There’s a lot to digest in the new trade agreement that the US, Mexico and Canada finalised in deadline-beating fashion, starting with a name change: If the new deal is adopted by all three countries, the North American Free Trade Agreement (Nafta) will give way to the United States-Mexico-Canada Agreement or USMCA. It’s a cosmetic change for an otherwise consequential set of revisions.
“It’s not Nafta redone, it’s a brand-new deal,” US President Donald Trump said at the White House. The pact includes major adjustments in several key areas of the countries’ trading relationships. The agreement sets new rules for automobile production. It reduces barriers for US dairy farmers to sell cheese, milk and other products to Canada. It retains a tribunal for resolving trade disputes that the US had sought to eliminate. It guarantees Canadian and Mexican manufacturers expanded access to some large US markets, such as cars and light trucks, but leaves lingering questions about their ability to avoid tariffs on steel and aluminium exports to the US. Here is what it means for the US and its trade allies following the agreement:
Bring more car production to US
Nafta required automakers to produce 62.5 per cent of a vehicle’s content in North America to qualify for zero tariffs. The new agreement raises that threshold to 75 per cent. That’s meant to force automakers to source fewer parts for an “Assembled in Mexico” (or Canada) car from Germany, Japan, South Korea or China. For the first time, the new agreement also mandates that an escalating percentage of parts for any tariff-free vehicle — topping out at 40 per cent in 2023 — must come from a “high wage” factory. The agreement says those factories must pay a minimum of $16 (Dh58.7) an hour in average salaries for production workers. That’s about triple the average wage in a Mexican factory right now, and administration officials hope the provision will force automakers to shift suppliers from Mexico to Canada or the US.
THE RISK: Automotive analysts have warned that the provision could have a damaging effect for Americans, by raising costs for US car buyers and incentivising automakers to move production to low-cost countries outside the US, such as China. Conversely, the final provision, as written, could prove relatively ineffective at shifting production — because it is not indexed to inflation. An average wage of $16 an hour will be less constraining in 2023 dollars than it is today.
Relief from future car tariffs for Canada and Mexico
Trump has repeatedly threatened, over the last year, to impose tariffs on imported automobiles. The Trump administration has undertaken an investigation that could lead to car tariffs, but it appears unlikely to finish up any time soon. The new agreement includes side letters that grant exemptions from any future US tariffs to 2.6 million imported passenger vehicles from Canada and Mexico. That’s slightly more vehicles than Mexico has exported to the US over the last year, and nearly 1 million more than Canada has exported.
THE RISK: The threat of car tariffs has clouded trade talks with several countries, including Japan and South Korea, which import cars and car parts into the US.
Win for US cheese
Perhaps the biggest sticking point in negotiations over the last month was the issue of Canada’s protection of its dairy market, including limits on imported dairy products from the US and government support that gives Canadian products an advantage on international markets against US ones. “Dairy was a deal breaker,” Trump said. The new agreement gives the US victories on both fronts. It gradually opens the Canadian market to more exported US dairy products, including fluid milk, cream, butter, skim milk powder, cheese and other dairy products. It also creates a list of cheese names that Mexico and the US agree can be marketed without restriction in their respective countries.
THE RISK: Other concessions were made, as is typically the case in trade agreements. For one, the “supply management” system Canada uses to protect its farmers would remain largely intact.
Win for Canada on dispute resolution
Trade agreements typically come with enforcement mechanisms. As part of its renegotiation efforts, the US sought to eliminate one of those mechanisms in Nafta: the so-called Chapter 19 provision, which gives the three countries a sort of neutral playing site to challenge each other’s impositions of tariffs, and other actions. Canada won the fight to keep that provision in the revised agreement. It did agree to eliminate another form of enforcement between the US and Canada, which allows investors to sue for relief from foreign countries’ actions.
THE RISK: Consumer groups have long criticised the resolution mechanism, contending it allows large corporations too much power to challenge environmental and other regulations. The new deal leaves that mechanism in place for disputes between the US and Mexico, but not for Canada.
Goodies for unions, banks and pharmaceutical companies
Among the small-but-significant items in the new agreement are a measure to push Mexico to make it easier for workers to form and join labour unions, steps to allow US financial services companies better access to Canadian and Mexican markets and a provision to extend the intellectual property protections of US pharmaceutical companies selling prescription drugs in Canada.
THE RISK: The last provision will grant longer protections to US biologic drugs, against biosimilar competitors, and it will probably raise the profits of those drugmakers when they sell in Canada.