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NAFTA On Life Support: USMCA On Deck

Having been reworked and passed by the U.S. House of Representatives in December and most recently approved by the Senate, the U.S.-Mexico-Canada Agreement (USMCA) is now set to be signed by President Trump. Once it also receives the expected ratification by Canada – it has already been passed by Mexico – USMCA will become effective.

USMCA will replace the North American Free Trade Agreement (NAFTA), but the vast majority of NAFTA’s provisions will remain unchanged. For many businesses, the overall impact of USMCA may be insignificant or even nonexistent. There are, however, a number of differences between USMCA and NAFTA that are worth highlighting.

USMCA is in some respects a protectionist arrangement which is one reason that it has been criticized as antitrade. (Notably, the title of the Agreement does not include the term “free trade”.) USMCA now requires that 75% (versus 62.5% under NAFTA) of a vehicle’s parts be made in one of the three signatory countries in order to avoid tariffs when moving between those countries. USMCA also requires that to remain tariff free a significant percentage of vehicle parts be made by workers earning at least $16.00/hour by 2023, and it further includes Mexico’s agreement to pass new laws intended to facilitate unionization in that country.

These provisions could add jobs in the U.S. automotive industry over the next several years, but from a consumer’s standpoint they might also increase the cost of cars. This could occur if tariffs arise because the hourly wage standard has not been met, or if manufacturing shifts to higher-wage production in the U.S. or Canada.

USMCA is not entirely protectionist in nature. It will require Canada to open up its markets to U.S. dairy farmers and poultry growers. It also includes provisions that were entirely absent from NAFTA. Of significance are those provisions intended to facilitate e-commerce and generally update the trading protocol between the signatory countries. When NAFTA was created in 1994, commercial use of the worldwide web was virtually nonexistent. NAFTA makes no mention of the internet, with references to telegrams and telexes appearing in the text. That has now changed with an entire Chapter devoted to digital trade, and enhanced provisions on intellectual property.

Not surprisingly, the impact of USMCA is the subject of much debate, and at this point is probably impossible to measure. According to the 375-page report by the U.S. International Trade Commission, effects of USMCA will be minimal. For most U.S. businesses, perhaps the biggest benefit offered by USMCA is certainty, with the threat of a U.S. withdrawal from NAFTA and the resumption of tariffs no longer in the news. This certainty does come with a caveat, since USMCA will terminate in 16 years unless the parties specifically agree to an extension. (NAFTA has no specific termination date.) For now, stakeholders will need to take a wait-and-see approach as to how the costs and benefits of USMCA will ultimately shake out; but don’t hold your breath. That debate still continues over NAFTA.