The most important clause in the new NAFTA deal

Check the spot price.
Check the spot price.
Image: REUTERS/Chris Helgren
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After the announcement that Canada had agreed a deal to join Mexico and the US in replacing NAFTA, the 1994 trade agreement between the three nations that is hated by Donald Trump, with a new pact, the Canadian dollar rose to a five-month high against its US counterpart. The Mexican peso is at a seven-week high. Exchange rates themselves are at the heart of the new pact.

The new United States Mexico Canada Agreement (USMCA) deal has 34 chapters covering everything from cross-border trade in services to the definition of woolen clothes (“wool apparel means: (a) apparel predominantly of wool, by weight”). In those thousands of words, negotiated between the three nations over the past two years, it is the second-last chapter that is truly groundbreaking.

Chapter 33, on Macroeconomic Policies And Exchange Rate Matters, is the first in a global trade deal (paywall) to outline a method for dealing with countries artificially devaluing their currencies to make their exports cheaper and gain trade advantages. Article 33.4 states (pdf):

1. Each Party confirms that it is bound under the Articles of Agreement of the IMF to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.

2. Each Party should:

(a) achieve and maintain a market-determined exchange rate regime;

(b) refrain from competitive devaluation, including through intervention in the foreign exchange market; and

(c) strengthen underlying economic fundamentals, which reinforces the conditions for macroeconomic and exchange rate stability.

To monitor this, all three countries have to declare their monthly interventions in the currency markets no later than seven days after the end of each month, as well as their foreign-exchange reserves and other data. If a dispute arises, the countries may form a panel that can limit some benefits from the USMCA as compensation, though it “may not suspend benefits that are in excess of benefits equivalent to the effect of that failure.”

This clause doesn’t have much bearing on trade between US, Canada, and Mexico. But it sets a precedent, one that Trump is likely to use in future trade deals, especially with countries in Asia. Perhaps one in particular, with which the US is fighting a trade war.

While the US does not officially declare China a currency manipulator, Trump has accused China of being one as the yuan has dropped significantly this year. “They’re trying to make up for lack of business by cutting their currency,” Trump has told Bloomberg. “It’s no good. They can’t do that. That’s not, like, playing on a level playing field.”