Say goodbye to NAFTA — and hello to USMCA.
The US, Canada, and Mexico officially signed a new trilateral trade deal on Friday at the G20 summit in Buenos Aires. It’s known as the USMCA, or the United States-Mexico-Canada Agreement. (At least in the United States.)
While on the campaign trail, President Donald Trump had promised to renegotiate the North American Free Trade Agreement (NAFTA), which he called the “worst trade deal ever.” After more than a year of talks between the three countries, he’s finally made good on that promise.
Trump, Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau celebrated the new deal on Friday, and Trump referred to it as a “groundbreaking agreement” during his brief remarks.
Trump also tweeted about the pact, calling it “one of the most important, and largest, Trade Deals in U.S. and World History.”
Just signed one of the most important, and largest, Trade Deals in U.S. and World History. The United States, Mexico and Canada worked so well together in crafting this great document. The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!
— Donald J. Trump (@realDonaldTrump) November 30, 2018
Though it has a new name, the USMCA isn’t quite a “brand new deal,” as Trump has described it. It’s basically NAFTA 2.0: an updated version of the nearly 25-year-old trade agreement, with major changes for automakers, new labor and environmental standards, intellectual property protections, and some digital trade provisions.
Even if the changes don’t quite match Trump’s bloviating, experts say the changes are significant. “It’s a substantially different agreement than NAFTA,” Richard Miles, director of the US-Mexico Futures Initiative at the Center for Strategic and International Studies, told me in October.
Friday’s relatively low-key signing ceremony was the easy part. Now begins the arduous process of getting the deal approved by lawmakers in all three countries.
Congress won’t consider the agreement until 2019, when Democrats become the majority in the House — and they may be reluctant to ratify the deal and give the president an easy win. And since the approval process will take some time, most of the new USMCA provisions won’t go into effect until 2020.
In the meantime, lawmakers in Canada, Mexico, and the US are still debating whether these revisions to NAFTA are wins or losses — and whether this new trade agreement is an improvement on what came before.
Here’s everything you need to know about USMCA, the trilateral trade agreement formerly known as NAFTA, and what it may mean for the future.
What’s new in the deal, and how big of an impact will it have?
Country of origin rules
Under the new deal, cars or trucks must have 75 percent of their components manufactured in Mexico, the US, or Canada to qualify for zero tariffs. This is a substantial increase from 62.5 percent in the original NAFTA.
The goal is to boost auto parts manufacturing in North America by forcing car companies to use parts made here versus cheaper parts from Asia. This will probably increase the cost of cars and trucks, and it might make it harder for Mexico to make or sell certain smaller cars here in the US.
The most striking difference about this new deal involves protections for workers in all three countries.
The agreement calls for 40 to 45 percent of automobile components to be made by workers who earn at least $16 an hour by 2023. This provision specifically targets Mexico and is meant to bring wages there up to US and Canadian standards.
That’s good for Mexican workers, but that’s not the only motivation behind it. The Trump administration hopes that if Mexico no longer pays its workers a lot less than the US and Canada do, companies will no longer have a reason to move their factories there (and out of the US), thus keeping manufacturing jobs in the US and Canada.
In addition, Mexico has agreed to pass laws giving workers the right to real union representation, to extend labor protections to migrants workers (who are often from Central America), and to protect women from discrimination.
And unlike NAFTA, the new deal allows each country to sanction the others for labor violations that impact trade. It’s a complex, multi-step process modeled after similar protections in the Trans-Pacific Partnership (TPP), a multinational trade deal that Trump pulled the United States out of after taking office.
These are much-needed reforms, and they address a lot of concerns that US labor unions have long had about NAFTA.
But the labor provisions also offer certain complications — particularly how to enforce the $16-an-hour wage rule. “That appears to be a bit of a nightmare in terms of administration and red tape,” says Duncan Wood, the director of the Mexico Institute at the Wilson Center.
That’s because it’s not quite clear how countries are going to keep track of how much companies in Mexico are paying their workers, or how Mexican companies will determine that everyone is making $16 an hour.
US farmers get more access to the Canadian dairy market
This has been a pet issue for Trump and is thus considered a win for the US — and probably Canadian consumers.
Canada uses what’s called a supply management system for dairy (and eggs and poultry), which closely regulates how much of each product can be produced and places strict tariffs and quotas on those items when they’re shipped into the country.
The US got Canada to open up its dairy market, starting with a six-month phase-in of access that goes up to nearly 4 percent — an amount just slightly above that which was negotiated in the TPP.
Canada also agreed to eliminate Class 7 milk, which made it cheaper to buy certain high-protein milk products from domestic producers in Canada; US farmers complained that it blocked their ability to export their products to Canada.
Wood said that while the US can claim this as a win, it’s really a victory for a small number of US farmers. “Is it a huge market? No, it’s not,” he says of Canada’s dairy market. “Is it going to make a life-changing difference to the United States balance of trade? Absolutely not. But it will make a difference to some farmers in places like Wisconsin.”
But US dairy farmers won at the expense of Canadian farmers — at least, that’s starting to be the view in Canada. Sarah Goldfeder, a principal at the Earnscliffe Strategy Group and a fellow at the Canadian Global Affairs Institute, said in October that though the Canadian dairy industry can likely absorb these changes, farmers and farmer associations are realizing they basically got screwed over.
“What was compromised all comes in agriculture — it’s grain, it’s dairy, it’s eggs, it’s poultry,” Goldfeder told me. “So I think that the agricultural sector in Canada is beginning to rumble.”
Elements of the dairy provisions changed in the final version of the USMCA, but according to Politico Pro Canada reporter Alexander Panetta, the changes are relatively minor — and not substantial enough to satisfy Canadian dairy farmers. They’re pushing back vocally against the USMCA, calling it a “dark day” in the history of dairy farming.
Intellectual property protections and digital trade provisions
This is seen as a win for the United States. The new agreement extends the terms of copyright from 50 years beyond the life of the author to 70 years beyond the life of the author. It also offers increased protections for a certain type of drug from eight years to 10 years — which basically extends the period that a drug can be protected from generic competition.
There’s also the fact that NAFTA was negotiated more than two decades ago, so it didn’t really deal with the internet. The USMCA aims to fix that by adding new provisions for the digital economy. These provisions include things like no duties on products purchased electronically, such as music or e-books, and protections for internet companies so they’re not liable for content their users produce.
Some experts told me these digital trade provisions fall short of what’s needed for a modernized NAFTA, but it’s a start.
Canada preserves the special trade dispute mechanism
One of Canada’s red lines was the preservation of NAFTA’s Chapter 19, which set up an independent mechanism to resolve special trade disputes between the countries (rather than trying to fight it out in domestic courts). Canada saw Chapter 19 as a way to defend against protectionist trade policies by the US, and it prevailed in this goal.
Investors can’t sue governments
In the original NAFTA, a provision known as Chapter 11 gave investors the ability to sue governments over changes to policies that they claim would harm future profits. It’s been eliminated for the US and Canada and has been restricted in Mexico except for a few sectors, including energy.
This might mean that investors, particularly in Mexico, are less protected than they were under the original NAFTA, but it’s also being applauded for eliminating a mechanism that companies used to challenge government health and environmental regulations.
Section 232 tariffs are still in place
In some ways, Section 232 tariffs have dictated the NAFTA debate more than the actual terms of the agreement. Section 232 is basically a trade loophole that Trump has used to impose steel and aluminum tariffs on Canada, Mexico, and the European Union.
As Zeeshan Aleem wrote for Vox June 2018, Section 232 “basically says that the US can block the import of materials critical for national security in order to ensure that the country has reliable supplies in the event of a war.” He continues:
But this isn’t really about national security — that just happens to be the legal argument the administration is using to establish that it has the legal authority to do this. If this were just about national security — that is, making sure we have reliable access to steel in the event of a major war — the fact that we get much of our steel from close allies should satisfy that requirement.
In reality, Trump is trying to boost the domestic US steel industry.
Both Canada and Mexico wanted protections from these tariffs — and Canada, in particular, finds these tariffs insulting, since it is a close defense partner of the US.
But the USMCA doesn’t exempt them from those tariffs. Canada and Mexico did get the US to make a side agreement that largely protects them from possible auto tariffs under 232, but the steel and aluminum tariffs remain in place.
During the signing ceremony on Friday, Trudeau made his frustration known, telling the US president that this new deal was “all the more reason we need to keep working to remove the steel and aluminum tariffs between our countries.”
The Trump administration, however, doesn’t seem to be in any rush: US Trade Representative Robert Lighthizer told reporters that while negotiations continue, the steel and aluminum tariffs remain in place.
The sunset clause
This new agreement puts in a 16-year “sunset” clause — meaning the terms of the agreement expire, or “sunset,” after a set period of time.
The deal is also subject to a review every six years, at which point the US, Mexico, and Canada can decide to extend USMCA. It’s a compromise from the five-year sunset clause that the Trump administration originally proposed.
These are some of the agreement’s highlights, but there are plenty more tweaks. Most of the provisions won’t go into effect until 2020, so it will be a while until American (or Canadian or Mexican) consumers and workers experience the effects of the new NAFTA.
It’s likely that American consumers will eventually pay a bit more for cars as a result of the deal, and while the administration’s goal is to keep manufacturing jobs in the US, it’s too early to predict what the consequences on the workforce will be.
If you’re an American dairy farmer, you’re probably celebrating, though — American agriculture seems to benefit under the new deal. Canadian farmers aren’t thrilled, but Canadian consumers could benefit as well, on dairy, and on things such as online shopping and wine.
Finally, the new labor provisions mean that Mexican workers stand to benefit, with greater workplace protections and possibly higher wages.
The USMCA is signed — now it needs to get approved
Trump, Trudeau, and Peña Nieto signed the agreement, but it now needs to be ratified by all three governments. Mexico is the most dependent on NAFTA — or USMCA — among the three countries, so it has the most to lose, said Miles. Incoming leftist president Andrés Manuel López Obrador had already said he won’t renegotiate the deal, and his backing will likely ease the agreement through Mexico’s legislature.
Canada’s concessions to the US on agriculture have roiled politicians in the aftermath of the agreement — and there’s also some pushback on Canada’s inability to resolve steel and aluminum tariffs and all the issues around Section 232. That might not necessarily stop it from getting through the Canadian Parliament, but it may become a campaign issue during federal elections next year.
“There’s a lot of fodder here for an upcoming election year, but I also think there’s no way it wasn’t going to be an election issue. Whatever deal [Trudeau] got, he was going to get hit by somebody,” said Goldfeder.
And then there’s the United States. Congress won’t consider the USMCA until 2019 — when the Democrats reclaim control of the House of Representatives. Both Democrats and Republicans supported a trilateral agreement that included Mexico and Canada, but Democrats have begun agitating against the agreement, with the primary gripe being that it doesn’t do enough to protect American workers and that the improved labor provisions lack teeth.
“Based on the details made available, this agreement fails to provide the credible enforcement mechanisms that ensure labor protections are more than just words on a page,” Rep. Bobby Scott (D-VA), the current ranking Democrat on the Education and Workforce Committee, said in a statement Friday. “As a result, this agreement does not live up to the promises made to American workers.”
Other prominent Democrats have expressed concerns, including on the Senate side; Sen. Elizabeth Warren (D-MA) came out against the new trade pact in a speech Thursday.
It might be an early sign the Democrats won’t give Trump an easy win.
But Democrats don’t have a simple way to make modifications to the USMCA. The US renegotiated NAFTA under the Trade Promotion Authority (TPA), a law which empowers the president to negotiate trade deals and allows Congress to “fast-track” the agreement with an up-or-down vote. This doesn’t leave room for the House or Senate to make changes or introduce amendments.
If Democrats do demand major tweaks, they’d likely have to pressure the administration to reach some sort of side agreement on labor or environmental rules.
None of this is likely to be sorted out soon. The US International Trade Commission will study the pact and issue a report on the effects of the USMCA on the economy, including its impact on different sectors and US consumers. That report is due 105 days after the official signing, so probably sometime in March. It’s likely Congress will wait to even consider the USMCA until that analysis is done.
In the meantime, the Democrats will probably use their leverage to get concessions out of the Trump administration on labor or environmental protections — or possibly even try to help lobby for the removal of steel and aluminum tariffs on Canada and Mexico.
It’s good to keep in mind that though Democrats may fight the USMCA, they likely will want to avoid the economic consequences of totally torpedoing the deal. Tearing up the trade pact altogether would be bad for workers and businesses in the US, Mexico, and Canada, many of whom could be stuck in limbo.
The bottom line: Bipartisan support is within reach, though it might take a bit more deal-making before Trump and the Democrats reach a consensus.
Trump gets a win on his trade strategy — but what does it all mean?
Trump promised to renegotiate NAFTA — and he did. But it’s not exactly the brand new deal he says it is, since the core of NAFTA remains intact. The new deal will also likely do little to address Trump’s big pet peeve about trade deficits.
“They have fixed some of the problems with NAFTA, they have brought it up to date, they have expanded the scope of the agreement, but they have in no way fixed what seemed to be the fundamental problems of NAFTA by President Trump, or the kinds of thing he identified during his election campaign in 2016,” Wood said.
NAFTA was negotiated more than 25 years ago, and elements of it were definitely outdated for the simple fact that technology has transformed in those years. USMCA has introduced digital trade protections and other updates, but it may not have gone far enough.
It’s “marginally more modern,” Goldfeder said. “It does deal with digital industries, it has some of the foundations of a 21st-century agreement, but it will need to be addressed six years from now.”
Many of the more forward-looking agreements, such as those on digital trade protections, were borrowed from the TPP — basically a retread of negotiations already completed. And the main success of USMCA revolved around, well, automobiles.
“It’s amazing that in 2018, cars are the main driver of a NAFTA rewrite, but here we are,” Marc Busch, an international trade law expert at Georgetown University, quipped to Vox after the deal was reached.
It’s also worth considering how NAFTA got renegotiated in the first place: by a president who threatened to rip up the agreement, and then used tariffs as an ongoing threat to wrestle Canada and Mexico to the negotiating table.
“Tariffs bring people to the table, and if you play hardball, then you get a deal,” Miles said. “I think now [Trump] feels validated that that’s what’s happened here.”