After over one year of tortuous negotiations a revised NAFTA was finally agreed on 30 September after Canada finally acceded to Washington’s bullying tactics and compromised on a number of key US demands. The new deal is officially known as the United States Mexico Canada Agreement (USMCA).
Throughout the entire process, Washington pushed for improved terms for its key industries — including energy, telecoms and the automotive sector — which left Canada, but primarily Mexico, defenceless to negotiate with the much larger US economy. Mexico, and particularly its automotive sector, will now face medium and long term consequences. The new higher wage zone production requirements will lead to foreign car manufacturers — which had established plants in Mexico because of lower salaries and other financial incentives and advantages — to alter their business strategies. While that could play out adversely, in the larger scheme of things it will trigger companies to increase wages which could in turn improve working conditions for all Mexican workers.
Leading car manufacturers have also pointed out that the USMCA has provided certainty and reduced risk for future investments in Mexico in spite of the rule changes under the new framework. Top financial institutions have praised the new agreement and believe that it will sustain and accelerate trilateral trade in the face of increased global protectionism. Besides the major future benefits, at least 70% of Mexico’s auto production already complies with the USMCA’s new framework.
The agreement is expected to be signed on 29 or 30 November just days before Andrés Manuel López Obrador’s (a.k.a. AMLO) inauguration on 1 December. The Mexican Senate will then begin thoroughly analysing the USMCA after AMLO takes office. We expect the US Congress to approve the agreement in 2019 despite likely Democrat gains in the US midterm elections next month but there is still uncertainty.
USMCA has kept similar wording to NAFTA in allowing Mexico to retain the ownership of all onshore and offshore hydrocarbons in its territory. It allows the country to change legislation. The ‘sovereign right to reform its Constitution’ offers wiggle room for the federal government and provides Mexico with relative safety from foreign intrusion. The inter-connectivity of US-Mexico energy relations will, however, bring additional challenges during AMLO’s six-year term in office, especially given new developments and ever increasing Mexican demand for natural gas and fuel imports from the US.