The end of NAFTA? Perspectives from Mexico, Canada, and the US

The end of NAFTA? Perspectives from Mexico, Canada, and the US

24 years ago, on the 1 January 1994, the North American Free Trade Agreement (NAFTA) between Mexico, the United States, and Canada came into force superseding the former Trade Agreement between Canada and the United States. Comprising an area of over 21 million square metres and a population of over 500 million people, the NAFTA became the world’s largest free trade area formed.

Donald Trump repeatedly labelled NAFTA during his presidential campaign as the worst trade deal ever signed by the United States, and in April 2017 he threatened to withdraw from it. Donald Trump does not need congressional approval to set in motion the withdrawal process. This possibility alarmed both Canada and Mexico, who insisted in the renegotiation of the agreement. Six months after Trump’s initial threats, the talks among the three countries to modify the treaty began.

Towards a new bilateral deal

The inability to agree on issues led to stalled talks for months until a few days ago when Donald Trump declared the United States was ready to ditch NAFTA for a bilateral agreement with Mexico. The breakthrough deal between Mexico and the United States involved an agreement on the percentage of North American content a car must have in order to pass duty-free borders. This was raised from 62.5% to 75% and increased the worker’s wage to a minimum of $16 an hour. Donald Trump gave up on the Sunset Clause that suggested ending the new agreement after 5 years. Instead, the new treaty is set for 16-year terms, with a 6-year review process.

The political stakes are high for all three countries: Donald Trump and the Republicans in Congress are up for re-election in November, and ensuring voters whose jobs depend on the treaty that the deal is sealed might be the key to their re-election. Enrique Peña Nieto wants to sign the agreement before leaving office at the end of November. Justin Trudeau faces a national election expected by October 2019, and his popularity in Canada is at an all-time low due to his inability to achieve an electoral reform, the Trans Mountain Pipeline, and a surprisingly conservative rhetoric.

Is the new deal a good deal?

This provisional agreement between Mexico and the United States could still mean no significant improvement. Tighter rules are unnecessary and could backfire on the Trump administration. Any new deal should move towards expanding liberalisation and not rolling it back; tightening origin rules takes the United States in the wrong direction. The new agreement will also push production costs higher on Mexican products that will eventually be paid by the American consumer. There is also a substantial wage differential between Mexico and the United States that would still draw manufacturers to shift more production to Mexico. Raising the salary per hour to $16 may not be enough of an incentive to move production back north. There is a cost to relocate; as a business, the savings you get over time must significantly exceed the costs incurred to shift. The fact that assembly work in the United States is still quite dependent on low-cost countries producing the parts does not bode well for the American economy. Even with the increase in salaries in Mexico, car companies would still have a considerable advantage over domestic labour.

Is NAFTA irreplaceable for Mexico?

The answer was affirmative decades ago, but Mexico has been creating a back-up plan in case Trump continues to impose tariffs. Mexico has a network of 12 Free-Trade Agreements with 46 countries; 32 Agreements on Reciprocal Promotion and Protection of Investment with 33 countries; and 9 Economic Complementation Agreements and Partial Scope Agreements within the framework of the Latin American Integration Association. Mexico went from being one of the closest markets in the world, and a commodity-exporting nation, to being the country that has the most free-trade agreements, and a country that now exports more manufactured goods than the rest of Latin America combined.

Mexico has been aggressive about looking beyond the United States for beneficial deals. Mexico’s first move was to turn towards the 2011 Free-Trade Pacific Alliance between Mexico, Colombia, Chile, and Peru. By the end of 2017, 94% of all the traded goods were tariff-free. Korean, Japanese, Chinese and German investment has increased significantly, resulting in a mushrooming supplier base. Mexico has been slowly crafting a series of trade agreements that make it an attractive place to do business, and it has started to diversify the destinations of its exports and the countries it imports from. This year, Mexico updated the trade agreement with the European Union, ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It is currently expanding current Free-Trade Agreements with Brazil and Argentina, and China has signalled interest in a Free-Trade Agreement. Mexico is slowly reducing its level of imports from and exports towards the United States. Although still highly dependent on the American market, Mexico’s diversification of markets may strengthen its position to refuse Trump’s demands.



While it is promising to see progress between two parties involved in the negotiation, this is not a done deal yet. Given Canada’s exclusion in the talks thus far and the workings of the American and Mexican congressional systems, a full reworking of NAFTA is still far from certain. American law requires a three-month waiting period before Congress can ratify it. Mexico’s requires senatorial approval as well. Mexico’s incoming president, Andrés Manuel López Obrador, will be sworn in on 1 December. If a final renegotiation agreement is not signed before then, López Obrador could demand modifications – and a deal that took years to renegotiate could unravel. Canada seems to be in no rush at all to reach an agreement, which could infuriate Trump and push him towards his old rhetoric. Under these circumstances, Mexico would have struck a better deal, and Canada could be left a reduced margin of ability to negotiate a beneficial bilateral agreement.

Categories: Economics, International

About Author

Lisdey Espinoza

Lisdey Espinoza Pedraza is a Politics and International Relations lecturer and PhD candidate at the University of Aberdeen. She holds a Master of Arts in International Relations and World Order from the University of Leicester; and a Bachelor of Arts in International Relations from the Universidad Iberoamericana, in Mexico City. She has spoken at numerous international conferences and her fields of specialisation are: political parties systems, democracy, migration, European politics,NATO, contemporary Latin American and North American politics, contemporary Mexican politics, and Mexico-USA diplomatic relations.