Will the U.S.-Mexico Deal Cause China to Lose Bargaining Power?

How will the trade war between the U.S. and China go after the U.S. President Donald Trump has struck a trade deal with Mexico on Monday, August 27, 2018 to overhaul the North American Free Trade Agreement (NAFTA) to provisions surrounding the digital economy, automobiles, agriculture and labor unions. The core of this trade will allow the U.S. companies to operate in Mexico without tariffs.

This has put pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the three-nation pact. Later on the same day, Trump and Canadian Prime Minister Justin Trudeau discussed trade in a telephone call and agreed to continue productive conversations.

The Mexico-U.S. discussions focused on crafting new rules for the automotive industry. 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, which could shift some auto parts manufacturing from China to Mexico.

The agreement has lifted equity markets in all three countries, with shares in automotive companies standing out on relief that the deal appeared to end the uncertainty that has been dragging the sector down for months.

 

Trump said during the agreement with Mexico that “China wants to discuss about the trade war, the time is still inappropriate.”

Mexico is an important trading partner for the U.S. and now the U.S. may get an upper hand in demanding China to commit to structural reforms rather than simply reducing the imbalances between the two countries.

The successful agreement with Mexico may be a good sign for China to show that the deal with Trump can also be accomplished if the deal is “proper”. The two countries need to come to an agreement before the additional 200 billion dollar tariffs on Chinese goods will be effective in September, which likely will be retaliated by Chinese government with the same value.