After more than a year of intense negotiations, on September 30, 2018, the United States, Mexico, and Canada reached an agreement to modernize the 24-year-old NAFTA agreement. NAFTA 2.0, which has been renamed the United States Mexico Canada Agreement (USMCA), aims to support mutually beneficial trade between the three countries, leading to freer markets, freer trade, and enhanced economic growth.
The update was seen as necessary to address recent emerging issues, such as the rise of e-commerce, intellectual property protection, and the coordination of regulatory frameworks. Other outstanding issues, such as those relating to the automotive and dairy industries, also fueled the development of the USMCA.
How Does the USMCA Differ From NAFTA?
There are a few slight differences between NAFTA and the new USMCA. The Investor-State Dispute System (ISDS) has been removed between the U.S. and Canada but remains enforced in some cases between the U.S. and Mexico. The ISDS is a dispute mechanism that allows private companies to take legal action against governments that infringe on their rights to engage in commerce in that country.
The USMCA has also made several adjustments to trade in specific industries. For example, the U.S. administration held the view that the NAFTA agreement encouraged the outsourcing of automobile production to Mexico, where labor rates are much lower. Under the USMCA, an agreement was reached where a minimum of 40% of an automobile’s content must be produced by workers earning no less than $16/hour.
Changes have also been made to the treatment of intellectual property and digital trade. USMCA now extends the terms of copyright from 50 to 70 years beyond the life of the author. The new agreement also includes provisions for the digital economy, including prohibiting duties on digital music and eBooks.
What are the Pros and Cons of the USMCA?
The USMCA consists of several compromises, rather than obvious advantages and disadvantages.
For example, the 40% automobile content clause is expected to divert vehicle production from cheap labor in Mexico. This will, in turn, create more jobs for U.S. autoworkers. Another projected benefit of the automobile wage minimum requirement is that it may force Mexico to pay local workers higher wages to avoid auto tariffs.
However, higher labor costs to produce automobiles can lead to higher vehicle costs, making them too expensive for some international markets, such as China. This may also lead to small cars no longer being sold in North America.
Chapter 19, a dispute mechanism for dumping and countervailing, was a hotly debated topic. The U.S. administration believed that this chapter infringed on U.S. sovereignty, and requested that it be removed. However, an agreement was reached where the Chapter would be maintained in exchange for increased access to highly protected Canadian dairy markets. While this is a benefit to U.S. farmers and Canadian consumers, it may result in a reduced market share for Canadian producers.
Another notable change contained in the USMCA is the increase of the de minimis (duty-free) threshold. This threshold has been increased from $20 to $150 for imports into Canada and $50 to $100 for imports into Mexico. While Canadians do not have to pay duties on imported U.S. goods valued less than $150, Canadian retailers may lose business as a result of the increased de minimis (the same applies to Mexico).
The USMCA, like its predecessor, NAFTA, has had polarizing views and opinions. However, until it fully ratified and enacted, it remains to be seen how this agreement will impact North American markets.