The New NAFTA: Is It Really a Big Deal?
After more than a year of negotiation, the Trump administration reached an agreement with Canada and Mexico to update the North American Free Trade Agreement (NAFTA), which was launched in 1994. The trade deal was signed in November 2018 at the G20 Summit in Argentina, where leaders from 19 countries and the European Union discussed international economic and financial issues.
The terms of the new deal—called the United States-Mexico-Canada Agreement (USMCA)—are not significantly different from NAFTA. The modifications provide the U.S. with some stronger economic advantages, mostly in the automotive sector. It also must be approved by the legislatures of the three countries before it becomes operational.
Key Highlights of USMCA
Automobiles must have 75 percent of their components manufactured in Mexico, Canada or the U.S. to qualify for zero tariffs. This is a significant increase from the current 62.5 percent requirement. Some experts believe this may actually hurt the North American automotive industry by making it harder to compete with car manufacturers in Asia, especially with steel tariffs still in place against Mexico and Canada. The U.S., however, signed “side letters” that essentially exempt the two countries from the tariffs.
To protect its dairy industry, the Canadian government maintains strict controls over domestic production and how many foreign dairy products are allowed into the country. The USMCA forces Canada to open up its dairy market by 3.59 percent, giving greater market share to U.S. and Mexican dairy farmers.
Chapter 19 allows Canada, Mexico and the U.S. to challenge anti-dumping and countervailing accusations in front of a multi-national panel of representatives. Canada has used Chapter 19 to effectively challenge the U.S. on its softwood lumber restrictions. Although the U.S. pushed hard to eliminate this from USMCA, Chapter 19 was retained.
- Improved labor rights—40 to 45 percent of automobile parts must be made by workers who earn at least $16 an hour by 2023; Mexican workers will have the right to union representation
- Increased intellectual property protections, including extending the term of copyright to 70 years beyond the life of the author (up from 50)
- U.S. drug companies will be able to sell pharmaceuticals in Canada for 10 years before facing generic competition (up from eight years)
- Chapter 11 was eliminated for Canada and mostly for Mexico, except for industries such as oil and gas that could be prime targets for nationalization in the future
Not a Done Deal
The USMCA calls for a review of the agreement after six years. If all parties agree, the trade partnership will continue for its full 16-year period with the option to renew for another 16 years.
Before it can go into effect, however, the USMCA must be ratified by all three governments. In the U.S., both Democrats and Republicans have stated there is little chance of passage without major revisions. For example, many Democrats feel the agreement doesn’t do enough to protect the environment and worker’s rights, while Republicans think it is too restrictive on trade, especially the automotive industry. Some Republicans also want to remove the steel and aluminum tariffs on Canada and Mexico, two critical allies and trading partners.
According to Geoffrey Gertz, a fellow in the Global Economy and Development program at the Brookings Institution, “The USMCA’s congressional path remains unclear. Of course, for their part, neither Canada nor Mexico will likely protest too strenuously if the U.S. fails to ratify the new pact, so long as it allows them to keep the existing NAFTA.”