In direct relationship to the checkbook policy that impacts middle-class Americans the U.S./Mexico trade deal is the biggest win so far in Trump’s presidency. There are such massive ramifications it could take days for anyone to comprehend how the granular details have such massive downstream consequences. The deal is incredibly complex.
At the 30,000 ft level, the deal positions Mexico to retain their current multinational investments, and through a series of sector-by-sector standards on origination the deal simultaneously closes the fatal NAFTA loophole. The agreement makes an economic manufacturing partnership between the U.S. and Mexico; and for assembly products third parties will have to produce parts and origination material within the U.S. and Mexico.
U.S.T.R. Lighthizer has put some details forward:
♦The NAFTA Loophole closure is explained in Summary Form HERE; with emphasis on the Auto-Sector. The key is a 75% part origination level for auto-assembly; and a 40-45% level for parts with a minimum $16/hr wage rate. The source-origination rate (75%) is even higher than all previously forecast negotiation results.
Example of downstream consequences/benefits: German auto-maker BMW recently built a $2 billion assembly plant in Mexico (almost complete). Most of their core parts were coming from the EU (steel/aluminum casting components) and/or Asia (electronics). Now the assembly plant will have to source 75% of the auto-parts from the U.S. and Mexico, with 45% of those parts from facilities paying $16/hr. Result: BMW will need to modify their supply chain and build auto parts in the U.S. and Mexico.
♦Agriculture is another important sector, explained in Summary Form HERE. CTH needs to dig into the details on this sector. Overall it appears Mexico has agreed to a common set of food manufacturing safety standards. Additionally the removal of any/all subsidies in agricultural trade between the U.S. and Mexico. There’s more, a lot more, but it will require some analysis akin to separating grains of sand with a toothpick.
♦U.S.T.R. Lighthizer also provides a Summary Fact Sheet HERE with a broad high-level review of the agreement principles.
- New “rules of origin” requirements to incentivize billions a year in vehicle and automobile parts production in the United States, supporting high-wage jobs.
- The strongest, fully enforceable labor standards of any trade agreement.
- New commitments to reduce trade-distorting policies for agricultural goods.
- Improvements enabling food and agriculture to trade more fairly.
- Strong and effective intellectual property protections.
- The strongest disciplines on digital trade of any international agreement.
- The most robust transparency obligations of any United States trade agreement.
NOTE: #7 is a critical point, with a great deal of emphasis, given the complexity of the rules of origin now constructed to close the NAFTA loophole.
White House Fact Sheet Available HERE.
CTH will have a lot more on the specific details, but we wanted to get the links to the fact sheets out quickly. Because of the fundamentally flawed prior agreement, this new trade agreement has massive consequences far beyond what would normally be considered.
Not only is Asia, specifically China, impacted; but so too are the EU and other international trade partnerships. The critical point is that the U.S. and Mexico have agreed to partner in our approach toward the rest of the world. Outgoing globalist Mexican President Pena Nieto is not happy; incoming nationalist Mexican President Andres Manuel Lopez-Obrador is ultimately the winner.
Through the efforts of Robert Lighthizer (U.S.) and Jesus Seade (AMLO) the Trump administration has now closed one of the access routes into coveted U.S. market, exploited by multinational corporations and countries (using NAFTA). The Mexico route is secure, agreements are made, and now attention turns toward Canada.
Think about the BMW example above, the downstream ramifications within this agreement are massive. It is not coincidental that Canada’s Foreign Minister Chrystia Freeland is in Germany coordinating the response. Now that a deal with Mexico has been reached, Canada has lost all prior leverage.
Remember, the U.S. and Mexico have agreed to “no protectionist tariffs/subsidies” in the agricultural sector. Canada protects its dairy sector with massive protectionist tariffs and subsidies. It is doubtful Trudeau and Chrystia can retreat from their construct.
“I think with Canada, frankly, the easiest we can do is to tariff their cars coming in. It’s a tremendous amount of money and it’s a very simple negotiation. It could end in one day and we take in a lot of money the following day,” Trump said.
Canada responded with a statement Friday night, saying: “Our focus is unchanged. We’ll keep standing up for Canadian interests as we work toward a modernized trilateral NAFTA agreement.” (link)
This will likely be the outcome. Like it or not, Canada gets to continue protecting dairy sector and gives up its auto-manufacturing sector as a consequence.
Freeland is expected to arrive in the U.S. tomorrow….