Will USMCA Make America Great Again?
President Trump recently announced “the greatest deal in the history of the U.S.,” the US-Mexico-Canada Agreement (USMCA). He is promoting it as a replacement for the North American Free Trade Agreement (NAFTA) that had been in place since 1994 and that Trump had called “a really bad deal.” Putting aside Trump’s recurring penchant for extreme hyperbole, is the USMCA different from and better than NAFTA?
The short answer is that USMCA is nothing more than NAFTA with a few improvements. Calling it by a new name is intended to create the impression that the Trump administration has successfully introduced a whole new trade agreement rather than simply having renegotiated a few elements of the existing one. Taking credit for accomplishing more than one actually achieves is a common practice among politicians, and while Trump has elevated this proclivity to new heights, he’s certainly not the first or the only one to have utilized it.
In brief, here’s my understanding of what’s actually changing based on the various media reports:
- Automobiles: This is the most comprehensive part of the agreement. Manufacturers can avoid tariffs if 75% of their vehicles’ components are manufactured in the U.S., Canada or Mexico, up from 62.5% under NAFTA (excluding pick-up trucks, which are completely exempt from tariffs). 70% of the steel and aluminum used must come from the region. In addition, at least 30% of content must be made by workers earning US$16 per hour or more, rising to 40% in 2023. And while the U.S. maintains its right to impose emergency tariffs of up to 25% on cars and parts on grounds of national security, the USMCA creates limited carve-outs for both Canada and Mexico which are well above current production quantities. The minimum wage agreement, which is three times the current wage of autoworkers in Mexico, was intended to drive more production back to the U.S. A countervailing viewpoint is that it could result in higher wages for Mexican autoworkers.
- Dairy products: Canada agrees to ease restrictions on its dairy market and allow U.S. farmers to export up to $560 million worth of dairy products. This has been a sore point for American farmers for years, although it represents only about 3.5% of Canada’s total dairy industry.
- Intellectual property rules: Law enforcement officials now can stop suspected counterfeit or pirated goods in any of the three countries, including criminal penalties for satellite/cable signal theft. Ironically, this new rule was originally promulgated by the Obama administration for the Trans-Pacific Partnership, which Trump refused to ratify. Also, USMCA provides 10 years of exclusive protection for new biologic drugs, and standardizes copyright protection for 70 years beyond the year the creator of a work dies.
- Agreement time horizon: The USMCA will expire in 16 years, unlike NAFTA, which was intended to remain in place until changed.
Some things haven’t changed:
- Trade disputes will continue to be decided by a panel of representatives from all three nations.
- U.S. tariffs of 25% on steel and 10% on aluminum from Canada and Mexico will remain in effect as negotiations continue.
- There will be no increase in the number of visas issued by the U.S. to make it easier for Canadian & Mexican citizens to work across North American borders.
The USMCA agreement will govern $1.2 trillion worth of trade impacting nearly 500 million consumers in North America, making it pretty important. On balance I think it’s an improvement over NAFTA but not to the degree that Trump bombastically declares. It still must be ratified by the legislatures of all three nations, which isn’t expected until 2019.