Evan DeBerry

NAFTA for the 21st Century

On November 30, 2018, amid its’ on-going trade disputes with China, the United States,

along with Mexico and Canada signed a new trade agreement known as the USMCA (United

States – Mexico Canada Agreement). The USMCA was proposed by President Donald Trump to

improve free trade in North America and make a fairer market in this region. It deals with

agriculture, manufacturing, labor, and more. If passed by Congress, the USMCA will replace the

North American Free Trade Agreement (NAFTA), which has been enforced since 1994.

Currently NAFTA is still active and will be until the USMCA officially takes effect. The two are

very similar, with the USMCA essentially modernizing NAFTA and dealing with new issues,

including digital trade.

The North American Free Trade Agreement began with Ronald Regan forming a free

trade agreement with Canada in 1988 and Mexico following soon after. Negotiations went on for

years, even after Regan left office, with all three countries finally signing in December of 1992.

After another year of legislation, Bill Clinton signed it into law in December of 1993. NAFTA

went into effect on January 1st, 1994. The goal was to help Mexico develop their impoverished

economy, while at the same time providing a new export market for the U.S. and Canada. Since

NAFTA was enacted, regional trade increased from almost $300 billion to over $1 trillion in

2016. Foreign direct investments in Mexican stocks also increased from $15 billion to over $100

billion. Mexico and Canada have become the largest U.S. export destinations, with 49 of the 50

states counting one of the countries in their top export markets. In fact, Mexico and Canada alone

make up more than a third of the U.S.’s total exports. The U.S. economy has been estimated to

grow billions of dollars each year in the last two decades. Studies show that around 14 million

jobs rely on these exports to Mexico and Canada, while almost 200,000 more are created each

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year with incomes 15 to 20 percent higher than jobs that were lost due to the competitive market.

Not all effects were positive, however. The trade balance between the U.S. and Mexico went

from the U.S. having a $1.7 billion surplus in 1993 to a $54 billion deficit by 2014. Some believe

that this caused the loss of more than half a million jobs in the U.S. over this time period.

Manufacturing jobs also declined; with the automotive industry losing more than 300,000 jobs,

while Mexico gained somewhere from 120,000 to 550,000. It was found in 2014 that for each of

the 15,000 jobs lost annually, the economy gains around $400,000 from higher productivity and

lower prices for consumers.

President Trump called NAFTA the “worst trade deal ever”, and even made campaign

promises to renegotiate it. Trump kept these promises, while waging an on-going trade war

through ever escalating tariffs in late 2018, when he proposed the USMCA to improve trade

relations between the U.S. and its neighboring countries. He considered this to be “the most

important trade we’ve ever made, by far.” On the surface, the USMCA may seem like a mere

revision of NAFTA with not much variance, but there are many improvements indicated in

NAFTA. Some of these issues addressed include protection of the labor force, wages, intellectual

properties, the dairy and automobile markets, and online sales. The agreement has been

negotiated and signed by the leaders of all three countries. All that is left is for it to be ratified by

the legislative branches of each government; however, the U.S. House of Representatives has

expressed that they will not consider the USMCA until Mexico reforms its’ labor laws.

One of the key incentives of this new trade pact is to localize car manufacturing in North

America by exempting tariffs but requiring 75% of all vehicles’ parts, increased from the

previous 62.5%, must be produced in North America. It also states that 40 to 45% of the parts

must be made by workers with an hourly wage of $16. The hope is to raise incomes in Mexico

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more to the standards of the U.S. and Canada. Doing this will prevent U.S. companies from

moving to Mexico to cut labor costs. The USMCA deals with intellectual properties by

extending copyrights from 50 years after the creator’s death to 70 years after. It also extends the

period from 8 to 10 years before generic versions of certain pharmaceutical drugs can be

produced. Digital trade will also be protected under the USMCA. It prevents protectionism or

discriminatory policies from hindering the ever-expanding digital market, and bans duties on

digital content, like music, games, movies, and software. In addition, the forced localization of

computer network servers is prohibited.

Another item addressed in the USMCA is the dairy market. Currently, dairy exports from

the U.S. to Canada make up less than 0.1% of total trade. The USMCA hopes to open up

Canada’s dairy market, a $16 billion industry, by allowing the export of around $560 million

worth of products from the U.S. This move will grant the U.S. approximately 3.6% of Canada’s

total dairy market. Class 7 milk pricing will be eliminated completely. This practice has been a

big issue in the past for U.S. dairy farmers. Class 7 was first created in 2016 to deal with a large

surplus of non-fat solids, a vital ingredient in butter and other dairy products. The policy

essentially placed high tariffs on ultrafiltered milk exports, while at the same time lowering the

price of Canadian produced ultrafiltered milk and flooding the market with it. Since the

implementation of Class 7 milk, the U.S., along with Australia and New Zealand have been

voicing complaints to the World Trade Organization. It is believed that the USMCA will

officially put an end to Class 7 milk and help resolve this longstanding trade dispute between the

U.S. and Canada.

In addition to improving trade within the dairy and automotive industries, the USMCA

also aims to conserve the environment. Each country will now be required to undergo an

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environmental impact assessment process. Some of the items to be assessed include ozone layer

protection, protection of marine life from water pollution, air quality, biodiversity, dealing with

alien species, and management of forests. The environment section of the USMCA also takes

steps to protect the rights of indigenous people. It also recognizes the importance of the

environment in their lives and suggests consulting with them on future preservation efforts.

In yet another small victory, Trump successfully convinced both Canada and Mexico to

raise their de minimis thresholds. De minimis, Latin for “about minimal things”, deals with

things that are too small to be of any real significance. In economical terms, de minimis

exemptions are low cost items allowed across borders tax-free, without duties being paid, and

with little or no bureaucratic delay. A higher de minimis threshold means lower taxes and

quicker and easier access to market. Canada’s de minimis threshold will be raised from $20 to

$40 (CAD), regarding taxes; and from $20 to $150 (CAD), regarding duties. While this will give

retail companies in the U.S. slightly better chance to reach Canadian consumers; when you factor

in Canada’s high sales taxes, as much as 15% in many provinces, the higher threshold accounts

for merely a few dollars per transaction. Mexico will be raising its de minimis threshold from

$50 to $100 (USD). The U.S. market is already far more open, allowing an $800 (USD)

threshold to Canada, Mexico, and all other countries.

There are a few provisions in the USMCA designed to keep things running smoothly and

hopefully improve on what NAFTA has established, such as the changes made to the original

investor-state dispute settlement system (ISDS). With ISDS in place, investors were granted the

ability to sue governments for making changes to policies that could potentially be harmful to

profits or actions which they deemed discriminatory. The ISDS system has completely

eliminated between the U.S. and Canada, and is much less strict with Mexico, only now

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pertaining to certain sectors; oil and gas, power generation services, telecommunication services,

transportation services, and management of the ownership of infrastructure. On the other hand,

Canada fought and succeeded to keep in place a system that was used to resolve trade disputes

between countries, calling it a way to fight against protectionism. The USMCA marks the United

States’ first time setting rules regarding monetary policy in a trade agreement. The purpose of

these rules is to prevent currency manipulation and require each country to uphold a market-

determined exchange rate. Another provision grants the U.S. the ability to restrict cross border

truck shipments from Mexico but does not apply to Canada. This is likely to discourage drugs

and other contraband from entering the U.S. through its’ southern border. The USMCA contains

a sunset clause, which is an agreement that ends after an expressed amount of time unless

extended before the deadline. The trade agreement will expire after 16 years, unless agreed upon

by all three countries to renew it. The USMCA will also be terminated, it states, if either country

enters a trade agreement with a non-market economy such as China’s.

In conclusion, the USMCA may not be perfect and is subject to much criticism, but the

fact is that it is an obvious improvement on NAFTA. It effectively modernizes an agreement that

was made long before many of the current economical and technological advances were even

foreseeable. It even seeks to resolve some issues that were believed to be caused by NAFTA.

Most importantly, in theory it does what it promises, which is bring jobs back to U.S. soil and

encourage U.S. manufacturers to use locally produced materials. Canada and Mexico are

necessary to the U.S. economy and make up a large portion of the country’s exports, so it is in

the U.S.’ best interest to continue the alliance that was forged decades ago. They are powerful

allies to have, especially with this trade war going on. Only time will tell if the agreement is

passed by Congress and becomes the new standard for America’s free trade.

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References:

“What is the USMCA?”. USMCA Coalition. https://www.usmcacoalition.org/get-the-facts/

Wikipedia contributors. “North American Free Trade Agreement”. Wikipedia, The Free
Encyclopedia. https://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement.
Wikipedia, The Free Encyclopedia, 2 April, 2019. Web. 2 April, 2019.

Arnold, Brandon and Bryan Riley. “NAFTA 2.0: What Comes Next For the USMCA and
American Trade Policy”. National Taxpayers Union. 3 October 2018.
https://www.ntu.org/publications/detail/nafta-20-what-comes-next-for-the-usmca-and-american-
trade-policy.

McBride, James and Mohammed Aly Sergie. “NAFTA’s Economic Impact”. Council on Foreign
Relations. 1 October, 2018. https://www.cfr.org/backgrounder/naftas-economic-impact.

Kirby, Jen. “USMCA, the new trade deal between the US, Canada, and Mexico, explained”.
Vox. 2 October, 2018. https://www.vox.com/2018/10/2/17923638/usmca-trump-nafta-trade-
agreement.

Johnson, Kelsey. “Dairy 101: The Canada-U.S. milk spat explained” iPolitics. 22 April, 2017.
https://ipolitics.ca/2017/04/22/dairy-101-the-canada-u-s-milk-spat-explained/.

Murray, Jean. “What Does “De Minimus” Mean in Business Taxes?”. The Balance Small
Business. 7 January, 2019. https://www.thebalancesmb.com/what-does-de-minimis-mean-for-
business-taxes-398218.

Caporal, Jack and William Alan Reinsch. “From NAFTA to USMCA: What’s New and What’s
Next?”. Center for Strategic & International Studies. 3 October, 2018.
https://www.csis.org/analysis/nafta-usmca-whats-new-and-whats-next

Bobechko, Janet. “USMCA- Impact on environmental issues”. Norton Rose Fulbright.

November 2018.
https://www.nortonrosefulbright.com/en/knowledge/publications/0c1e6826/usmca---impact-on-
environmental-issues