Trade relief

Wednesday, 3 October 2018 00:00 - - {{hitsCtrl.values.hits}}

Ending almost a year of uncertainty, millions of people heaved a sigh of relief when a new deal was agreed to keeping global value chains spanning the US, Canada and Mexico largely intact. President Donald Trump on Monday touted a new trade deal with Canada and Mexico as a win for US workers while investors breathed a sigh of relief that the key pillars of NAFTA had survived his hardball strategy to reshape global commerce.

Washington and Ottawa reached an agreement on Sunday after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement. The United States had forged a separate trade deal with Mexico, the third member of NAFTA, in August but it was essential to get Canada on board to create a workable deal. The new agreement, called the United States-Mexico-Canada Agreement (USMCA), is aimed at bringing more jobs into the United States, with Canada and Mexico accepting more restrictive commerce with the United States, their main export customer.

Under the new agreement more value addition would have to be done in the US, creating the possibility of opening new factories in the US for American workers and making jobs more competitive by increasing the minimum wage at Mexican factories. However any US job gains are likely years away, but the deal provides Trump with a victory that he can tout at campaign rallies over the next month on behalf of fellow Republicans running in the 6 November congressional elections.

But auto industry officials privately said job gains would be more limited, partly because tighter autos content rules would raise their costs even as the deal eases worries that they would have to tear up supply chains and move existing assembly plants. The proposed minimum wage increases would also put pressure on prices and create pressure on companies to increase salaries of middle management. However some of these concerns may be mitigated as Mexico’s president elect has said he is willing to reduce VAT payments, which could offset some higher costs imposed by the new agreement.

A NAFTA collapse could have caused US farmers, a key Trump constituency, to lose access to major agricultural markets in Canada and Mexico at the same time that China has halted purchases of US soybeans and other commodities due to a tariff war. However, the US was criticised for pushing Canada to liberalise its dairy industry with detractors blaming Trump for antagonising a major ally to increase milk sales but Canada has managed to hold onto a dispute resolution mechanism that was initially under threat.

NAFTA underpins about $1.2 trillion in annual trade between its three member countries. The survival of NAFTA was seen as a crucial test to both the US Government and free trade around the world. Countries will now shift to the trade war between US and China that is likely to have far more widespread impact on global trade.