What Is the USMCA?

The USMCA Explained in Less Than 5 Minutes

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The USMCA, or the United States-Mexico-Canada Agreement, is a free trade agreement between the three nations. It replaced the North American Free Trade Agreement (NAFTA) in 2020.

While USMCA continues to aim to eliminate trade barriers as NAFTA did, it takes additional measures to address key issues like U.S. job losses in the automobile industry, rules surrounding e-commerce, and intellectual property rights. Let’s take a closer look at what the USMCA covers. 

Definitions and Example of the USMCA

The USMCA, or United States-Mexico-Canada Agreement, is a free trade agreement that replaced the North American Free Trade Agreement (NAFTA). It has been in place since July 1, 2020. 

The goal of the USMCA is to create a more modernized and balanced environment for trade among the United States, Mexico, and Canada. The USMCA kept some of the provisions from NAFTA but updated and added rules surrounding the areas of digital trade, small and medium-sized enterprises, the environment, agriculture, labor, and more.

New rules, for example, prohibit custom duties for electronically transmitted (digital) products and promote cooperation on cybersecurity issues, among many other changes. 

How the USMCA Works

The USMCA was a product of the Trump administration, which said its priority was to reduce the trade deficit and create more U.S. job opportunities for the middle class. 

Key issues for the U.S. included enforcement of labor and environmental provisions, intellectual property rights, and establishing the role of Congress in revising, approving, or potentially withdrawing from the agreement in the future. 

The resulting legislation, the USMCA, was signed into law in Mexico in June 2019, in the U.S in January 2020, and in Canada in March 2020. The USMCA entered into force on July 1, 2020.

The USMCA keeps many provisions that were in NAFTA but provides many other updated rules and changes. Some of the main rules introduced by USMCA include ones that affect the U.S. auto industry workers, agricultural products, intellectual property, and small and medium-sized businesses (SMEs).

Rules of origin for automobiles, trucks, and other products

The agreement requires that 75% of auto components be made in North America (an increase of 12.5% compared to NAFTA). Wages for automobile workers were also affected, with rules now requiring 40% to 45% of auto content to be made by workers earning at least $16 per hour.

Modernizing and strengthening food and agricultural trade

Canada and Mexico are the first and third, respectively, largest export markets for U.S. agricultural and food products, so decreasing tariffs and restrictions on a number of products may help American farmers. In addition, the three nations will cooperate on agricultural biotechnology efforts, such as gene editing in agriculture.

Under the new rules, for example, U.S. farmers have greater access to Canadian supply-management-restricted dairy, poultry, and egg markets as the agreement raises the amount of those goods that can be imported tariff-free. In turn, the U.S. granted more access to Canadian dairy, sugar, peanuts, and cotton.

New protections for U.S. intellectual property and ensuring opportunities for trade in U.S. services

USMCA aims to strengthen the protection of intellectual property in an effort to foster innovation and drive economic growth. For example, copyright protection is extended from the life of the author plus 50 years to plus 70 years. 

The agreement requires law enforcement to stop intellectual property theft, including counterfeit or pirated goods, and unauthorized camcording of movies. It sets free trade for digital products, such as video games, software, and music by prohibiting custom duties and other discriminatory measures.

Ensuring small and medium-size enterprises (SMEs) benefit from the trade agreement

U.S. small and medium-sized enterprises (SMEs) often lack funds to pay for customs duties and taxes due to smaller trade volumes. 

The USMCA increases the tax-free threshold from C$20 to C$40 for imports into Canada and sets the duty-free level at C$150. Mexico allows products up to $50 to remain tax-free and allows duty-free shipments up to $117. These changes make it cheaper for small U.S. businesses to ship to these countries.

Other changes in the USMCA that are intended to reduce trade barriers and increase efficiency are:

  • The requirement of uniform custom procedures at all ports of entry in all three countries
  • A reduction in trade costs by increasing automation to process custom shipments that enter a country
  • A reduction in paperwork for express shipments valued below $2,500

Early Effects of the USMCA on the United States Economy

It’s still too early to know the true effects of USMCA. Some economists and analysts believe the USMCA is not expected to have a measurable effect on overall U.S. trade with Mexico or Canada. This is due to the reduction of tariff and non-tariff barriers already in place since NAFTA. In addition, they do not expect to see a measurable effect on jobs, wages, overall economic growth, or the U.S. trade deficit.

One study by the U.S. International Trade Commission (ITC) in 2019 concluded that the most significant effects on the U.S. economy were likely to be in the automobile sector and digital trade.

Key Takeaways

  • The USMCA is a free trade agreement between the United States, Mexico, and Canada.
  • The USMCA replaced the North American Free Trade Agreement (NAFTA) in 2020 by updating and adding new policies intended to promote trade.
  • The agreement’s new rules address topics like intellectual property and small shipments as well as issues with trade-in automobiles, agriculture, and digital products.