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Evan Horowitz | Quick Study

Trump scores a NAFTA win with Mexico and puts Canada in a difficult spot

The deal slightly reduces incentives for carmakers to relocate south of the border. Above, the Volkswagen plant in Puebla, Mexico.
The deal slightly reduces incentives for carmakers to relocate south of the border. Above, the Volkswagen plant in Puebla, Mexico.(PEDRO PARDO/AFP/Getty Images/File 2018)

The United States and Mexico said Monday they had reached a new trade deal, a step toward President Trump’s goal of rewriting the North American Free Trade Agreement that, for now, is being taken without Canada.

The deal slightly reduces incentives for carmakers to relocate to Mexico and limits some companies’ ability to challenge government trade rules, which could prompt opposition from US businesses.

At a morning press conference, Trump called it a “a big day for trade.” He also suggested he might drop the name NAFTA altogether, offering instead a new title that conspicuously removes Canada from the picture: the “United States Mexico Trade Agreement.”

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Trump was joined via phone by Mexico’s outgoing president, Enrique Peña Nieto, who was quick to say that Canada should be brought back into the negotiations.

As a candidate, Trump vowed to tear up NAFTA, “the worst trade deal in history.” This agreement would merely revise NAFTA, but it’s still a win for a get-tough approach that has rattled some US manufacturers.

Many hurdles remain, including the fact that any final deal would need to be ratified by Congress.

Monday’s announcement puts Canada in a difficult spot. When NAFTA renegotiation began in 2017, it seemed to pit Trump against the largely pro-NAFTA front formed by Canada and Mexico. Now, that dynamic has broken down, with the Canadians shunted to the outside, deciding — alone — how to respond to these latest moves.

For now, they seem to be weighing options. Promising that Canada would “continue to work toward a modernized NAFTA,” a spokesman for the Canadian foreign minister said that, “We will only sign a new NAFTA that is good for Canada and good for the middle class.”

Until Monday, Trump’s trade agenda had been marked by many rising tariffs but few concessions from trading partners. He has introduced levies on steel and aluminum, targeted China with tens of billions in new border taxes, and threatened to curtail the importing of foreign-made cars — in the name of national security.

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So far, the payoff has been limited to a promise of future talks with the European Union and reports of heightened concern among the Chinese. But Trump has pushed ahead, with the slack provided by the strong economy and the still-optimistic stock market, which gained ground again Monday and which has been climbing for months even as the trade war escalated.

Not even pushback from import-sensitive businesses and members of Trump’s own party have prompted the president to back down in any meaningful way.

Now, Trump can point to this US-Mexico agreement, and the rekindled prospects for a new NAFTA, even if it’s unlikely to have a a big impact on American workers and companies.

Among the potential losers from a revised NAFTA are US farmers, who have come to rely on exports to Mexico and Canada, and US automakers, which have built complicated supply chains that depend on the easy movement of goods across borders.

But it’s not clear that NAFTA ever had a big impact on North America’s economy — which means tweaking it probably won’t, either.

Studies from the Congressional Budget Office and the Congressional Research Service have found mostly small effects on US jobs and economic growth.

In Mexico, the benefits seem limited, despite an increase in jobs outsourced from the United States. And a recent analysis suggests eliminating NAFTA would have only a mild impact on Canada’s economy.

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What is more, the changes currently under consideration appear to be relatively slight, unlikely to spark any kind of dramatic shift in trade patterns.

A key focus of the new agreement involves new rules for the digital economy, which didn’t really exist when NAFTA was negotiated in the early 1990s. That’s more an update than a transformation.

On auto manufacturing, which had been one of the stickiest issues, cars would qualify as tariff-free only if they used more local steel and more local parts and were assembled by higher-paid workers. That would penalize car companies that set up low-wage plants in Mexico, but it’s the kind of change that requires adjustment, not a revolution in the auto industry.

Potentially more consequential is the pending non-NAFTA-related decision about whether the United States will slap high tariffs on imported autos in the name of national security, something the administration has threatened.

From Canada’s perspective, then, there may be a good reason to quickly sign on to this new NAFTA: It’s a lot like the old NAFTA. One exception is the apparent watering down of rules to settle disputes. As a result, it would be harder for companies to contest government regulations but easier for leaders like Trump to impose retaliatory measures when they feel their economy is being treated unfairly.

Canada has publicly opposed such changes, but it’s possible the United States and Mexico will make rapid concessions, since they’re eager to get a deal done this week, so the ink can dry before a new Mexican president takes office.

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But even if that happens — and it’s still a long way off — would that count as a victory for Trump’s “America first” trade regime?

This question would be easier to answer if the Trump administration were clearer about its goals. Given that NAFTA’s effect on US workers was never as consequential as the rise of China, it’s unlikely that any renegotiation could spark a rebirth in US manufacturing or dramatically reduce the trade deficit.

But that may be too high a bar. Until Monday, it seemed possible these negotiations would collapse in acrimony, undermining Trump’s claim to be the dealmaker in chief.

That fear has now been quieted, and Trump can trumpet his new proof that hard rhetoric does sometimes lead to new agreements.


Evan Horowitz digs through data to find information that illuminates policy issues facing the nation. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.