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New U.S.-Mexico trade agreement is hardly a done deal

NAFTA 2.0: Impact of potential trade deal
NAFTA 2.0: How potential trade deal would impact workers, economy 03:23

The trade understanding between the U.S. and Mexico announced by President Donald Trump Monday sets into motion a series of events that could lead to an overhaul of the North American Free Trade agreement. Although NAFTA has been in force among the U.S., Mexico and Canada since 1994, Mr. Trump doesn't want the new deal to be called NAFTA. 

Whatever it's called, the deal appears significant, but it lacks detailed specifics. It does add pressure on Canada to reenter the talks if the 1994 agreement is to be overhauled. Plus, Congress must approve the changes. All of this is on a very tight timetable, economists and observers said.

The preliminary deal may encourage more manufacturing in the U.S. Yet it's far from final. Even after being formally signed, Mexico's lawmakers also must ratify it.

Here are some key points from the announcement and what may happen next:

Canada said it is "encouraged." But time is running out

Mr. Trump's announcement includes plans to wrap up negotiations between the U.S., Canada and Mexico by Saturday at the latest. That deadline targets a final sign-off by Mexico's current President Enrique Peña Nieto before his administration leaves in November.

"We could have a separate deal [with Canada], or we could put it into this deal," Mr. Trump said today.

Canada hasn't participated in the renegotiations for two months. And Mr. Trump said individual trade deals are still on the table. He threatened tariffs on autos imported from Canada as another way to keep up pressure.

Canada said it was "encouraged by the continued optimism shown by our negotiation partners," according to Adam Austen, spokesperson for Canadian Minister of Foreign Affairs Chrystia Freeland, who called progress between the U.S. and Mexico "necessary."

Trump on trade deal with Mexico, plan to replace NAFTA 07:23

"We are in regular contact with our negotiating partners, and we will continue to work toward a modernized NAFTA," Austen said. "We will only sign a new NAFTA that is good for Canada and good for the middle class. Canada's signature is required."

Mr. Trump has the authority to renegotiate NAFTA as a trilateral agreement, so Canada must be involved, said Michelle Casario, an assistant professor of economics at Villanova University.  

Even if Canada and the U.S. work out their differences, "Congress has a very tight window to ratify any new trade deal, there is no guarantee that an agreement will be in place by the end of this year," analysts at Moody's Investors Service said in an email.

Final decisions aren't likely until 2019

Under the U.S. Trade Promotion Authority law, known as TPA or "fast track," Mr. Trump must wait 90 days to sign an agreement after notifying Congress of his intention to do so.

John Cornyn of Texas, the No. 2 Senate Republican and chairman of the subcommittee on international trade, said in a statement the Mexico agreement is a "positive step," but he added that Canada needs to be party to a final deal. "A trilateral agreement is the best path forward," he said, noting millions of jobs are at stake.

U.S. Trade Representative Robert Lighthizer told reporters Monday a TPA notice should be sent by Friday, triggering the 90-day period. Canada will have an option to sign into the agreement later if a breakthrough doesn't happen this week, he said.

The U.S. midterm elections could make things tougher

"The accelerated timeline to reach agreement with Canada over the next week presents a risk to the finalization of the deal," Raymond James analyst Ed Mills wrote in a note.

That's because the midterm elections might make it tougher for Mr. Trump to get what he wants from Congress.

"There is a good chance that control of the House majority might have flipped to the Democrats, who could have different views on some aspects of the agreement than the Administration, making ultimate passage somewhat more difficult," Goldman Sachs economist Alec Phillips wrote in a note.

Lack of a "sunset clause" may help

One piece that may ease tensions with Canada: The U.S. softened its demand for a five-year "sunset clause" requiring the deal to be renewed, a sticking point that led to the stalemate with Canada.

The U.S.-Mexico agreement now includes a six-year mandated review period with Mexico. If the parties don't come up with a renewal, the agreement would end in 10 years. Neither President Trump nor Peña Nieto mentioned the sunset clause during their announcement.

The fact sheets are "incredibly thin"

The agreement has some key changes for the auto, farming and textile industries but is short on the detailed text typical among nations before an agreement is signed, experts said.

Fact sheets from the U.S. Trade Representative are "really incredibly thin for someone who claims to have negotiated the biggest trade deal in history," said Height Capital analyst Clayton Allen in an interview. "The only things we know for sure, content has to come within the NAFTA region."

Mexico agreed to ensure that 75 percent of automotive content will be produced within the trade bloc, up from a current 62.5 percent, to receive duty-free benefits. But no further details were available. It also mandates 40 percent to 45 percent of content will be made by workers earning at least $16 an hour.

What is the NAFTA fight really about? 01:41

Those changes are meant to encourage more auto production in the U.S.

But the changes in labor rules may raise costs for consumers. The global auto supply chain is so complex and integrated, the changes would be difficult as outlined, Villanova's Casario said.

"The bottom line here is the agreement would increase production costs, and that would increase costs for consumers," Casario said.

Digital trade is now included, and intellectual property rights were also added. Both those items may improve on the 1994 NAFTA agreement as technology has evolved, Casario said. 

Duty-free access to farm products will also stay in the deal, and Mexico agreed to immediately start buying as many U.S. farm products as possible. That should please farmers, Allen said.

-- The Associated Press contributed to this report

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