- The US, Canada, and Mexico reached a preliminary agreement over the weekend on an update of NAFTA.
- The overhaul, which will rename the trade deal as the US-Mexico-Canada Agreement, also includes a small provision that could make it more difficult for members to make free-trade deals with China.
- The deal could also free up President Donald Trump to escalate the trade war with Beijing.
While Sunday night’s agreement between the US and Canada marked an important step forward for North American trade relations, the newly minted US-Mexico-Canada Agreement also contains a potential shot at China.
Chapter 32 of the new deal, which overhauls NAFTA, addresses the ability of members to enter into a free-trade agreement with a country that has a “non-market economy.” While many countries are considered to have nonmarket economies, the most notable member of the list is China.
The USMCA text stipulates that three months before the US, Canada, or Mexico begins trade negotiations with a nonmarket economy, the other two countries must be notified. Additionally, any formal text of a deal with a nonmarket economy must be provided to the other members at least 30 days before signed.
The USMCA also contains a poison pill that could stop Canada or Mexico from entering into a deal with China.
“Entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement),” the text says.
In practice, this could mean the US could tear up the USMCA if Canada or Mexico makes a deal with China that it does not like. Given the tight links between the three North American economies, maintaining the USMCA would most likely take priority over a deal with China.
The Trump administration reaffirmed in late 2017 that the US considered China a nonmarket economy.
The USMCA could also embolden Trump to take a harder line against the Chinese. Reports indicated that the Trump trade team was spread thin renegotiating NAFTA, working on a potential agreement with the European Union, and taking on China. By closing a major front in the trade battles, said Ed Mills, a public-policy analyst at Raymond James, Trump can hammer China harder.
“President Trump is racking up trade victories, which will embolden him to double down in his trade fight with China,” Mills wrote in a note to clients on Monday. “He could use these victories to start building a coalition to join allies in the China trade dispute. We continue to believe the trade fight with China has more risks than the market is anticipating.”
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