NAFTA going into USMCA

What does the new Free Trade Agreement between the 3 North American countries really means?

By Gregorio Canales

Before going into comment the new Free Trade Agreement between Mexico, USA, and Canada, let us see what the old one did for the region.

Before NAFTA come to effect (1994), the trading between these 3 countries were approximately 290 billion dollars. Last year (2019), the trade between the NAFTA Countries were $1.23 trillion dollars. That represent more than 4-fold in merchandise trading among 491 million inhabitants. Also, there are new value chains in different sectors that intertwined between the three counties. Nowadays, more than ever, the North American region is consolidating as an intranational market that generate growth and prosperity for its inhabitants.

Although, NAFTA in general had been good, not all of it had been icing on the cake for everybody. There are some sectors that had been hit by this market rearrangement, in all the three countries. And this situation has been used for political purposes, specially in the USA.

Nevertheless, NAFTA was renegotiated and signed into a new agreement called in USA as US- Mexico-Canada Agreement or USMCA. This new agreement has 12 more Chapters that the previous NAFTA and include areas such as e-commerce and labor issued that were not considered before. A brief of the changes is as follow:

  • Country of origin rules: Automobiles must have 75% of their components manufactured in Mexico, the US, or Canada to qualify for zero tariffs (up from 62.5% under NAFTA). This provision will take 5 years to be implemented with annual increments until 2023.
  • Mexico and Canada get assurance Trump will not pound them with auto tariffs: Trump has repeatedly threatened to slap hefty tariffs on car and vehicle parts coming from overseas into the United States. Along with the new trade deal, his administration signed “side letters” allowing the two nations to mostly dodge Trump’s auto tariffs. The side letters say Canada and Mexico can continue sending about the same vehicles and parts across the border free of charge, regardless of whether auto tariffs go into effect down the road. Only parts above that quota could face tariffs. 
  • Trump’s steel & aluminum tariffs stay in place (for now): Canada & Mexico wanted Trump to stop his 25 percent tariffs on steel & aluminum. But that did not happen. Yet! The three countries are still discussing lifting those tariffs, and signaled that, as a token of good faith, for the signature of the new USMCA such lifting could be approaching. 
  • Labor provisions for autos: 40% of automobile parts, and 45% for pick-up truck must be made by workers who earn at least $16 an hour by 2023 (for this provision all payroll could be included). Mexico has also agreed to pass laws giving workers the right to Union representation, extend labor protections to migrant workers, and protect women from discrimination. The countries can also sanction one another for labor violations.
  • Intellectual property and digital trade: The deal extends the terms of copyright to 70 years beyond the life of the author (up from 50). It also extends the period that a pharmaceutical drug can be protected from generic competition. 
  • China provision: There is an issue on Chapter 32 of the USMCA that could be cumbersome for Mexico on dealing with China. There is an explicit citation for initiation of trade talks with economies that are determined for one of the signatories as a Non-Market Economy. 
  • USMCA must be reviewed after 6 years. The USMCA stipulates that the three nations will review the agreement after six years. If all parties agree it is still good, then the deal will continue for the full 16-year period (with the ability to renew after that for another 16 years). This was a compromise provision: Trump wanted ability to renegotiate the deal frequently. Ultimately, there will be a review, but it will not happen until after Trump leaves office.

It also includes new provisions to deal with the digital economy, including prohibiting duties on things like music and e-books, and protections for internet companies so they are not liable for content their users produce. 

  • De Minimis provision: This term has to do with the minimal importation cost allowed with no taxes. It was USD$50 with NAFTA and with USMCA will be USD$100. This will foster digital trade.
  • No section 232 tariff protections: Section 232 is a trade loophole that Trump has used to impose steel and aluminum tariffs on Canada, Mexico, and the European Union. Both Canada and Mexico wanted protections from these tariffs, but they did not get them. They did get the US to make a side agreement that protects them from possible auto tariffs under 232, though. 
  • Sunset clause: The agreement puts in a 16-year “sunset” clause — meaning the terms of the agreement expire, or “sunset,” after a set period. The deal is also subject to a review every six years, at which point the US, Mexico, and Canada can decide to extend USMCA.

You can say that USMCA It is basically NAFTA 2.0, with major changes for automotive production and new policies on labor and environmental standards, intellectual property protections, and some digital trade provisions. But in general, about 95% of the Rules of Origin remains the same as in NAFTA and only includes an expected tougher enforcement.

Does these changes will generate the desired outcome, it is something still to be seen! Does these changes will upset value chains already established over 25 years of NAFTA operations, most definitely. What the future of USMCA will changes trade between the three countries will be? Here are some possible scenarios:

  • Auto market and pharmaceutical products will increase prices for the regional market because of the new rules.
  • Re-localization of plants form elsewhere in the world to this region to fulfill the Rule of Origin. 
  • Shortening of value chains and nearshoring. Mexico will win on this area if it does play it well. 
  • Labor claims in Mexico because of unfulfilling workers conditions in production plant in its territory.

As a conclusion of these implications, does the USMCA is better than NAFTA? The answer is no! Is just a new version that consider new trade issues that there were not present 25 years ago. But it brings to the table new constrains that there were not present before and does not imply it will make this region a better marketplace. It also implies that the new Rule of Origin becomes more stringent in the economic sector that proved to be a success for Mexico, harming its economic performance. Does it create good conditions for business to flourish, well it depends on the actual reaction of consumers and their preferences for new products and pricing. What it does imply, is a new international tendency towards regionalism and/or nationalism, that it may not necessary cure the previous situation of winners and losers, but it will certainly change the market prospective for many companies.

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