Trump might tear up ‘the best deal ever made’

In 2020, when he renegotiated a North American free trade deal that had stood for nearly three decades, US President Donald Trump described the creation of the US-Mexico-Canada Agreement (USMCA) as “the best and most important deal ever made” by the US. Now, having labelled that deal “bad” and “unfair,” he’s considering tearing it up.

This week, the US began formal negotiations with Mexico over changes to the relationship established by the USMCA agreement, which replaced the North American Free Trade Agreement, or NAFTA. While there have been discussions with Canada, so far it has been largely left out in the cold, with that relationship quite frosty.

When the USMCA agreement was struck, the three countries agreed to a joint review after six years and, if they agreed it was satisfactory, to leave it in place until 2042.

If they don’t agree to that extension, the existing agreement remains in place, but will be subject to annual reviews over the next decade. If, at the end of that period, there still isn’t a consensus, the agreement is terminated.

Since the 2020 deal, which was (despite Trump’s description of NAFTA as “perhaps the worst trade deal ever made” and his enthusiasm for the USMCA) more of an update to NAFTA than a wholesale re-writing of the countries’ trade relationships, a lot has changed in the trade relationships.

Canada and Mexico, despite the USMCA, have been included in Trump’s trade wars on the rest of the world.

While a raft of tariffs imposed by legislative headings deemed illegal by the US courts have been withdrawn, or may have to be withdrawn, they still face sector-specific tariffs – steel, aluminium, autos, timber products as well an over-arching 25 per cent rate on imports – that are based on sounder legal footings (even if the notion of citing national security for putting tariffs on goods like prams, washing machines, refrigerators and golf carts is farcical).

Despite Trump’s tariffs, Canada and Mexico would like to retain the USMCA, which covers more than $US1.8 trillion ($2.5 trillion) of cross-border trade between the countries.

Mexico had a trade surplus of $US196.9 billion with the US last year and Canada a $US46.4 billion surplus. When combined, that’s about twice what it was before the USMCA.

The Trump administration, however, is adamant that the agreement has to be changed. Its focus has shifted, from 2020, from “near-shoring” to “reshoring,” as Trump pursues his “America First” ambition of reviving US manufacturing.

The administration is also trying to respond to changes in the trade patterns caused by the Trump tariffs.

While his trade wars have caused China’s exports to the US to shrink, they caused those of Mexico and some South-East Asian economies to explode, with goods originating in China, or with components from China, being transhipped and entering the US through its backdoors.

Canada’s decision to lift a ban on Chinese electric vehicles earlier this year, replacing it with a 49,000-vehicle quota, has also alarmed the US, which is concerned that Canada could provide a platform for the backdoor entry of low-cost Chinese EVs to the US and threaten the US auto industry.

Mexico seems to be trying hard to work with the US administration and appears prepared to make some of the concessions on the “rules of origin” (specified levels of US sourcing and manufacturing of components) that determine whether a product attracts a zero tariff, labour conditions and co-operation with the US in cracking down on the drug trade.

It has to largely fall into line with the US demands because about 40 per cent of its GDP and 80 per cent of its exports are dependent on its continued access to the US market.

Canada’s economy is also heavily exposed to the US – post the USMCA, the three economies and their supply chains have been increasingly integrated – but Canadian Prime Minister Mark Carney has responded to Trump’s tariffs with a frenzy of trade deals designed to diversify the Canadian economy away from that dependence on the US.

He has struck deals with China, the European Union, India, Indonesia, Ecuador and Mexico.

He’s signed up Germany as a customer for Canadian LNG. Canada has awarded a contract for a fleet of early warning planes that was sought by Boeing to Sweden’s Saab and Carney is looking to divert at least some of the 88 F-35 fighter jets ordered from Lockheed-Martin to a non-US supplier.

The hope for the key US trade partners is that the likely outcome is just a waiting game for the Trump era to end, and a more conventional administration eventually emerges.

That race to build relationships elsewhere, and a Canadian backlash to the Trump tariffs (and his regular references to Canada as the 51st or 52nd US state) that has seen sales of US wine and distilled product taken off the shelves by Canadian provinces and Canadian tourist volumes to the US plummet, are points of severe friction with the US, as is Carney’s unwillingness to see Canada as subservient to its larger neighbour.

Carney has described the US tariffs as “violations” of the USMCA deal and has said that Canada is not a “supplicant” in the review of the agreement.

“It’s not a case ​that the United States dictates the terms. We have a negotiation, we can come to a mutually successful outcome – it will ​take some time,” he has said. He’s also made it clear that Canada will allow the USMCA to lapse into annual reviews rather than make major concessions to the US.

The US administration wants more access to Canada for its farm sector, it wants the effective ban on wine and distilled spirits lifted, changes to Canada’s digital media and technology regulations, higher US labour content in vehicles assembled in Canada and tighter restrictions on how Canadians can get visas to work in the US.

It is dangling the prospect of reducing the tariffs on Canada, and Mexico, as the carrot for their agreement to a revision of the USMCA on its terms, although the Canadians, in particular, are wary of accepting that at face value.

That’s not surprising, given Trump’s propensity for adding tariffs on a whim – and the demonstration effects of his attempt to renege on the supposed multi-decade deal that he, or at least his first administration, negotiated and hailed as a Trump triumph.

The hope for the key US trade partners is that the likely outcome – their agreement is subjected to annual reviews – is just a waiting game for the Trump era to end, and a more conventional administration eventually emerges with a more sophisticated and less aggressive attitude towards trade.

That’s a hope shared by the rest of a world battered by Trump’s misconceived obsession with trade deficits and tariffs.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.