What’s the Difference Between USMCA and Good Old NAFTA?
BUENOS AIRES, ARGENTINA – December 2, 2018
Trump and Justin Trudeau and Enrique Peña Nieto signed the new free-trade deal – the U.S. Mexico Canada Agreement, also known as USMCA – in Buenos Aires this Friday, at the backdrop of the G-20 Summit to settle a dispute between America and its closest neighbors.
President Trump abides one of his election promises again. This times he achieved a review of NAFTA. The new better deal called USMCA governs $1.2 trillion worth of trade affecting nearly a half billion North American consumers. The three leaders signed it this Friday. The agreement is expected to take effect on 1 January 2020, the year when the 59th quadrennial US presidential election takes place. However, it is still must be ratified by the legislatures of all three nations. Considering the results of the midterm, the perspective of Congress voting for USMCA is almost non-existent.
Some journalists skeptically called new deal NAFTA 2.0, but there are some major differences. Three countries have been negotiating more than a year to reach the agreement. USMCA has been welcomed as a win-win-win by the leaders of each country. However, without a doubt, the US is the main beneficiary.
NAFTA worked fine for 24 years; what do we need to change it for? A quick look at the main differences between NAFTA and USMCA could help us answer this question.
The first difference relates to a stipulation that the agreement must be reviewed by the three nations every six years, with a 16-year sunset clause. The agreement can be extended for additional 16-year terms during the six-year reviews.
That means the US can renegotiate the conditions with its North American partners if there are some changes in the economy. More flexibility grants more stability. NAFTA has no such thing.
The second difference relates to regional value content requirements. The new deal stipulates that 75% of parts for cars built in North America would be made in North America in order to qualify for duty-free treatment. This figure was 62.5% in the old NAFTA.
That means that duty-free cars will have 12.5% more North America parts. It’s better for quality. It’s better for customers. It’s better for industry workers.
The third difference relates to labor value-content requirement. This rule requires that at least 40% of auto content and 45% of heavy truck content are made by workers earning at least USD $16 per hour. Moreover, the members have agreed to improve the working and safety conditions for workers and reduce discrimination against working women.
According to the Center for Automotive Research, current average hourly wages in Mexico are $3.41 in parts and $7.34 in assembly production against the proposed $16. The current production wage in US and Canada is $20.
The fourth difference relates to the increase in market access for US dairy products. Canada will give higher access to American dairy products coming into their market by setting higher import quotas in the new agreement. The USMCA will grant the US a 3.6% portion of Canada's domestic dairy market.
The US will get a juicy piece of Canada’s domestic $19 billion dairy market. That means 3.6% tariff-free access to it. It will allow American farmers to export about $684 million worth of dairy products. Under the never-ratified Trans-Pacific Partnership, the granted access was a mere 3.25%.
The fifth difference relates to new stipulations. The US, Mexico, and Canada have agreed to the inclusion of new provisions on e-commerce and digital trade which clearly did not exist in the old NAFTA. USMCA raises duty-free shopping limits to USD $100 to enter Mexico and CAD $150 to enter Canada without facing import duties. These figures stood at USD $50 in Mexico and CAD $20 in Canada in the old agreement. This is great news for online shoppers in Mexico and Canada. It is also a very positive development for shipping firms and e-commerce giants such as Amazon and eBay. Intellectual property will receive increased protection.
That means more free trade in North America. More free trade means higher economic growth. Harsher punishments will be added for pirated movies online and civil/criminal penalties for satellite/cable signal theft. The pact includes a slew of new rules for “strong and effective protection and enforcement of intellectual property rights.”
The sixth difference relates to the dispute-settlement system. Although NAFTA’s Chapter 19 (which allows member countries to bring grievances against other members over allegations of unfair trading practices) remains unchanged in the new agreement, the more important investor-state dispute-settlement system (which permits investors to file grievances against other governments) will phase-out between the US and Canada and it will be heavily restricted between the US and Mexico.
US 25% tariffs on steel and 10% on aluminum from Canada and Mexico stay in place.
The Canadian Prime Minister noted that there is more work to be done, calling the recent announcement that General Motors will close plants in Canada and the US "a heavy blow." You can read about it in this article.
Addressing Trump, he said, "And Donald, it's all the more reason why we need to keep working to remove the tariffs on steel and aluminum between our countries."
"General Motors has said that those steel and aluminum tariffs robbed it of a billion dollars in profits in the last year," Scott Horsley reports. In June, GM also warned the Trump administration that new tariffs could result in "a smaller GM."