USMCA

USMCA Members:

Canada, the United States, and Mexico are the three signatories of the USMCA. The deal became effective on July 1, 2020, officially replacing NAFTA.

Fig.1, NAFTA/USMCA Flag

USMCA Agreement

The NAFTA members began renegotiating in early 2017 after Donald Trump promised to renegotiate the deal in his 2016 presidential election campaign and his economic plan. At the time of its ratification, NAFTA was the world's largest free trade agreement. However, it has been scrutinised by labour unions, workers, and politicians for causing significant job losses in the US.

Trump gained bipartisan support in congress to renegotiate the deal and threatened to remove the US from the deal, as he had previously done with other international agreements such as the Paris Climate Accords if renegotiations were denied or unsuccessful. Mexico and Canada also sought to modernise the trade deal. Fortunately, an unofficial agreement was reached between the three countries on September 30, 2018, which was formalised the following day. The deal was signed on November 30 by US President Donald Trump, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto during the 2018 G20 Summit in Buenos Aires, Argentina.

Fig.2, USMCA member leaders signing the USMCA deal in during the 2018 G20 Summit in Buenos Aires, Argentina

The document was then directed to the respective legislative branches of the three countries for approval. Mexico was the first to ratify the deal in June 2019, followed by the US in January 2020. To gain the Senate's approval, Trump had agreed to lift aluminium and steel tariffs from Canadian and Mexican providers, which he had implemented in 2018. Canada was the last of the three to ratify the agreement in March 2020.

After further discussions with US House Democrats, who fought for stronger environmental and labour protection provisions, an amended version of the agreement was signed. With all three governments having ratified the deal and developed domestic implication provisions, the deal officially came into effect on July 1, 2020.

USMCA vs. NAFTA

Although the USMCA largely upholds provisions of the NAFTA deal, some significant changes were made. Five areas of change are described below.

1. Auto-manufacturing: In NAFTA, it was agreed that at least 62.5% of automobile components be manufactured within the trading bloc, with the risk of increased tariffs if they did not meet this requirement. The USMCA raised this to 75%. It also required at least 40 to 45% of automobile manufacturing in the bloc to be undertaken by workers paid an average of $16 per hour. Mexico also agreed to pass stricter labour laws to provide better worker protection rights and allow their workers to unionise easier.
2. Agriculture: Due to President Trump imposing 25% tariffs on steel and aluminium imported from Mexico and Canada in 2018, the countries responded with retaliatory tariffs. This caused the price of American steel and aluminium to rise by 11%, increasing manufacturing and repair costs for farmers in the US. Paired with the devastating effects of the Coronavirus outbreak, US agricultural exports decreased drastically. The USMCA, however, restored NAFTA's tariff-free trade of poultry, dairy and eggs between the North American countries. It also gave US farmers special access to a larger market by requiring Canada to remove its intricate dairy pricing regime, allowing US dairy products to be sold in the Canadian Dairy market. This was a major focus point for the Trump administration.
3. Digital and intellectual property: NAFTA was outdated in technological terms and did not include digital supply chains or intellectual property provisions. The USMCA updated the trade agreement to recognise digital trade and patent and trademark protections for digital intellectual property such as music and videos. It also increased copyright terms from 50 years to 70 years.
4. 16-year sunset clause: NAFTA did not have an expiration date. The UMSCA, on the other hand, was signed with a 16-year sunset clause. This clause stated that unless all three countries agreed to continue the trade deal, it would expire automatically in 16 years. It also stated that every six years, the signatories would meet to assess the agreement and its performance, with the ability to make modifications and updates to the deal during these joint reviews.
5. Dispute resolution procedures: Two Chapters within the NAFTA agreement regarding dispute settlements were revised and included in the USMCA. Matters regarding countervailing and anti-dumping were resolved through Chapter 19 of NAFTA. The USMCA states that such disputes are now to be heard in front of a panel of experts from the involved states and resolved within the USMCA structure as opposed to domestic courts. Chapter 19 was revised and renamed Chapter 10 of the USMCA. Similarly, Chapter 11 of NAFTA was a mechanism to settle disputes between investors and states in cases where companies could sue the governments if they believed they were imposing biased or discriminatory policies. This mechanism was revised as chapter 14 of the USMCA, with Canada gaining a total exemption for the first three years of the agreement.

Pros and Cons of USMCA

Concessions must be made during negotiations in order for parties to come to an agreement. Although the USMCA is generally seen as a progressive and mutually beneficial deal, as with all deals, some compromises had to be made. Even clauses which appear to be profitable may not materialise as intended.

For instance, in the case of the auto-manufacturing and labour clauses changes in the USMCA, there are some obvious benefits. The wage requirement of an average of $16 per hour for 40-45% of total workers in auto companies guarantees higher pay rates, particularly for Mexican workers who would generally get around three times less than this prior to the deal. These low wages permitted under NAFTA were often blamed in the US for significant job losses as companies would outsource manufacturing jobs to Mexico; the wage requirements could create more jobs in the US and Canada. Furthermore, with Mexico agreeing to allow their workers to unionise, coupled with the Rapid Response Mechanism, which the US House Democrats fought to include in the deal, protection for Mexican workers' rights has increased significantly.

Despite NAFTA being blamed for the loss of a 1/3 of auto-manufacturing jobs in the US, there is a higher chance that these losses resulted from automation developments. In short, jobs were more likely lost as companies laid off workers and replaced them with machines. So even if manufacturing companies benefit from a higher workload, they may not hire a significant amount of new employees in the US. Furthermore, the wage requirements of the USMCA may damage US trade with China. As manufacturing becomes more expensive, the price of cars may also rise, meaning they could be too expensive to sell in the Chinese market and for the average American. This could also lead to further job losses; if fewer cars are sold, fewer employees will be needed in manufacturing jobs.

The Trump administration also attempted to remove Chapter 10 of the USMCA, claiming it was unconstitutional, but failed. Their worry was rooted in the clause threatening US sovereignty and decision-making powers. However, they eventually agreed to keep the clause in exchange for Canada's concession to allow US farmers into their dairy markets, which may result in lower profits for Canadian farmers.

The 16-year sunset clause and the six-year review periods also raised concerns for manufacturing companies who make extensive long-term investments. They argued that the clause might render some business deals redundant if, for example, a firm from one state decides to build a factory in one of the other two states under certain conditions. However, during the six-year review, the governments made a change which would affect their operations midway, causing significant financial losses. Realistically, the firm could use a dispute resolution clause to negotiate its case in a scenario like this. However, in another sense, the clause is also accused of being unnecessary overall, considering that any of the three countries could simply withdraw from the USMCA with a six-month notice period.

Fig.3, USMCA Signing ceremony with (left to right) Mexican President Enrique Pena Nieto, US President Donald Trump, and Canadian Prime Minister Justin Trudeau

The USMCA is regarded as a necessary upgrade and worthy replacement for NAFTA, which modernised and improved its provisions. Companies and industries have been given a five year transitionary period to implement USMCA regulations. This stronger and more defined trade agreement will undoubtedly have some collective benefits for the US, Canada and Mexico. With more defined rules, trade between the countries is expected to increase significantly, meaning that the three countries can rely less on other trade partners farther away. Free trade and shorter distances not only save money, but they also mean less waiting times for manufacturers and consumers and less environmental pollution by ships and aircraft.