The preliminary US-Mexico trade deal announced Monday is a positive step forward in the negotiation process and hopefully one which will bring the United States, Mexico and Canada back to the table to revise and modernize the terms of the North American Free Trade Agreement (NAFTA). That the American and Mexican negotiators could agree to progress past the sticking point involving the automobile industry and rules of origin is a sign of not only the potential for negotiating "NAFTA 2.0" but also for a more productive US-Mexico relationship.
NAFTA was originally negotiated 25 years ago, before the internet changed the way we do business and when Mexico had a much more inward-looking economy. Mexico has transformed dramatically since NAFTA went into effect -- in large part because of NAFTA -- evolving in everything from its work force, consumer culture and technical know-how to its integrated supply chains, industrial capacities and global trading networks.
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Still, Mexico's economic expansion over the last quarter century is inextricably linked to the US economy, with around 80% of its exports going to the United States. In short, Mexico has much to lose if NAFTA negotiations ultimately fail.
Thus, the preliminary trade deal is significant for the success of a more comprehensive, renegotiated "NAFTA 2.0" (or whatever they decide to call the agreement to make it more politically palatable).
Despite the strong-arming negotiating tactics of the Trump administration, Canada wants an updated NAFTA, too. With Canadian Foreign Affairs Minister Chrystia Freeland heading to Washington, Canada seems willing to move forward with negotiations related to the preliminary terms struck between the United States and Mexico.
Regarding auto trade and rules of origin, the two parties agreed that 75% of auto parts be made in the United States and Mexico, as opposed to the current 62.5%. They also expanded the timeline horizon for the agreement, making it a 16-year agreement to be reviewed every six years. This represents a softening of the US stance on the so-called "sunset clause" and Trump's original demands for a five-year automatic expiration of the agreement, which was a deal-breaker for Mexico and Canada.
A revised, modernized and expanded NAFTA was always the goal for the business community, and, indeed, markets responded favorably to news of the preliminary deal. Increasing opportunities for the free flow of goods and services, finding willing buyers and sellers, and creating efficiencies in the market are good for the American, Mexican and Canadian economies.
And just as significantly, it may mark the beginning of a new and improved US-Mexico relationship, which has suffered tremendously as a result of the difficult NAFTA negotiations and the often-negative rhetoric President Donald Trump has used with respect to Mexico. The election of the leftist, nationalist candidate Andrés Manuel López Obrador (popularly known as "AMLO") as the next Mexican President is certainly some evidence of the strained alliance between the United States and Mexico.
López Obrador ran on a campaign as critical of Trump as he was of current Mexican President Enrique Peña Nieto. On the campaign trail, López Obrador said that "Mexico and its people will not be the piñata of any foreign government" and promised to stand up to Trump. Indeed, López Obrador's popularity increased with the "Trump effect," which galvanized Mexicans looking for strong leadership in the face of Trump's attacks.
For the moment, at least, López Obrador has signaled his approval of the preliminary deal between the United States and Mexico. His trade advisers worked with the Peña Nieto team to negotiate with the US, lending support to the talks and establishing Mexico's new administration as more pragmatic on economic policy issues.
This is good news for the future of NAFTA, trade relations and the business community -- it is also good news for the Mexican economy. López Obrador's economic views have tempered since he first ran for president in 2006, and he now seems less of an interventionist and more motivated to maintain macroeconomic stability in Mexico once he takes office on December 1.
This preliminary NAFTA deal may also set the stage for the United States and Mexico to deal with a host of other thorny and complicated issues, including immigration, fighting drug trafficking and border security. With luck, this is the beginning of a more balanced bilateral relationship and a modernized NAFTA. If coupled with continued market-friendly economic policies in Mexico, this will be the foundation for a broader agenda and enhanced cooperation between the two countries.