agreement - such as in the auto, dairy and agribusiness sectors - will vary depending on specific details of the agreement."

London-based research firm Capital Economics also came out with comments on the implications of the new agreement.

"The announcement of a trilateral trade deal with the US and Canada removes one major source of uncertainty surrounding Mexico's outlook," said Latin America economist Edward Glossop. "The focus will increasingly shift onto the policies of president-elect Andrés Manuel López Obrador, and the evidence so far is that he's striking a remarkably centrist tone. One consequence is that the peso should hold up well, paving the way for interest rate cuts."

Glossop noted that the publication of the full text of the deal has helped to clarify some things, including new labor content requirements, showing these only cover workers directly involved in adding the value that can be included in the wage calculation.

There had been some discussion as to whether wages of other workers (e.g. managers) could be included too, which would have inflated Mexican wages. The net result is that the new requirement is indeed likely to be a binding constraint for some exporters, he said.

Glossop also noted that a side agreement partially exempts Mexico (and Canada) from any future auto US tariffs levied under Section 232. This allows Mexico to export up to 2.6mn cars to the US tariff-free, well above current levels.