The USMCA: Key Changes to NAFTA and Their Economic Impacts
The United States-Mexico-Canada Agreement (USMCA) was signed by the three nations on November 30, 2018. After over a year of deliberation in Congress, a modified form was passed by the House in December of last year, ratified in the Senate a month later, and signed by President Trump on January 29, 2020.[1] Though yet to be implemented, it is generally viewed as a modernizing update to NAFTA with only moderate changes for most industries, but with potentially significant impacts on a select few.
In April 2019, the USITC released its in-depth analysis of the economic impacts of the proposed trade agreement, and it forecast relatively modest gains across sectors. This is perhaps a predictable outcome, as the USMCA consists largely of rule changes, with NAFTA having already eliminated tariffs across sectors. Specifically, it estimated output in agriculture, manufacturing and mining, and services to increase by 0.18%, 0.57%, and 0.17%, respectively, [2] with a boost to GDP of 0.35% and roughly 176,000 jobs (0.12% of employment) created over a six-year period.[3] The most consequential changes relate to the automotive and dairy industries, labor, and digital trade, with a handful of other important modifications and new provisions.
Automobile production: rules of origin and labor value content requirements
The automobile industry, including automobile parts and finished vehicles, is likely to experience the greatest effect upon its production and consumption patterns. For automobiles to qualify for duty-free treatment, new rules of origin standards mandate that 75% of auto content be made in North America,[4] up from 62.5% under NAFTA. Additionally, “labor value content” rules require that 40-45% of auto content be made by workers earning at least $16 per hour. These two broader requirements are further subdivided into separate sets of rules for parts categories and employment at the plant level.[5]
Together, these automobile industry provisions are intended to encourage domestic production of automobiles and parts, localize a greater portion of the auto supply chain, and support U.S. workers by protecting and promoting high-wage labor. Though the USITC report estimates a net gain of 28,000 jobs (including 30,000 gained in auto parts production and 1,500 lost in vehicle production), it expects a small price increase for cars (1.6%) and trucks (0.4%), and for total U.S. consumption to decline by 140,000 vehicles.[6] It also predicts a general decrease in both U.S. vehicle production and regional trade in vehicles, with imports from the rest of the world increasing.[7]
Employment and labor implications
USMCA also included a stipulation that Mexico overhaul its labor laws,[8] a key item in garnering bipartisan support in the U.S. The reforms are meant to enhance protections of Mexican workers, particularly pertaining to their ability to unionize, which is more broadly applicable to the manufacturing sector at large. The USITC report estimates that these provisions will raise Mexican union wages by 17.2%,[9] assuming enforcement is effective.
To enforce new labor protections, the USMCA includes a “rapid-response mechanism” that allows a panel of labor experts – agreed upon by both parties involved in a complaint – to verify corrective action (or lack thereof) in a facility upon which a complaint has been filed.[10] Failure to meet compliance may result in denial of a specific facility or firm’s goods to pass customs, and this gives industries a new tool in ensuring fair competition.
Access to the Canadian dairy market
The USMCA allows U.S. dairy producers greater access to Canadian markets by reducing Canada’s tariff-rate quotas and eliminating low-tier price classes for milk, largely in exchange for easing protections on U.S. sugar producers.[11] The USITC report estimates these changes will result in a $226.8 million (0.1%) gain in dairy product output and $314.5 million (7.1%) in additional exports to Canada and Mexico.[12] Furthermore, U.S. producers of poultry, eggs, and egg products will gain greater access to Canadian markets incrementally over the agreement, and are expected to increase exports by roughly 50% ($183.5 million) annually by the 6th year of the agreement.[13]
Intellectual property and digital trade
The USMCA’s updated copyright protections have been extended from 50 years to 70 years past the life of the author, while also enhancing a broad range of other IP protections covering numerous sectors.[14] It prohibits levying duties on digital products that are distributed electronically, such as e-books, videos, music, software, and games. Equally significant, it ensures the free flow of data across borders and limits data localization requirements.[15] As one might expect, there are no such rules under the 26-year-old NAFTA. Finally, it is worth noting that the USMCA originally included a provision to protect biologic drugs from generic competition for 10 years – while such exclusivity is granted for 12 years in the U.S., this protection is allowed for only eight years in Canada and five in Mexico. However, that article was scrapped shortly before the agreement was ratified in the House.[16]
Other noteworthy items
Review, sunset, and renewal. Every 6 years, the agreement will be reviewed by the three parties to determine whether to extend it for a new 16-year period. If no such agreement is reached, parties will review annually to extend it for another 16-year period, or the agreement will otherwise expire after the period concludes.[17]
Environment. Chapter 24 of the USMCA includes enforceable commitments to preventing illegal fishing and forestry, as well as promoting improved air quality and reducing marine litter. However, much of this section of the agreement followed the language and guidelines of NAFTA and existing multilateral environmental agreements.[18]
ISDS. The investor-state dispute settlement (ISDS) mechanism – the object of major controversy during TPP negotiations – will be phased out over 3 years. However, there is no phase-out for some firms in oil and natural gas, power, telecommunications, transportation, and some infrastructure.[19]
De minimis threshold. Canada and Mexico each agreed to raise their de minimis thresholds, the dollar value under which shipped items can be allowed to pass customs duty-free. This is intended to benefit small- and medium-sized businesses, and is expected to increase e-commerce exports by $332 million to Canada and $91 million to Mexico.[20]
Foreign exchange. The agreement includes the creation of a committee to ensure transparent and market-based exchange rates, so as to prevent competitive currency devaluations – a first for trade agreements more generally.[21] As this is not a point of concern between the three countries, it is thought to be a precursor for future trade deals, particularly with China.
Non-market economies. The other parties can back out of the USMCA if one enters into a free trade agreement with a non-market economy, such as China.[22]
In sum, the USMCA will likely have a modest effect when measured by topline economic indicators. However, important changes in trade patterns and production could significantly affect workers and firms in select industries, and the regional pact at long last incorporates 21st century features of international trade.
Select tables from the USITC Report
Table 1. Economy-wide effects of the USMCA [23]
Table 2. Changes in trade from USMCA [24]
Table 3. Changes in auto production and trade from USMCA [25]
Notes
[1] The final remaining hurdle before going into effect is ratification in Canada’s House of Commons, which is all but assured. See Johnson, Kelsey, “Canada kicks off USMCA ratification process, urges bi-partisan co-operation,” Reuters, January 27, 2020, accessed February 5, 2020 at https://www.reuters.com/article/us-usa-trade-canada/canada-kicks-off-usmca-ratification-process-urges-bi-partisan-co-operation-idUSKBN1ZQ26L
[2] United States-Mexico-Canada Agreement: Likely Impact on the U.S. Economy and Specific Industry Sectors (Investigation No. TPA-105-003, USITC Publication 4889, April 2019) p. 17, available at https://www.usitc.gov/publications/332/pub4889.pdf
[3] Id. at 37. The model also predicts exports to Canada and Mexico to increase by about 5.9 and 6.7 percent ($19.1 billion and $14.2 billion), respectively. Regarding the model’s 6-year forecast period, see p. 43.
[4]“Rebalancing Trade to Support Manufacturing,” USTR, accessed February 4, 2020 at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/rebalancing.
[5] For a summary, see United States-Mexico-Canada Agreement: Likely Impact, pp. 74-81. There are yet further requirements for steel and aluminum sourcing, which are also applied to other downstream industries that are steel- and aluminum-intensive (p. 81).
[6] United States-Mexico-Canada Agreement: Likely Impact, p. 19.
[7] Id. at 86 (Table 3.8). The authors note that these changes are small relative to total sales. However, some analysts are more pessimistic about the larger picture regarding the competitiveness of the U.S. auto industry. See Schott, Jeffrey J., “Five Flaws in the USMCA and How to Fix Them,” Peterson Institute for International Economics, August 6, 2019, available at https://www.piie.com/blogs/trade-and-investment-policy-watch/five-flaws-usmca-and-how-fix-them.
[8] See, for instance, Lighthizer, Robert, “Letter to Mexico’s Under Secretary and Chief Trade Negotiator for North America Jesus Seade Kuri,” December 16, 2019, available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/december/ustr-responds-mexico-usmca.
[9] Villarreal, M. Angeles and Cathleen D. Cimini-Isaacs, “USMCA: Labor Provisions,” Congressional Research Service, January 10, 2020, available at https://fas.org/sgp/crs/row/IF11308.pdf.
[10] United States-Mexico-Canada Agreement: Likely Impact, p. 25.
[11] Id. at 117-118.
[12] Id. at 23. Imports are also expected to increase, albeit by a smaller amount ($227.9 million, or 9.0%).
[13] Id. at 23. See also “Agriculture: Market Access and Dairy Outcomes of the USMC Agreement,” USTR, accessed February 4, 2020 https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/market-access-and-dairy-outcomes
[14] “Modernizing NAFTA into a 21st Century Trade Agreement,” USTR, accessed February 4, 2020 https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/modernizing.
[15] Many of these modernizing provisions were in fact carried over from TPP negotiations. See “Trans-Pacific Partnership Fact Sheet: Promoting Digital Trade,” USTR (undated), available at https://ustr.gov/sites/default/files/TPP-Promoting-Digital-Trade-Fact-Sheet.pdf.
[16] Wiseman, Paul, Linda A. Johnson and Kevin Freking, “North America trade pact deals rare setback to Big Pharma,” Associated Press, December 19, 2019, accessed February 4, 2020 at https://apnews.com/fb54abbce60e1fe44926becb84e86edf
[17] United States-Mexico-Canada Agreement: Likely Impact, p. 266.
[18] Vaughan, Scott, “USMCA Versus NAFTA on the Environment,” International Institute for Sustainable Development (undated), accessed February 4, 2020 at https://www.iisd.org/library/usmca-nafta-environment.
[19] United States-Mexico-Canada Agreement: Likely Impact, p. 24.
[20] Id. at 24.
[21] Id. at 263
[22] Id. at 262.
[23] Recreated from Tables 2.2 and 2.3 combined, from United States-Mexico-Canada Agreement: Likely Impact, p. 44. The model predicts increased real GDP when USMCA provisions that reduce policy uncertainty for international data transfer, cross-border services, and investment are given a moderate weight. When these provisions are given no weight, the model predicts small negative effects for real GDP, and for output, employment levels, and wages in agriculture and services. When these provisions are given increased weight, the model predicts a 1.21 percent gain in real GDP as a result of USMCA. See Table 2.6, p. 56.
[24] Recreated from Tables 2.4 and 2.5 combined, from United States-Mexico-Canada Agreement: Likely Impact, p. 45.
[25] Recreated from Table 3.8 from United States-Mexico-Canada Agreement: Likely Impact, p. 86.