NAFTA

Introducing USMCA, The New NAFTA

Team Leader: Samantha Jennings

Primary Researcher: Yonas Assefa Nigussie

The North American Free Trade Agreement (NAFTA) came into effect in 1994 and established an economic zone where goods could be traded with fewer restrictions between Canada, Mexico and the United States.1 This agreement has brought economic benefit to all parties involved since its implementation,2 yet after over two decades the United States sought to renegotiate the agreement. The negotiations that began in the summer of 2017 lasted over a year and resulted in a new tripartite free trade agreement called the United States Mexico Canada Agreement (USMCA).

The new USMCA agreement has changed critical policy concerning the automotive industry, which will ultimately have a major economic impact on all countries involved. One of the new changes stipulates that in order for a vehicle to qualify for tariff free trade, 75% of its parts must be sourced from North America. This raises the threshold from 62.5% that was set out in NAFTA.3 An additional provision states that 40%-45% of the vehicles must be made by workers that make over $16 USD.4 This wage provision is likely to increase Mexican imports of Canadian and U.S. parts as workers from the latter two countries already meet the wage requirements.5 Ultimately, the new automotive provisions are indicative of the United States’ attempt to protect its manufacturing sector, unfortunately at the cost of raising prices for the consumer.

Beyond the automotive industry, the procurement provisions also greatly impact the steel industry, as North American steel is an essential requisite for the tariff-free procurement thresholds.6 Under the USMCA, there are specific rules of origin regarding steel which require that 70% of vehicle makers steel and aluminum purchases are from North America.7 Furthermore, there remain tariffs on Canadian steel and aluminum products that have not yet been lifted and have already impacted the automotive industry as well as other aspects of the economy.8 Problematically, USMCA provides additional barriers to steel purchasing on top of the existing tariffs and legislation that exist in the affected countries.

The United States sought to gain competitive advantage in the manufacturing sector as well as changing the Canadian supply management regulation, two goals they have achieved with the USMCA.9 Despite these short-term gains, the new agreement could have negative long-term economic effects due to higher administrative costs and rising wages.10

  

Endnotes

1 United States of America. Department of Commerce. 6.1 – NAFTA Overview: General information on the North American Free Trade Agreement and NAFTA Basics video. [Washington], 2017. https://www.export.gov/article?id=NAFTA-An-Overview.

2 McBride, James., and Mohammed Aly Sergie. “NAFTA’s Economic Impact. Council on Foreign Relations.” Accessed November 09, 2018. https://www.cfr.org/backgrounder/naftas-economic-impact.

3 Callaghan, Mike. "NAFTA to USMCA – What's in a Name?" The Interpreter. October 04, 2018. Accessed November 09, 2018. https://www.lowyinstitute.org/the-interpreter/nafta-usmca-what-in-name.

4 "From NAFTA to USMCA: What's New and What's Next?" Center for Strategic and International Studies. October 23, 2018. Accessed November 09, 2018. https://www.csis.org/analysis/nafta-usmca-whats-new-and-whats-next.

5 “Exit NAFTA, Enter USMCA." Center for Strategic and International Studies. November 14, 2018. Accessed November 09, 2018. https://www.csis.org/analysis/exit-nafta-enter-usmca.

6 Jha, Veena., and Badri Narayanan. "Renegotiation of NAFTA: Pros and Cons for Canada and Mexico." International Institute for Sustainable Development. Accessed November 9, 2018. https://www.iisd.org/sites/default/files/publications/renegotiating-nafta-pros-cons-canada-mexico.pdf.

7 "NAFTA: USMCA Preserves Open Trade in North America." Scotiabank - Global Banking and Markets. October 1, 2018. Accessed November 9, 2018. https://www.gbm.scotiabank.com/content/dam/gbm/scotiaeconomics63/2018-10-01_I&V.pdf.

8 Bouchet, Max, and Joseph Parilla. "How Trump's Steel and Aluminum Tariffs Could Affect State Economies." The Brookings Institution. October 02, 2018. Accessed November 09, 2018. https://www.brookings.edu/blog/the-avenue/2018/03/06/how-trumps-steel-and-aluminum-tariffs-could-affect-state-economies/.

9 Callaghan, "NAFTA to USMCA – What's in a Name?"

10 "NAFTA: USMCA Preserves Open Trade in North America." Scotiabank - Global Banking and Markets.