The U.S. and Mexico have reached a tentative agreement on renegotiations over NAFTA. The agreement includes: a requirement that 75% of autos must be sourced in North America (NA), up from 62.5%; 40%-45% of auto content must be produced by workers earning USD16/hour or more; steel and aluminum used in autos must be sourced in NA; tariffs on digital products are prohibited; some dispute settlement panels are eliminated, and; the agreement will have a 16-year term with a 6-year review instead of a 5-year “sunset clause” the U.S. had been insisting on. The agreement eliminates some uncertainty that NAFTA might be scuttled, a positive development. It is also forcing Canada to the table to sign on to the agreement or be left out of the pact. U.S. lawmakers have a 90-day window to consider the agreement.
For Mexico, the agreement dissipates trade uncertainty (80% of Mexican exports go to the U.S.). New labor content rules could end up boosting wages while not excessively harming Mexico’s competive-ness. Lastly, according to the government, more than two thirds of the country’s car exports to the U.S. would be compliant with the new rules; the remainder will have a five-year phase-in period.