NORTH AMERICA is “a much more stable place than it was yesterday”, declared Justin Trudeau, Canada’s prime minister, on October 1st. That is because on the day before, after months of negotiations, Canada joined an agreement between Mexico and the United States that largely preserves a 24-year-old free-trade accord among the three countries. President Donald Trump, who took office threatening to tear up the North American Free Trade Agreement (NAFTA), has settled for a modest revision of it. Of course, he gave it a new America-first name: the United States-Mexico-Canada Agreement (USMCA). He may think the name’s ugliness is a virtue. It is “too long and unpronounceable to fit in a 30-second attack ad”, noted one analyst.
Failure to join the deal struck on August 27th by Mr Trump and Mexico’s president, Enrique Peña Nieto, would have been a disaster for Canada. Two-thirds of its trade in goods, the equivalent of a third of GDP, is with its southern neighbour. Especially vulnerable to a rupture would have been 130,000 workers in Canada’s vehicles industry, almost all of them employed in Ontario. Without a regional deal, the auto-parts sector, which depends on cross-border supply chains, might have collapsed, says Kristin Dziczek of the Centre for Automotive Research in Michigan. That risk has now diminished. The Canadian dollar reached a four-month high of 78 cents on news of the deal (see chart).
But Mr Trudeau was expressing relief rather than enthusiasm. The agreement came after a breakdown in his relations with Mr Trump. It does not end the tariffs that the United States has slapped on steel and aluminium exports from Canada, Mexico and other countries. Nor does it end the threat that the United States will impose more tariffs on national-security grounds. Unlike NAFTA, the USMCA will be subject to review by its three signatories every six years, and can expire a decade after each review if any party wants it to. That puts the USMCA’s long-term survival at the mercy of politics. If free-trade agreements are a form of commercial disarmament, the USMCA introduces something like concealed carry.
Such uncertainties will reinforce the determination of Canada and Mexico to diversify their trade relationships. But the USMCA makes that more difficult. It warns that if signatories make free-trade deals with “non-market” economies the agreement could be terminated. That is designed to discourage them from making agreements above all with China.
The biggest changes in the new accord are to rules governing trade in vehicles, which were agreed on in advance by Mexico and the United States. These are double-edged. When the USMCA’s new rules are fully phased in, as soon as 2023, cars will have to have 75% of their value created within North America to cross its borders duty-free. In addition, up to 40% will have to come from workers earning at least $16 an hour on average, which will mainly affect low-wage Mexico. Mr Trump hopes that these measures will nudge carmakers in North America to buy more parts from within the region, and to assemble more of them in the United States. But some of the “cash and jobs” that Mr Trump predicts will come from the new deal could also go to Canadian carmakers.
That will happen only if investors feel secure. But there is plenty to unnerve them. A side letter to the agreement shields Canada and Mexico at current levels of production from restrictions on cars that the United States might impose on national-security grounds. Another gives the Mexicans and Canadians each 60 days to negotiate an exemption from any other tariffs threatened on the same grounds. But these assurances depend on Mr Trump’s word. Few company bosses have much trust in that. Greater protection and burdensome rules for carmakers mean that American consumers will pay more.
In the nail-biting negotiations Canada succeeded in reducing one sort of uncertainty. The new accord keeps NAFTA’s “Chapter 19” mechanism, which allows companies hurt by tariffs from a signatory government to appeal to a five-member panel. Robert Lighthizer, the US Trade Representative, dislikes this mechanism, which he sees as undermining American sovereignty. Canada was determined to keep it as a shield against arbitrary American action. That was Canada’s main success in the negotiation. But the dispute-settlement regime does not apply to tariffs levied on grounds of national security.
In most other respects, USMCA is a conventional modern trade agreement. Mr Trump prised open Canada’s protected dairy market a bit. American farmers will gain access to 3.6% of it, a thin slice more than the 3.25% they would have received under the Trans-Pacific Partnership (TPP), a trade deal that Mr Trump rejected. This ought to please Canadian cheese eaters, but it will hurt people working on 11,000 Canadian farms.
Like the TPP, to which all three countries would have belonged had Mr Trump not pulled out of it, the new deal seeks to bring rules up to date. It sets out new ones for trade in digital products like music and e-books; protects the intellectual property of drugs firms, film studios and others; and includes commitments to liberalise financial services. The USMCA mandates more protection for workers, for example by making it easier for them to join trade unions in Mexico. Unlike NAFTA, it makes such rules enforceable. But Celeste Drake of the AFL-CIO, the federation of American unions that has long opposed America’s trade deals, says that the current text has no mechanism for keeping that promise.
The trade gains from such rule changes are hard to forecast. The United States’ economy is too big to feel much effect. For Canada and Mexico, the main consequence is that the threat from Mr Trump to their most important trade relationship has subsided. BMO Capital Markets, a broker, thinks that Canada’s economy will grow 2% next year. It now says it is more likely to revise the forecast up than down. Mexico’s economy is expected to grow at a slightly faster rate.
Despite angry cheesemakers, Mr Trudeau should have no trouble getting parliament to approve the USMCA. Andrés Manuel López Obrador, who will become Mexico’s president on December 1st, wants his country to ratify it as soon as possible so that he can focus on his domestic agenda. The USMCA faces more obstacles in the United States. Republicans in Congress may try to vote on the deal in the lame-duck session after congressional elections in November. It would have a rougher passage in the next Congress, especially if the Democrats, who get support from trade unions and are not fond of the president, win either house. As Mr Trump remarked on the day he rebranded NAFTA, “anything you submit to Congress is trouble.”