The new US-Mexico trade agreement announced August 27 by US President Donald Trump, discriminates against some investors, experts say. The agreement aims to replace the existing the North American Free Trade Agreement (NAFTA) that went into effect in 1994.
“It seems that not all investors will have the same level of protection,” says Luis Rubio Barnetche, executive partner of Holland & Knight's Mexico City office and a member of the team that negotiated the original NAFTA on behalf of the Mexican government. “There will be some sort of investors class A and investors class B, it would be interesting to understand what was the criteria and rationale to provide more or less protection to either class, as that could be discriminatory in itself.”
The new agreement will exclude the Chapter 19 antidumping dispute settlement mechanism of NAFTA, but leave investor state dispute settlement arbitration mechanism or (ISDS).
NAFTA led to a trade boom between the United States, Mexico and Canada. Exports of U.S. goods and services to Mexico jumped from $51.9 billion in 1993 – the last year before NAFTA entered into force – to $243 billion last year, according to a Latinvexanalysis of analysis of US Census Bureau data.
Trump, however, has repeatedly called NAFTA “the worst deal ever,” claiming that the US trade deficit with Mexico hurts the United States. The US trade deficit with Mexico reached $71.1 billion in 2017, compared with a $375 billion deficit with China.
On Monday, he called NAFTA a "rip off."
"I think NAFTA has a lot of bad connotations for the United States because it was a rip-off," Trump said.
The exclusion of Chapter 19 will complicate a US deal with Canada, the third member of NAFTA, Rubio points out.
“Canada had previously expressed strong views with regard to the need for Chapter 19, [and] this is expected to complicate negotiations with Canada,” he says. “The systemic impact is that without Chapter 19, all dumping decisions will have to be challenged in local courts, where local authorities have shown great deference for their authority decisions. The likelihood of succeeding in local courts against investigating authorities is expected to be lower than under Chapter 19.”
That, in turn, would complicate US congressional approval of the US-Mexico trade deal. If Canada is excluded from a final deal, Trump would need 60 votes in the US Senate to approve the US-Mexico deal. Since the Republicans only have 50, he would need 10 Democrat votes, which is seen as unlikely.
If Canada is added, however, he can get fast track approval with 51 votes (the 50 Republicans and Vice President Mike Pence as a tie breaker).
“We will have to wait for Canada,” Rubio says. “Each country has its own agenda, but I would assume NAFTA has a similar relevance to Canada as it does for Mexico and the US, hence eventually we will continue trading as a bloc.”
Mexican congressional approval is expected to be easier than the U.S. process.
“It is very likely that the new agreement will have to be approved by a new Senate which will be conformed mainly by members of the same party that won the elections,” Rubio says, alluding to the Morena party of president-elect Andres Manuel Lopez Obrador. “Given that negotiators from the incoming administration have been participating in the last rounds of NAFTA negotiations, I would assume the Senate would have no problem approving the resulting text.”
Trump announced that the new agreement, even if Canada is included, will not be called NAFTA. The Mexico deal will be called the U.S. Mexico Free Trade Agreement.
"They used to call it NAFTA," he said at The White House. "We’re going to call it the United States-Mexico Trade Agreement, and we’ll get rid of the name NAFTA."
It is unclear what a trilateral deal that includes Canada would be called. Or if Trump ends up with a separate US-Canada free trade deal, thus making congressional passage more difficult.
“NAFTA is already a brand name, it identifies the region of North America as powerhouse at the eyes of the world,” Rubio says. “It will be interesting to see if a new title would get better reviews - or worse.”
In a call with Trump Monday, Mexican President Enrique Peña Nieto referred to the new deal as an effort "to renew it, to modernize it, to update" NAFTA, rather than replace it.
Even Trump's own US Trade Representative's Office (USTR) refers to the agreement as "modernizing NAFTA." (See the brief overview posted on its web site).
NO SUNSET CLAUSE
The US-Mexico trade deal does not include a 5-year sunset clause, as Trump and his negotiators had wanted, but which business said would effectively kill the purpose of a free trade agreement, since it would not provide any long term stability.
The new deal, will however, include the possibility of a review after six years and if one of the parties then wants to scrap it, there will be 10-year extension before it lapses.
“The original proposal was 5 years, a 16 year period is obviously an improvement, but the truth is that this type of clause is not as worrisome as maintaining the status quo for denunciation of the treaty, where any party with a 6 months advance notice can denounce the treaty at any time,” Rubio says. “The devil is in the details, we need to have a look at the texts to make a precise assessment.”