US and Mexico near breakthrough on key trade issues

US and Mexican officials are close to ending a months-long stalemate on thorny bilateral trade issues ranging from cars and agriculture to energy, which could pave the way for a broader agreement – including Canada – to renegotiate the North American Free Trade Agreement (Nafta).

As negotiators from both countries met at the office of the US trade representative a block from the White House on Saturday, US President Donald Trump said the country's relationship with Mexico was "getting closer by the hour".

“Some really good people within both the new and old government, and all working closely together. . . a big trade agreement with Mexico could be happening soon!” Mr Trump wrote in a tweet.

Breakthrough

A possible breakthrough on trade with Mexico would ease some of the fears about US protectionism even as the Trump administration escalates its trade dispute with China, with little sign of progress.

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But any deal between Mexico City and Washington would not be complete unless Canada – which has been carefully following the talks – joins a full agreement to revamp Nafta.

“Once the bilateral issues get resolved, Canada will be joining the talks to work on both bilateral issues and our trilateral issues,” Chrystia Freeland, Canada’s foreign minister, told reporters on Friday. “And will be happy to do that,” she added.

According to people close to the talks, US and Mexican negotiators have at least reached a consensus on the treatment of Mexican car exports to the US, which has long been a subject of tension between the countries.

The deal would involve tariff-free access to the US market for cars produced in Mexico as long as 75 per cent of their components were made in North America – compared to 62.5 per cent now.

The Trump administration had long insisted that level should be set at 85 per cent, in a bid to force production back to the US. A small tariff would apply to cars entering the US market from Mexico that do not meet those standards.

In the bilateral negotiations – spearheaded by Robert Lighthizer, the US trade representative, and Ildefonso Guajardo, the Mexican economy minister – other main sticking points have been the treatment of farm products and access to Mexico’s energy market.

The current Mexican government, led by president Enrique Pena Nieto, opened up the country's energy sector with a series of reforms, although the incoming administration, led by Andrés Manuel López Obrador, has been sceptical, making a deal more difficult.

Positions

However, Jesus Seade, an aide to Mr López Obrador, has joined the talks in Washington, and people close to the discussion insist the incoming and outgoing administrations are closely coordinating their positions.

If Mexico and the US do strike a bilateral deal in the coming days, there would likely still be some major sticking points to resolve with Canada before a full pact to revamp Nafta, which was originally signed in 1994, could be clinched. The biggest obstacle remains the insistence by the US on a “sunset” clause that would see the trade deal expire after five years, forcing a new renegotiation.

That provision is staunchly opposed by both Canada and Mexico, as well vast swaths of corporate America, because it make it hard for companies to make long-term investment plans.

The fate of Nafta has been in doubt ever since Mr Trump won the presidency in 2016, after a campaign in which he attacked the agreement for shifting production to Mexico and shrinking employment in the US.

Many economists, however, have warned that scrapping Nafta, which Mr Trump has threatened to do in the absence of a renegotiation, could deal a major blow to the US economy, as many companies are dependent on supply chains stretching across North America.

If a deal is concluded between all three countries in the coming weeks, it would still have to be ratified by the countries’ respective legislatures, which could prove challenging. In the US, this would most likely happen with a new congress in 2019, after the midterm elections in November.

People close to the talks said that if the Democrats reclaim the House of Representatives, the path to congressional approval of any new Nafta deal would be especially perilous. – Copyright The Financial Times Limited 2018