The United States and Mexico agreed on Monday to overhaul the North American Free Trade Agreement (NAFTA), putting pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the three-nation pact.
Highlights of the new deal:
The deal would require 75% of auto content to be made in the NAFTA region, up from the current level of 62.5%. A fact sheet describing the bilateral agreement specified the content would be made in the United States and Mexico.
The deal improves labor provisions, in part by requiring 40% to 45% of auto content to be made by workers earning at least $16 per hour. That measure could move some production back to the United States from Mexico and should lift Mexican wages.
The United States relented on its demand for an automatic expiration for the deal, known as a “sunset clause.” Instead, the United States and Mexico agreed to a 16-year lifespan for the deal, with a review every six years that can extend the pact for 16 years.
Mexico agreed to eliminate dispute settlement panels for certain anti-dumping cases, a move that could complicate talks with Canada, which had insisted on the panels.
NAFTA is the initialism for the North American Free Trade Agreement, an agreement signed by Canada, Mexico, and the United States that reduced or eliminated trade barriers in North America. (Since the U.S. and Canada already had a free trade agreement (signed in 1988), NAFTA merely brought Mexico into the trade bloc.)
Negotiations for the trade agreement began in 1990 under the administration of George H.W. Bush and were finalized under Bill Clinton’s presidency in 1993. The agreement went into effect on January 1, 1994.
In 1993 the European Union (EU) created a “single market”—one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. This allowed every country and business in the EU to have access to more than 500 million consumers.
NAFTA, which was approved that same year, was designed to have a similar effect, providing a way to allow the exchange of goods and services to flow more freely across national borders without the artificial restrictions.
NAFTA provided for the progressive elimination of all tariffs on any goods qualifying as North American. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through corollary agreements, implement labor and environmental safeguards.
NAFTA was controversial when first proposed, mostly because it was the first [free trade agreement] involving two wealthy, developed countries and a developing country. Some people felt that allowing free trade with a developing country provides an incentive for U.S-based business to move their operations to that country.
Since its implementation, NAFTA has remained a prime target of trade protectionists (those who advocate taking measures such as taxing imports to “protect” domestic industries from foreign competition).