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NAFTA Insights – Implementing the deal

NAFTA Insights – Implementing the deal

July 2019

Since the last USMCA – formerly NAFTA - Insights, all hands have been on deck to implement the deal. With Eurasia Group providing the latest developments from the renegotiations, in this edition we consider the three countries’ ratification process from the business standpoint.

 

So what’s the latest on the politics?

USMCA clears approval in Mexico but its ratification remains unlikely in the US.

 

On June 19th, 2019, the Mexican Senate ratified the US-Mexico-Canada Agreement (USMCA) with overwhelming support (89 percent of votes in favor), becoming the first country of the three signatories to get the deal approved.

 

The ratification comes on the back of the suggestion that tariffs could be imposed on all Mexican products coming to the US. Mexican President remains committed to maintaining good relations with the US and he had no concerns about the deal and just wanted it to get out of the way so that it did not distract from the domestic priorities. In this sense, the swift ratification of the deal in the Mexican Senate is part of the efforts to show that Mexico will remain collaborative with the US but also that the debate focuses on the ratification by the US.

 

This remains the deal’s main challenge. While discussions over the deal in the US have intensified, its ratification remains unlikely given a tight timeline and partisan politics (a 35 percent probability that it gets approved this year). On May 30th, 2019, US President submitted the Statement of Administrative Action (SAA) required to be introduced at least 30 days before a draft implementing bill can be introduced to Congress. With SAA submitted, US President could introduce the implementing bill as early as June 29th, 2019, after which Congress must vote on it within 90 session days. The House has 60 days to approve it while the Senate has 30 additional days.

 

The procedure thus forces an up or down vote once the bill is introduced, something that is meant to fast-track approval, but negotiations with the House Democrats are complicating the prospects of ratification, as they are seeking to reopen the deal, in particular, when it comes to a stronger enforcement for labor and environmental standards, as well as additional provisions on drug pricing.

 

When USMCA’s predecessor (NAFTA) was ratified, side agreements on labor and the environment were included to address concerns as a way of avoiding the reopening of the deal. Now, the White House alongside USTR Robert Lighthizer are hoping to use similar mechanisms to quell any apprehensions about the deal. But the Democrats’ stance remains hardened and as the 2020 electoral cycle approaches, partisan considerations will intensify the closer the vote gets.

 

But reopening the deal is likely a red line for both Presidencies. The USMCA would be a significant achievement in US President first term, while for Mexican President it would require him to divert his attention from what matters the most to him.

 

As such, in a context of heightened tensions, US President is likely to raise the threat of withdrawal from NAFTA, which remains in place while the USMCA is being ratified, as a tactic to pressure Democrats to pass the deal in Congress. With that said, given the political and economic implications of such a move, that threat is unlikely to materialize.

 

US focus on key electoral issues like trade, security and migration will lead to bouts of volatility over the next year. But ultimately, while uncertainty surrounding North American trade relations will likely rise, the status quo is still likely to hold, with NAFTA remaining in place.

 

The view from Mexico

From a Mexican perspective, the USMCA ratification is a clear message to provide certainty to the domestic and international investors that do business in Mexico, as well as to transmit a message that it is a reliable partner that it is true to its word and international commitments. The ratification took place once the Labor Reform was executed, as well as the steel and aluminum tariff to Mexico were revoked by the US.

 

On June 3rd, 2019, the final texts of the USMCA were publicly released so it is recommendable that companies corroborate any possible amendments to the content that they used to analyze the possible impact of the USMCA on their industry, sector and company. The next step for Mexico would be the publication of the USMCA on the Mexican Official Gazette by the Executive Power.

 

The view from Canada

In the wake of Mexico’s ratification of USMCA, Canada is also on the path to ratification. On June 13th, 2019, the Canadian House of Commons passed its second reading of USMCA (Bill C-100) with a vote of 152-100. The next step is a third reading in the House of Commons, where Bill C-100 will either be adopted or rejected. Should it be adopted, it may be sent to a committee for discussion before being sent to the Senate for consideration. With Liberal Party holding the majority of seats in Parliament, all signs point to the USMCA being passed by the House of Commons.

 

The Canadian government is eager to ratify USMCA. Coupled with the recent retractions of the steel and aluminum tariffs by both Canada and the US, Canadian businesses are feeling a greater sense of certainty with regard to cross-border trade with the US.

 

However, while there have been positive updates in the trade arena, Canadian businesses are still feeling a degree of uncertainty in international trade. While Canada is currently on the path to ratification, it is unclear whether USMCA will be ratified in the US. Furthermore, growing friction in Canada-China relations, is causing doubt amongst Canadian companies engaged in cross-border trade with China.

 

Our recommendation to Canadian businesses is to be pro-active. Scenario-planning can alleviate uncertainties in the trade environment. Canada is in a unique position with 13 in-force free trade agreements (FTAs), one of the most notable being the recently-ratified Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Utilizing FTAs like CPTPP, and sourcing goods from member countries, can allow Canadian companies to diversify their supply chains and reduce impact of trade uncertainties.
 

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