US, Canada agree to Nafta replacement that will include Mexico

[WASHINGTON] US President Donald Trump is set to sign a successor to the North American Free Trade Agreement (Nafta) that will make modest revisions to a deal he once called a "disaster", easing uncertainty for companies reliant on tariff-free commerce.

US and Canadian negotiators worked around the clock this weekend to secure an agreement before a Sunday midnight deadline that allows leaders from all three countries to sign the accord by late November. The pact replaces the 24-year-old Nafta with a new deal called the US-Mexico-Canada Agreement, or USMCA, covering a region that trades more than US$1 trillion annually.

The deal caps a turbulent period for relations between the US and Canada, traditionally close allies on national security and trade. The alliance was severely tested by Mr Trump's aggressive negotiating style and Prime Minister Justin Trudeau's willingness to stand his ground on key issues such as dairy and dispute settlement.

US equity futures, Canada's dollar and Mexico's peso all gained on the news. The loonie climbed to its strongest since May against the greenback, while the Mexican peso rose as much as 1 per cent.

The new accord involves improved access to Canada's dairy market for US farmers, stronger intellectual property provisions, and tighter rules of origin for auto production, according to two senior Trump administration officials who spoke to reporters on condition of anonymity.

Mr Trump had threatened repeatedly to pull out of Nafta, a scenario that business leaders warned would wreak havoc on their supply chains. In force since 1994, the pact eliminated tariffs on most goods. The Trump administration had already agreed last month to an updated pact with Mexico, which increased pressure on Canada to make concessions to join the deal.

The last-minute agreement on Sunday allows the countries to sign the deal with Mexico's outgoing president, Enrique Pena Nieto, before he leaves office on Dec 1.

Lawmakers from the three countries would still need to approve the pact. The new deal likely won't be voted on by the US Congress until 2019. The Democrats may take control of the US House in midterm elections in November, which could undermine Mr Trump's ability to win approval.

Senator Orrin Hatch, a Utah Republican, said he was pleased the administration was able to keep the three-way structure intact, noting that Nafta has been a "proven success" for the US. Mr Hatch is chairman of the Senate Finance Committee, the main panel in the upper chamber responsible for trade.

The US is making headway on trade talks with some of its biggest partners except China. Mr Trump signed a renegotiated trade pact with his South Korean counterpart Moon Jae-in last week, and said he had reached agreement with Japanese Prime Minister Shinzo Abe to open trade talks as the US seeks greater access for its car exports.

In contrast, Mr Trump has imposed higher tariffs on US$250 billion of Chinese goods, and warned of more to come.

The new trade pact offers Canada and Mexico some cover from the Trump administration's threat to impose duties on car imports for national security reasons. Canadian car exports up to 2.6 million units won't be impacted by any US tariffs on foreign cars. Mexico got the same threshold level, though neither country exports that many cars to the US.

Other details of the agreement:

The so-called Chapter 19 dispute-settlement mechanism - which hears bi-national anti-dumping and countervailing duties cases and was a major sticking point in the trade talks - remains untouched in the new agreement

Steel and aluminium tariffs that Mr Trump imposed on both countries earlier this year remain in effect and will be dealt with separately, according to the US officials. They did not offer a timeline for when those tariffs could be removed.

Investor-state dispute settlement will be gradually phased out between the US and Canada but remain in place for certain sectors between the US and Mexico, the officials said.

Canada agreed to raise the threshold for applying duties to cross-border purchases, a key demand from the US Canada's new so-called de minimis level will be C$150 (S$160) for customs duties, up from C$20 now, and C$40 for sales taxes

BLOOMBERG