Publish in Special Reports - Wednesday, October 3, 2018
Some of the biggest changes under USMCA affect the auto sector. Here Ford's Cuautitlán plant in Mexico. (Photo: Ford)
North American free trade continues, but with some setbacks.
BY JOACHIM BAMRUD
The new US-Mexico-Canada Agreement (USMCA) announced by President Donald Trump on Monday represents a setback compared with the North American Free Trade Agreement (NAFTA), experts say.
“Even though there were signs of relief when it was known that Canada accepted the terms and a trilateral agreement was again possible, as the dust settles it is clear that this USMCA is not an evolution of NAFTA, but rather an agreement that gives in to a number of awkward US requests,” says Juan Francisco Torres Landa, office managing partner for Mexico City at Hogan Lovells.
In the case of the automotive industry the new rules of origin, the export caps, the sunset review periods, the 16 year term of the Agreement, and the labor oriented rules all pose new obstacles for long term planning, he points out.
“The question then is how the industry will adjust to these new rules that reduce full flexibility and how to remain competitive with other regions in the world,” Torres Landa says.
The next few weeks will be very important as the speed at which the main issues were negotiated prevented a process to have clean and final texts, he says.
“Those now need to be proofread and some of the pitfalls could be corrected,” Torres Landa says. “But the problem still will remain with a new deal that is far more restrictive than NAFTA. In that respect this is somewhat of a setback for the industry.”
And that setback is for the industry as a whole, he points out.
“The entire region will suffer if the restrictions designed for political purposes fail to work in the real world,” Torres Landa says. “Companies are now running numbers and going through the various exercises of how best to live with the new rules to then determine just how they can adjust to the new reality and come up with safe and sound implementation plans. Until we hear from those companies that operate regionally and on a worldwide basis, it is premature to arrive at firm conclusions. However, what is certain is that these new rules create unnecessary noise in an industry that was working with impressive benefits in terms of competitiveness for the region.”
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.
“It would seem that this entire impulse to redo NAFTA and create the USMCA missed a key factor which is “if it is working, don’t fix it”,” Torres Landa says.
After 24 years the original NAFTA required some important overhauling, he acknowledges. NAFTA generated a lot of benefits and could have been upgraded with its basic infrastructure untouched.
“However, the electoral commitments by the current US administration made that impossible and caused the three countries to embark on an unknown, complicated and almost dangerous adventure,” Torres Landa says. “The fact that all three North American countries have been able to arrive at a successful conclusion of the negotiations for the new USMCA as the replacement of NAFTA is almost miraculous.”
The dispute settlement mechanisms have changed, particularly when it comes to ISDS measures.
“The former Chapter 19 of trade remedies and disputes was largely salvaged based on Canada's adamant and timely insistence on preserving the right not to have to litigate in domestic courts,” Torres Landa points out.
The earlier, US-Mexico agreement excluded it, which discriminated some investors, as pointed out by 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. (See US-Mexico Deal Discriminates Some Investors).
Still, the new USMCA will discriminate as well, according to El Financiero.
While NAFTA’s Chapter 11 guaranteed any investor the right to sue one of the three countries, the new USMCA’s chapter 14 reserves that right for only four sectors: oil, gas & electricity, telecommunications and infrastructure.
Some of the biggest changes under USMCA affect the auto sector, Fitch Ratings points out. These include a phased-in change to the rules of origin that will require 75 percent of a vehicle's value (up from 62.5 percent) to be produced in North America and a new rule stipulating that factories that pay workers $16/hour account for two-fifths of a car produced duty-free in-region. Nonetheless, the U.S. retains the right to levy auto tariffs on national security grounds, but side agreements with Mexico and Canada would safeguard their automotive exports from these, establishing a quota higher than their current exports.
Auto parts output in Mexico will jump about 10 percent over the next three years as automakers scramble to adhere to stricter content rules laid out in the USMCA, Reuters reports. The new trade deal is also getting support from Japanese carmakers, according to another report from Reuters.
Torres Landa also takes issue with the haste of the negotiations.
“We now need the dust to settle, understand how the different concessions made by the three countries result in a clear, consistent and well thought out text that all countries can live with,” he says. “This is not an exaggeration because the haste with which the final hurdles of the negotiations were handled have resulted in a fine print that is not clean of mistakes, typos and inconsistencies.”
The three countries and their teams must now sit down to clean up everything and fully understand where the final text is considering that the two final states of negotiations did not formally include all three countries, but rather the US negotiating with its two different counterparts in a sequence of first Mexico and then Canada, Torres Landa points out.
“The jury is out now on how the new agreement is finally put together and its implications, he says. “That analysis will be particularly relevant by the internal Congressional bodies that must approve the final product in each country. “
And there is already rising criticism and doubts among US and Canadian lawmakers.
US Senate Majority Whip John Cornyn warned yesterday that may not have enough support to win approval in the U.S. Senate, Bloomberg reports.
In fact, the vote may be delayed until next year. How the new Congress votes, especially if the House of Representatives flips to the Democrats, could be a key stumbling block, Fitch Ratings warns.
Meanwhile, Canadian and Mexican lawmakers are looking at the restrictions the USMCA would put against Canada and Mexico reaching a free trade agreement with China, Reuters reports.
Still, the USMCA provides relief for those who feared Trump would eliminate all free trade in North America.
"The agreement is positive sign for those who have expressed concerned about threats of economic protectionism in the bloc turning into a reality,” says Manuel Padrón, a Mexico-based partner in the International Commercial & Trade practice of Baker McKenzie. "The new NAFTA deal will provide investors in the three countries with certainty as to how their trade rules will affect their industries over the next six years. They also guarantee that the region's supply chains won't need to undergo significant changes. It is also worth noting that there will be no significant increases in tariffs among the three countries and that, overall, an efficient modernization of the previous version of NAFTA was achieved with the USMCA.”
Fitch Ratings also pointed the deal ending uncertainty about North American trade.
“A deal between the Canadian, Mexican and U.S. governments for a revised trilateral free trade agreement should reduce key uncertainties for U.S.-Canada and U.S.-Mexico trade that have been in place since the U.S. announced its intention to renegotiate NAFTA,” it said in a statement.
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