Trump's NAFTA Changes

The USMCA Would Create U.S. Jobs and Raise Auto Prices

Image shows a folder open on the presidential desk. On the inside of the folder it reads:

Image by Theresa Chiechi © The Balance 2019

On Nov. 30, 2018, U.S., Mexican, and Canadian leaders signed the United States-Mexico-Canada Agreement at that year's G-20 meeting. On Sept. 30, 2018, their trade representatives had renegotiated North American Free Trade Agreement. It must be ratified by each country's legislature. As a result, it wouldn't go into effect before 2020.

After signing the agreement, Trump threatened to terminate NAFTA if Congress didn't approve the USMCA. House Democrats approved the deal in December 2019. Some Senate Republicans wanted steel and aluminum tariffs eliminated for Canada and Mexico and President Trump lifted these tariffs on May 19, 2019.  On Jan. 7, 2020, the Senate Finance Committee voted to approve the legislation and the agreement was moved to the full Senate.

The deal is an important component of President Trump's economic plan. He wanted to lower the trade deficit between the United States and Mexico. In 2018, Americans bought $80.7 billion more imports from Mexico than vice versa. The trade deficit with Canada was smaller in 2018 at $19.1 billion. NAFTA's purpose was to make North America more competitive in the global marketplace. NAFTA was the world's largest free trade agreement. 

6 Changes to NAFTA Under the USMCA

The new deal changes NAFTA in six areas.

First, auto companies must manufacture at least 75% of the car's components in Canada, Mexico, or the United States. It was 62.5% previously. At least 40% of the value a passenger car and 45% of a light truck must be made by workers earning at least $16 an hour. Autos that don't meet these requirements will be subject to tariffs. The agreement protects Mexico and Canada from any future U.S. auto tariffs.

These changes should create more U.S. jobs for autoworkers. But it could reduce U.S. jobs for cars sold to China. The higher labor costs will make them too expensive for the Chinese market. It will also increase the price of cars sold in America. It also means some small cars will no longer be sold in North America.

Second, Canada must open up its dairy market to U.S. farmers. It will eliminate its complex pricing scheme for Class 6 and 7 products. That includes milk protein concentrate, skim milk powder, and infant formula. It also allows certain cheeses to be marketed in Mexico and the United States. It opens the wine market in British Columbia to American wine.

Third, Mexican trucks must meet U.S. safety standards before crossing the border. That was a win for Mexico. It was promised in the first NAFTA agreement but withdrawn by the U.S. Congress. Mexico must also allow its workers to form unions.

Fourth, the new agreement provides more protection for patents and trademarks. This adopts many of the intellectual property rights negotiated in the Trans-Pacific Partnership abandoned by Trump.

Fifth, U.S. drug companies can sell products in Canada and Mexico for up to 10 years before facing generic competition. It was eight and five years, respectively, under NAFTA.

Sixth, companies can no longer use Chapter 11 of NAFTA to resolve disputes with governments. The only exceptions are U.S. oil companies. They are concerned Mexico may try to nationalize its oil industry again. But NAFTA's Chapter 19 dispute resolution panels remain. These arbitration panels rule on whether a NAFTA country treated a partner's overseas investments unfairly. The panels make sure U.S. corporations maintain the rights protected by the U.S. Constitution.

The agreement met President Trump's September 30 deadline. He needed to notify Congress 90 days before signing the deal. He wanted that to happen before new Mexican president, Andres Manuel Lopez Obrador assumed office on December 1, 2018.

The parties agreed to revisit the USMCA every six years. If they don't renew it, the deal will sunset in 16 years.

History of NAFTA Renegotiations

The NAFTA renegotiations began on Aug. 16, 2017. President Trump appointed U.S. Trade Representative Robert Lighthizer to represent the United States. 

In his first 100 days, Trump threatened to withdraw from NAFTA if Canada and Mexico refused to renegotiate. They were willing because the agreement is outdated. For example, it doesn't address internet commerce. It also needs to incorporate the environmental and labor protections that are in side agreements.

On March 5, 2018, the seventh round of the renegotiations concluded. Progress had been slow.

On May 31, 2018, Trump imposed a 25% tariff on steel and a 10% tariff on aluminum on Canada, Mexico, and the European Union. In retaliation, Canada imposed tariffs on $12.6 billion of U.S. imports. Negotiators tried to move forward despite the angry rhetoric from their nations' leaders.

Changes Trump Wanted But Didn't Get

The Trump administration claimed the dispute resolution panel eroded the sovereignty of U.S courts. For example, in 2017 the U.S. Commerce Department accused western Canadian provinces of subsidizing their lumber exports. It claimed they dumped low-cost lumber into the American market. The resolution panel ruled in favor of Canada. The Commerce Department threatened to impose a 20% tariff on Canadian lumber imports. But U.S. manufacturers wanted to keep the panel. They agreed it protects their foreign investments.

The administration wanted its trade partners to open up more of their government contracts to U.S. companies. At the same time, it wanted to use “Buy American” provisions to limit their firms from winning U.S. government contracts. 

The administration had also wanted to eliminate unfair subsidies. It also wanted state-owned companies, such as Mexico's Pemex, to operate more like private corporations. In 2013, Mexican President Enrique Peña Nieto allowed foreign direct investment in Pemex. But the company is a source of national pride, so it's unlikely to be completely privatized. 

In the past, Trump said he would like Mexico to end its value-added tax on U.S. companies. Trump claims that the VAT acts as a tax on U.S. exports to Mexico. A VAT tax is like a federal sales tax that's imposed on all companies in the supply chain. Mexico charges a 16% VAT tax on all business sales, whether it's to other firms or the consumer. When companies export the finished product to the United States, Mexico rebates the VAT tax. But U.S. companies that export to Mexico must pay the VAT tax. This may encourage U.S. companies to build factories in Mexico to receive the rebate and avoid the tax. 

Trump had asked Mexico to end the maquiladora program. This program allows U.S. companies to set up low-cost factories across the border in Mexico to assemble finished products. They then export the goods back to the United States. As a result, maquiladoras became responsible for part of Mexico's exports and employed a percentage percent of its workforce. That undercut American workers and sent jobs to Mexico. NAFTA expanded the maquiladora program by ending tariffs.

What Mexico and Canada Wanted and Didn't Get

Mexico and Canada both wanted increased access for business travelers. They also wanted inclusion of gender rights in the agreement. 

Canada did not get the United States to end tariffs on its lumber and dairy products. It also wanted Boeing to drop its lawsuit against Bombardier. The U.S. Commerce Department added a tariff of about 220% on the imports of Bombardier CSeries jets. As a result, Airbus will fund Bombardier's manufacturing plant in Alabama to skirt the tariff. That worsens Boeing's competitive position against Airbus, its biggest competitor.

Mexico was looking for an anti-corruption clause.

How Trump Could Have Easily Ended NAFTA

Trump could have ended NAFTA by submitting a notice under Article 2205 of the NAFTA agreement. He would have to do so 90 days before withdrawal. He did not need congressional approval to do this. Some experts refer to Section 125 of the Trade Act of 1974. It states that the president has the power to unilaterally withdraw from all trade agreements. Others refer to NAFTA's Implementation Act. They argue that, since Congress approved NAFTA, only it has the authority to withdraw. It's uncharted legal territory.

Even if the United States did withdraw from NAFTA, the other two parties could retain the agreement between each other. But it would reinstate tariffs on trade between the United States and Canada and the United States and Mexico. That would raise the costs of imports from Mexico. Before NAFTA, Mexican tariffs on U.S. imports were 250% higher than U.S. tariffs on Mexican imports. Trump also threatened to impose a 35% tariff on Mexican imports. By law, he can only raise tariffs by 15 percent for 150 days without congressional approval. 

Without NAFTA, Mexico and Canada would probably return to most-favored-nation trade status. Canada and the United States would probably reinstate their bilateral trade agreement. Exports from those countries would be assessed standard tariffs. At that point, importers would probably sue the U.S. government for making their costs higher overnight. 

How USMCA Affects the Economy

Trump's threat to end NAFTA weakened trade relationships with America's partners. Mexico created a backup plan if Trump made good on his threat to pull out of NAFTA. It turned toward the Pacific Alliance. In 2011, the alliance created a free trade zone between Mexico, Colombia, Chile, and Peru.

Mexico also improved its trade relationship with the EU. On April 21, 2018, the EU upgraded its trade agreement with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.

The new agreement might help restore some of the 500,000-750,000 manufacturing jobs lost in California, New York, Michigan, and Texas. On the other hand, it could raise the price of affected imports for American consumers. Inflation would increase as a result.

The new restrictions might reduce some trade. As of 2016, NAFTA quadrupled trade to $1.1 trillion.

In 2018, the United States imported $346.5 billion from Mexico. Mexico is the largest supplier of goods after China. The new agreement won't threaten the flow and price of these imports. They include oil, manufactured products, fruits, vegetables, coffee, and cotton. The only exception is automobile imports.

Similarly, 80% of Mexico's exports go to the United States. Restrictions on auto exports might damage Mexico's economy. It could force more Mexicans to immigrate to the United States.

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