Trump's NAFTA Changes

The USMCA Would Create U.S. Jobs but Raise Prices

Image shows a folder open on the presidential desk. On the inside of the folder it reads: "The new changes to NAFTA." Inside the folder is a document that reads: "NAFTA: Features new auto manufacturing regulation; opens canada's dairy market to U.S. farmers; regulates mexican trucks crossing the U.S. border; offers more protection for patents and trademarks; reduces competition for U.S. companies selling products in canada; Restricts companies for file for chapter 11"

Image by Theresa Chiechi © The Balance 2020

On Jan. 29, 2020, President Donald Trump signed the United States-Mexico-Canada Agreement (USMCA). The White House estimated it would create 600,000 jobs and add $235 billion to the economy.

The deal was an important component of President Trump's economic plan. He wanted to lower the trade deficit between the United States and Mexico. In 2019, Americans bought $101 billion more imports from Mexico than vice versa. The trade deficit with Canada was smaller in 2019 at $27 billion.

The new agreement was a renegotiation of the North American Free Trade Agreement (NAFTA). NAFTA's purpose was to make North America more competitive in the global marketplace. NAFTA was the world's largest free trade agreement.

How the USMCA Came Into Force

Final negotiations were completed on Sept. 30, 2018, meeting President Trump's Sept. 30 deadline. He needed to notify Congress 90 days before signing the deal. He wanted that to happen before the new Mexican president, Andres Manuel Lopez Obrador, assumed office on Dec. 1, 2018.

The USMCA was signed on Nov. 30, 2018, by U.S., Mexican, and Canadian leaders at that year's G-20 meeting.

It was then sent to each country's legislature to be ratified. 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, so President Trump lifted them.  On Jan. 16, 2020, it was passed by the Senate. The USMCA was signed by Donald Trump on Jan. 29, 2020 with bipartisan support.

For the USMCA to come into force all three countries needed to finish ratifying it. Mexico was the first to ratify the agreement in June 2019. Canada ratified it on March 13, 2020.

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

Six Changes to NAFTA Under the USMCA

The new deal changes NAFTA in six areas: auto manufacturing, dairy, truck standards, intellectual property, pharmaceuticals, and dispute resolution.

Auto Manufacturing

The USMCA requires auto companies to 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 of a passenger car and 45% of a light truck must be made by workers earning at an average of $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 jobs for U.S. autoworkers. But it could reduce the number of U.S. jobs manufacturing automobile exports to China. The higher U.S. labor costs will make cars 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.

Canadian Dairy Market

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 U.S. cheeses to be marketed more in Canada. It opens the grocery story wine market in British Columbia to American wine.

Mexican Trucks

The USMCA requires Mexican trucks to 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.

Patents and Trademarks

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.

Pharmaceuticals

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

Dispute Resolution

Companies can no longer use Chapter 19 of NAFTA to resolve disputes with governments. One of the few exceptions is U.S. oil companies. They are concerned Mexico may try to nationalize its oil industry again.

NAFTA's Chapter 11 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. 

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.

Both Canada and Mexico were willing because NAFTA was outdated. For example, it didn't address internet commerce. It also needed 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 from 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 neighboring 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 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 oil company Pemex. But the company is a source of national pride, so it's unlikely to be completely privatized. 

A value-added tax (VAT) is like a federal sales tax that's imposed on all companies in the supply chain.

Trump wanted Mexico to end its value-added tax on U.S. companies because it acts as a tax on U.S. exports. 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. It 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 the 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 C Series 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 six months 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, because 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 with each other. 

The absence of a trade agreement 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. 

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 probably would sue the U.S. government for making their costs higher overnight. 

How the 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 700,000 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 result.

The new restrictions might reduce some trade.

In 2019, the United States imported $358 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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