How the New Agreement Between the U.S., Mexico, and Canada Trumps NAFTA and Advances Trade Between Our Countries
About the Deal
The U.S., Mexico, and Canada have a negotiated a new trade deal that binds the respective economies of each. The United States, Mexico, Canada Agreement (USMCA) governs over $1.2 trillion worth of trade and impacts over 500 million consumers in North America. The USMCA takes effect in 2020 subject to Congressional approval and replaces the controversial North American Free Trade Agreement (NAFTA).
What's In the Deal?
The new deal includes new rules for auto production designed to keep more of the parts manufacturing and assembly process here in North America. This will generate more jobs, increased worker protections, and higher wages as a result. Also, increased access to the Canadian dairy market for U.S. farmers. New intellectual property protections. Notable items not addressed in this deal are steel and aluminum tariffs. Something left unchanged in this deal from NAFTA are the rules surrounding dispute resolution. There's also something here that has significant implications for trade with China as well. We'll explore key aspects of the USMCA later in the article.
The Politics of the Deal
On the campaign trail in the 2016 Presidential Election, President Trump repeatedly criticized the poorly negotiated U.S. trade agreements and promised, if elected, to renegotiate those agreements. He singled out NAFTA as a prime example of a terribly bad trade deal for the U.S. His message of renegotiating these poor agreements that have disadvantaged U.S. workers and manufacturers resonated in states that the GOP hasn't won in a long time including Michigan, Wisconsin, and Pennsylvania. Trump won each of these states in the election, carrying him to the Presidency. The USMCA does away with NAFTA and significantly improves upon it. This will be seen as a major victory in those states and throughout the country.
Trump tweeted after the deal that the USMCA...
"Late last night, our deadline, we reached a wonderful new Trade Deal with Canada, to be added into the deal already reached with Mexico. The new name will be The United States Mexico Canada Agreement, or USMCA. It is a great deal for all three countries, solves the many......"
"....deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world. The USMCA is a historic transaction!"
Who Likes the Deal?
The deal is receiving wide-spread support from U.S. industry and trade reporters including The Business Insider, Fox Business, the Washington Times, The Washington Examiner, The Wall Street Journal, and others as you can see here.
More praise came from the United Steelworkers, the United Autoworkers, and the Governor of Wisconsin, Scott Watson.
U.S. Trade Representative, and USMCA Negotiator, Robert Lighthizer said,
“This is better than anything the United States has ever negotiated before,” U.S. Trade Representative Robert Lighthizer said. “It’s going to make a real difference for working men and women in this country. Now, some Wall Street guys are going to have to figure out another way to make a fortune, but in terms of working men and women, and farmers and ranchers it’s going to make a big difference.”
Who Doesn't Like It?
While the overwhelming response to the USMCA has been positive, some have been more critical of the USMCA saying they don't believe it's a big enough upgrade over NAFTA or what was proposed in earlier TPP discussions. They also express discomfort over some of the early tensions of the negotiating process between the U.S., Mexico, and Canada.
What Do We Think?
We think that most of the criticism is just politically driven. The USMCA is a significant upgrade over NAFTA and what might have been discussed earlier in a potential TPP deal. More than a nice-to-have upgrade, the USMCA was a very necessary upgrade as NAFTA was not only a poor trade agreement that unnecessarily disadvantaged U.S. workers and manufacturers, but it had also become a very outdated agreement. The USMCA will be beneficial not only to the U.S., but to all three countries going forward.
OK, So What About the Details of the Agreement?
Let's take a look at a few of the key aspects of the USMCA...
Auto Manufacturing
The USMCA requires that 75% of a car's components come from North American manufacturers in order to qualify for zero tariffs. That's up from 62.5% under NAFTA. These new "rules of origin" should equate to more manufacturing being done in North America.
Additionally, 30% of the work done in manufacturing cars and trucks must be done by "high-wage" manufacturers, where workers are making at least $16/hr. The current average wage in Mexico for parts manufacturers is only $3.41/hr and for assembly workers it's $7.34/hr. The current production wage in Canada and the U.S. is $20/hr. The USMCA's requirements here should push wages up in Mexican factories and move more auto manufacturing work into the U.S. and Canada as well.
The Trump Administration will likely need to increase the current tariff of 2.5% for cars that don't meet the 75% requirement in order to ensure compliance, otherwise some manufacturers may prefer to pay the tariff than meet the 75% requirement.
The agreement also increases protections for Mexican workers and makes it easier for them to join unions. This makes it less likely American manufacturers would prefer to eliminate jobs in America and outsource them to Mexico.
Further, environmental and safety requirements were strengthened for all cars being manufacturing in Mexico.
Dairy
Canada has restrictions in place that protect their own dairy farmers by limiting the import of U.S. dairy products. Canada further supports it's dairy farmers in a way that gives them an inherent advantage on international markets versus U.S. dairy farmers. Through the USMCA, the U.S. was able to earn concessions from Canada in both regards. American dairy farmers will now enjoy greater access to Canadian markets allowing them to sell more dairy products including milk, butter, cheese, ice cream, and more to our neighbors to the north.
Michael Dykes, President and CEO of the International Dairy Farmers Association, said...
"We are pleased to see President Trump follow through on his commitments to dairy."
In addition, U.S. negotiators were able to open up grocery store shelves in British Columbia to U.S. wines, which can now be sold side-by-side with Canadian wines. Agricultural gains in areas such as wheat grading were also made in the USMCA.
Intellectual Property
One of the major improvements over NAFTA is the USMCA's tackling of intellectual property issues. Here the USMCA provides much greater protections for innovators, copyright holders, and patent holders. These protections will be welcomed by biologic drug manufacturers and content providers like the Motion Picture Association of American, the Recording Industry Association of America, the Business Software Alliance, and others.
One notable bit of detail regarding the IP language in the USMCA is that it didn't include any "fair use" language which gave educators and others wide ranging rights in the use of intellectual property. It also did not include specific exceptions for rights users in the use of intellectual property as was outlined in the TPP. Instead it provides only a three-step test for the use of intellectual property by rights users that seems to afford less flexible for rights users in the use of intellectual property. In other words, with regard to intellectual property, the USMCA favors the protection of the rights holders over that of the rights users.
Sunset Clause
One of the fatal flaws of NAFTA was that it had no expiration date. Somehow those that negotiated the agreement believed it would last forever. That shows just how much foresight was missing from that agreement. It couldn't possibly have anticipated the technological changes that would come and therefore it couldn't keep up with the times or the changing nature of trade. The USMCA doesn't make the same mistake. It has a sunset clause built in. The agreement will expire in 16 years. Every six years the parties must return to the bargaining table to renegotiate it and then to recertify it. This will keep the agreement relevant into the future.
Dispute Resolution
Trade agreements typically have mechanisms for enforcing the agreement and settling disputes. In the case of NAFTA, the U.S. felt that Mexico and Canada had too much power in disputing tariffs they felt were unfairly implemented. The U.S. sought to change the dispute resolution provided by NAFTA as a result, but ultimately agreed to leave the dispute resolution process unchanged which represented a win for Canada.
What About Steel and Aluminum Tariffs?
One fascinating aspect of the deal is what is absent from it -steel and aluminum tariffs. The U.S. sought to deal with these tariffs as a matter separate of the USMCA. Both Mexico and Canada wanted to become exempt from these tariffs as part of the USMCA but that didn't happen. The steel and aluminum tariff negotiations will now take place separately. In the meanwhile, existing U.S. tariffs of 25% on steel and 10% on aluminum from Mexico and Canada will remain in place. There's been talk that these negotiations will begin immediately and it's possible that some form of quotas may replace the tariffs but that remains to be seen.
When asked about these negotiations, U.S. Trade Representative Robert Lighthizer had this to say...
"If we're going to do something with those two countries, it's got to be something that maintains the integrity of the steel program, which the President believes is very good for the country -- for the steel industry, but also for the country generally. So we have to maintain that. We have to also take care of the needs of Canada and Mexico. So there is a balance there. We've had some discussions, and we'll see where it goes. To be honest, in the last several weeks, we've been pretty much focused right on this issue and on this really massive trade agreement. And we'll see how that goes. We'll probably take a few days to catch our breath, and then we'll start talking to them about that."
What Message Does the USMCA Send to China?
One of the more intriguing aspects of the USMCA is the message it sends to China. This comes via the limitations on trade agreements with non-market governments that were built into the deal. When asked about this, Lighthizer responded as follows...
"There is a provision in here that says that if someone we have a trade agreement with enters into a trade agreement with a non-market economy, we want to sit back and have a review of it. That's a reasonable thing to do. ...as an example, if one of the countries entered into a free trade agreement with China, that's something that potentially could change the economics of the deal from our point of view, and that's something we would consider."
In other words, if other USMCA countries were to enter into a free trade agreement with China, the U.S. would want to revisit the USMCA. This is an extraordinary clause as it basically says to Mexico and Canada, if you enter into a free trade agreement with China, we'll walk. That's a very strong deterrent. It remains to be seen if the U.S. will seek this same clause in upcoming trade negotiations with other countries as well to further constrain China.
No matter, it's clear that U.S. negotiators are sequencing their trade agreements strategically to strengthen their position for their most significant battle on trade - the trade battle with China.
Here's more on that from Peter Navarro, Assistant to President Trump on Trade and Manufacturing...
The Trump Strategy
There were several key factors contributing to the success of the USMCA negotiations from a U.S. perspective. Here are a few worth mentioning...
Divide and Conquer
Instead of negotiating this agreement multilaterally, which Trump is not in favor of, Trump preferred a bilateral approach. That meant he sequenced the negotiations beginning with Mexico. Once an agreement was in place with Mexico, Canada was in a much more difficult position given their need to be included in this agreement.
A Willingness to Walk Away
Once the agreement was in place with Mexico, Trump announced he was willing to walk away from an agreement with Canada if necessary.
A Deadline Set
Trump placed a deadline on Canada for a deal by September 30th. This dramatically increased the urgency on the Canadian side to get a deal done. With the urgency came more activity and ultimately additional concessions that cleared the way for agreement.
Tariffs and Tension
After proclaiming his willingness to walk away, Trump announced that if Canada was not included in the agreement that he'd simply hit them with a 25% tariff on their auto exports. This dramatically increased the tension in the negotiations with Canada. Anyone who followed these negotiations from the beginning knows that there were tensions all along between Trump and Mexican President Nieto and Trump and Canadian Prime Minister Trudeau. Experienced negotiators understand however that tension is a necessary part of the negotiating process. In fact it's the tariffs and the tension that brought Mexico and Canada to the table. Trump said it himself,
"Without tariffs, we wouldn't be talking about this deal."
Trump's Negotiating Style
When asked about the President's negotiating style, his tough approach, his rhetoric, and the contentious relationship he's seemingly had with Trudeau, Jared Kushner responded as follows...
"I think the President is very instinctive. I think he's also very deliberate. He knows what he wants to accomplish and he's very focused on trying to achieve it. In the trade paradigm -- and I'm much newer to trade than obviously Ambassador Lighthizer is -- I think a lot of the counter parties we deal with have a very good arrangement with our country that they are currently enjoying. So their goal is to try to make sure we don't get to an agreement quickly. I think the President is very focused on results, and he's very focused on trying to see us do it at a speed more that he's used to -- more than what trade negotiators are used to. So that's kept, obviously, our feet to the fire, and it's also pushed us forward. I think it's also the actions he's taken. I mean, he is very serious about the fact that if he's not able to achieve negotiated outcomes, he's not going to shy away from unilateral outcomes because he does believe that very -- you know, what he says, he believes. And he would like to see us achieve outcomes that obviously bring jobs back to America, that stop companies from outsourcing jobs that eliminate jobs for American workers, and he wants to see us open up more export markets. And so his objectives are very clear. I think they make a lot of sense. I think they bring more wealth to our country. I think they bring more jobs to our country. And he's pushed very hard to do it. I mean, there's not a day that goes by that he's not speaking to -- well, I speak to him multiple times -- but he'll call Ambassador Lighthizer once, twice, three times a day. He really wants to know the status of these negotiations and he's very focused on trying to deliver the outcomes."
A Final Assessment By the Negotiators
There are many people and many departments party to a negotiation like this but the two lead negotiators were U.S. Trade Representative Robert Lighthizer and Trump Advisor, Jared Kushner. Here's what both had to say about the USMCA negotiating process:
From Robert Lighthizer
"This was a good negotiation and we're very pleased with it. We think it's groundbreaking in a number of areas. I would single out the rules of origin for automobiles, which we think is really going to bring jobs back to America. The labor provisions are extremely important; it's extremely significant. The intellectual property provisions are important. There's a great deal in here for agriculture -- particularly dairy, but agriculture across the board. There's a whole lot in here for what you would think of as kind of the new economy: the digital trade and financial services. There's a serious provision in here on currency, which we can talk about. And there also are issues -- I mean, there are provisions on state-owned enterprises. And I guess the last thing that I would mention is the review mechanism that people refer to as "sunset." And so we can talk about all those things in any way that you like. I'm reasonably pessimistic about all things involving negotiations. But somehow, they manage to get done. So this is just another case of that."
From Jared Kushner
"...we were able to all come together, work as partners together on the same side of the table with the Canadians and the Mexicans, to figure out ways to create more opportunities for our countries to do more business together and for our workers to do better."
On any speculation of a mid-term deadline to negotiate a deal, Kushner said...
"To date, our focus has been making the right agreement. And one thing the President was very clear on is: "Take your time." You know, a lot of people were saying, "Will you get this done before the midterms?" And what I would say to them is, "We're going to get it done when we have the right deal." And the President really did not want any artificial deadlines. He's focused on the long-term benefit of America's workers and America's farmers."
Resources
Want to see more about the details of the agreement? See the full text here...
https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement
https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico