Excludes Chapter 19, but keeps ISDS arbitration mechanism.

BY JOACHIM BAMRUD

The new US-Mexico trade agreement announced August 27 by US President Donald Trump, discriminates against some investors, experts say. The agreement aims to replace the existing the North American Free Trade Agreement (NAFTA) that went into effect in 1994.

“It seems that not all investors will have the same level of protection,” says Luis Rubio Barnetche, executive partner of Holland & Knight's Mexico City office and a member of the team that negotiated the original NAFTA on behalf of the Mexican government. “There will be some sort of investors class A and investors class B, it would be interesting to understand what was the criteria and rationale to provide more or less protection to either class, as that could be discriminatory in itself.”

The new agreement will exclude the Chapter 19 antidumping dispute settlement mechanism of NAFTA, but leave investor state dispute settlement arbitration mechanism or (ISDS).

TRADE BOOM

NAFTA led to a trade boom between the United States, Mexico and Canada.  Exports of U.S. goods and services to Mexico jumped from $51.9 billion in 1993 – the last year before NAFTA entered into force – to $243 billion last year, according to a Latinvex analysis of analysis of US Census Bureau data.

Trump, however, has repeatedly called NAFTA “the worst deal ever,” claiming that the US trade deficit with Mexico hurts the United States. The US trade deficit with Mexico reached  $71.1 billion in 2017, compared with a $375 billion deficit with China.

On Monday, he called NAFTA a "rip off."

"I think NAFTA has a lot of bad connotations for the United States because it was a rip-off," Trump said.

CANADA ROLE

The exclusion of Chapter 19 will complicate a US deal with Canada, the third member of NAFTA, Rubio points out.

“Canada had previously expressed strong views with regard to the need for Chapter 19, [and] this is expected to complicate negotiations with Canada,” he says. “The systemic impact is that without Chapter 19, all dumping decisions will have to be challenged in local courts, where local authorities have shown great deference for their authority decisions. The likelihood of succeeding in local courts against investigating authorities is expected to be lower than under Chapter 19.”

That, in turn, would complicate US congressional approval of the US-Mexico trade deal.  If Canada is excluded from a final deal, Trump would need 60 votes in the US Senate to approve the US-Mexico deal.  Since the Republicans only have 50, he would need 10 Democrat votes, which is seen as unlikely.

If Canada is added, however, he can get fast track approval with 51 votes (the 50 Republicans and Vice President Mike Pence as a tie breaker).

“We will have to wait for Canada,” Rubio says. “Each country has its own agenda, but I would assume NAFTA has a similar relevance to Canada as it does for Mexico and the US, hence eventually we will continue trading as a bloc.”

Mexican congressional approval is expected to be easier than the U.S. process.

“It is very likely that the new agreement will have to be approved by a new Senate which will be conformed mainly by members of the same party that won the elections,” Rubio says, alluding to the Morena party of president-elect Andres Manuel Lopez Obrador. “Given that negotiators from the incoming administration have been participating in the last rounds of NAFTA negotiations, I would assume the Senate would have no problem approving the resulting text.”

Trump announced that the new agreement, even if Canada is included, will not be called NAFTA.  The Mexico deal will be called the U.S. Mexico Free Trade Agreement.

"They used to call it NAFTA," he said at The White House. "We’re going to call it the United States-Mexico Trade Agreement, and we’ll get rid of the name NAFTA."

It is unclear what a trilateral deal that includes Canada would be called. Or if Trump ends up with a separate US-Canada free trade deal, thus making congressional passage more difficult.

“NAFTA is already a brand name, it identifies the region of North America as powerhouse at the eyes of the world,” Rubio says. “It will be interesting to see if a new title would get better reviews - or worse.”

In a call with Trump Monday, Mexican President Enrique Peña Nieto referred to the new deal as an effort "to renew it, to modernize it, to update" NAFTA, rather than replace it.

Even Trump's own US Trade Representative's Office (USTR) refers to the agreement as "modernizing NAFTA." (See the brief overview posted on its web site).

NO SUNSET CLAUSE

The US-Mexico trade deal does not include a 5-year sunset clause, as Trump and his negotiators had wanted, but which business said would effectively kill the purpose of a free trade agreement, since it would not provide any long term stability.

The new deal, will however, include the possibility of a review after six years and if one of the parties then wants to scrap it, there will be 10-year extension before it lapses.

“The original proposal was 5 years, a 16 year period is obviously an improvement, but the truth is that this type of clause is not as worrisome as maintaining the status quo for denunciation of the treaty, where any party with a 6 months advance notice can denounce the treaty at any time,” Rubio says. “The devil is in the details, we need to have a look at the texts to make a precise assessment.”

AUTO SECTOR

Fitch Ratings views as positive that the auto manufacturing sector will not be hurt by the new deal, as had been widely feared.

“The maintenance of intricate regional supply chains built up over the last 24 years will be positive for Mexican auto suppliers,” it said in a statement. “However, a requirement that Mexico adheres to International Labor Organization rights could put upward pressure on labor costs for Mexican corporations.”

Proposed amendments include an increase to 75 percent from 62.5 percent in the minimum auto content produced in the United States or Mexico and there is also a requirement that between 40 percent and 45 percent of auto content is made by workers earning more than US$16 per hour and for greater use of U.S. and Mexican steel, aluminum, glass and plastics, according to Fitch. Manufacturers that do not meet these requirements will be subject to a 2.5 percent tariff.

According to some public statements made by the Mexican authorities, around 70 percent of Mexico's auto exports already meet these criteria, and the remainder will have a transition period to comply with the new requirements. In the meantime, they would have continued market access to the United States, Fitch reports.

However, the proposed U.S.-Mexico trade deal would allow President Donald Trump to impose punitive “national security” tariffs of up to 25 percent on imports of Mexican-made cars, sport utility vehicles and auto parts above certain volumes, auto executives and sources told Reuters.

BETTER THAN NO DEAL

Fitch Ratings says the new US-Mexico deal gets rid of the uncertainty hanging over NAFTA.

“The preliminary bilateral agreement announced by the US and Mexico is positive for Mexican corporates,” it said. “We believe the announcement reduces uncertainty about the final outcome of negotiations and establishes a framework for future long-term investment decisions.”

The deal is set to benefit the share prices of companies like Nemak, Cemex, GISSA y Grupo México Transportes, El Financiero reported.

In the end, Rubio believes the new deal is better than no deal, as had been feared after Trump became president.

“It is a positive outcome, even a bad agreement is better than no agreement,” he says. “We will have to see the whole text, there may be positive surprises that may compensate for those parts which may be criticized.”

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