USMCA: Total Overhaul or NAFTA 2.0?

Image Caption: President Trump delivers a statement at a news conference regarding the new USMCA deal written to replace NAFTA.

The Office of the U.S. Trade Representative released the text of the United States-Mexico-Canada Agreement (USMCA) on September 30.

As the product of negotiations that began in August 2017, the deal will replace the North American Free Trade Agreement (NAFTA), which came into effect in 1994. At a press conference to address the new treaty, President Donald Trump exuberantly declared, “It’s not NAFTA redone, it’s a brand new deal.”

Since his days as a candidate, Trump has been a harsh critic of NAFTA, calling it “the single worst trade deal ever approved in this country.” Even after his presidency began, Trump openly flirted with the prospect of withdrawing from NAFTA altogether. Trump has presented the USMCA as a radically different deal, but the details tell another story. Despite a few substantive additions and modifications, the new agreement is, at its core, very similar to NAFTA.

The United States’ key concern in negotiations was automobile manufacturing, and many of the new provisions in USMCA reflect that. For example, the USMCA’s rules of origin stipulate that 75% of a vehicle’s parts be manufactured in either the U.S., Mexico, or Canada in order to receive exemption from tariffs. Under NAFTA, automakers qualified for tariff exemption if just 62.5% of a vehicle’s parts were sourced from the three countries. Also, a brand new provision in USMCA requires that, by 2020, 30% of vehicle production be completed by workers making at least $16 an hour, which is around three times the average Mexican auto-worker’s wage. To complement this provision, Mexico has agreed to pass a law that will facilitate worker unionization. However, while the agreement recognizes the United States’ right to impose tariffs of up to 25% on automobiles in the name of national security, two of the twelve side-letters that were released along with USMCA’s text grant both Mexico and Canada 2.6 million tariff-exempt vehicles, a higher quantity of cars than the amount that either country currently  exports to the U.S.

American pressure also yielded change for dairy trade between the U.S. and Canada. Under USMCA, Canada will allow the U.S. to export $560 million in dairy products, which accounts for 3.5% of Canada’s $16 billion dairy market. Canada had already offered the Americans similar market access under the Trans-Pacific Partnership (TPP), from which Trump withdrew shortly after assuming office in January 2017. An important difference, however, is that USMCA allows the U.S. to claim the entire quota alone, whereas the TPP would have forced the U.S. to compete with ten other nations.

A third U.S. demand that influenced negotiations over the new agreement was enacting a sunset clause allowing the trade deal to face re-approval or expiration every five years, breaking with NAFTA’s indefinite duration. Mexico and Canada both opposed this initiative, but ultimately a compromise was reached. If approved, USMCA will start in 2020, face a review by all three nations every six years, and either expire in 2036 or be extended until 2052.

Beyond these three contentious issues, most of USMCA’s new provisions are common sense updates of NAFTA. A case in point are the new provisions on digital trade, which has become a key aspect of North American commerce in the decades since NAFTA’s implementation. These provisions are in the spirit of the original NAFTA—they keep products bought online duty-free and offer liability protections for Internet companies operating in North America. Furthermore, intellectual property right protections have been increased, introducing new penalties for crimes like movie pirating and cable theft in all three countries.

Most of USMCA’s other provisions are directly borrowed from NAFTA. Most notably, NAFTA’s dispute resolution system that allowed companies to challenge tariffs and other protectionist measures before a panel of representatives from the three countries remains in place. The U.S. has accused the system of being biased against it, but Mexico and Canada have succeeded in preserving it. Sectors that NAFTA left untouched, namely Mexico’s energy sector, remain undisturbed under USMCA. All other tariff exemptions that NAFTA created, along with its standards on services and investment, remain in place, word for word.

USMCA may not be as different than NAFTA as Trump says it is, but it is on course for approval anyways. The next step is for it to be signed by Trump, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto before Peña Nieto’s term ends on November 30. Finally, USMCA will have to be ratified by the national legislatures of all three countries, a process that is unlikely to get underway before 2019.