After the U.S. and Mexico imposed a September 30 midnight deadline for Canada to conclude the NAFTA renegotiations, we were all waiting Monday morning to see if there would finally be white smoke indicating that a new deal had been christened. This deadline was based on the requirement that the full text of a new international agreement must be published 60 days before it can be signed by the U.S. Congress. The ultimate push to sign by December 1 was motivated by the end of Mexican President Peña Nieto’s term on November 30; he wanted to avoid risking a move by his unpredictable, left-leaning successor, Andrés Manuel López Obrador, to reopen negotiations one more time. From the Canadian side, time was also an issue, as the 42nd Quebec general elections were scheduled for October 1 to elect members to the National Assembly of Quebec, a region where dairy—a sector to which the U.S. demanded better access—is particularly important.
All these events contributed to a clock quickly ticking down on the potential renegotiation deadline for the three countries. U.S. and Mexican negotiators waited in good faith, because they knew that if there was not an agreement with Canada, they would go still have the bilateral United States-Mexico Trade Agreement (USMTA) to work with. However, Canada signed on at the eleventh hour; and now the text has finally been submitted with all three countries under the new-and-improved (?) title of the United States-Mexico-Canada Agreement (USMCA).
Why a bilateral agreement between Mexico and the U.S was never a good option
At a news conference in New York City last Tuesday, the U.S. Trade Representative, Robert Lighthizer, stated that the U.S. would “go ahead with Mexico. If Canada comes along now, that would be best. If Canada comes along later, then that’s what will happen.” That is, an initially bilateral agreement between the U.S. and Mexico could be edited later to include Canada. The text of this U.S.-Mexico bilateral deal was scheduled for release on September 29, but release was pushed back following Mexico’s strengthened advocacy for Canada’s inclusion—a further sign of uncertainty in the economic negotiation.
At the end of the day, however, Canada, Mexico, and the U.S. are among each other’s largest trading partners. Given such economic interdependence, there was acknowledgment from all sides that a trilateral agreement was likely the only eventual option. Moreover, the U.S. administration was under increasing pressure from different interest groups and the U.S. Congress to reach a trilateral agreement. Any decision to move forward without Canada would have been met with a lukewarm reception (at best) in Congress; the mandate for U.S. negotiators had been to renegotiate NAFTA, not a bilateral agreement with Mexico. Additionally, many Republican and Democratic members of Congress, as well as leaders from labor organizations, have made clear in recent weeks that they would be unlikely to support a revised agreement that didn’t include Canada.
What’s really new beyond the name?
Sunday’s deadline marked the culmination of more than 13 months of renegotiations among the three nations. One of the most anticipated resolutions regards the “sunset clause” proposed by President Trump as recently as this month, which has been incorporated into the new agreement but with a longer time-frame than President Trump had requested. Essentially, the addition of a sunset clause requires all three countries to renew USMCA every 6 years, lest it be terminated. Both Mexico and Canada vehemently disapproved of this clause, as they fear it will create great uncertainty within the global economy, discouraging businesses. It also requires an immense amount of administrative energy from all three nations. Other important differences in this final text are changes to the mandatory proportion of auto components made on North American soil: the required percentage will increase from 62.5 percent to 75 percent. Moreover, the agreement also requires that 40-45 percent of all auto content be made by workers earning at least $16 per hour. The following table explains not only the two changes mentioned above, but also other key changes such as those related to the auto industry and dairy products.
|Issue||NAFTA 1994||USMCA 2018||Possible Effect|
North American Free Trade Agreement
United States Mexico Canada Agreement
A possible effect of this “minor” change is that moving away from NAFTA allows room for the public to form a new opinion on this agreement.
In order to qualify for zero tariffs, a car or truck must have 62.5 percent of its components manufactured in Canada, Mexico, or the U.S.
In order to qualify for zero tariffs, a car or truck must have 75 percent of its components manufactured in Canada, Mexico, or the U.S. Also, there is a new rule that by 2020, cars and trucks should have at least 30 percent of the work on a vehicle done by workers earning $16/hour (by 2023, this changes to 40 percent).
There will likely be an increase in the price of cars caused by heightened production costs. While there are socioeconomic benefits to manufacturing within North America, new requirements might also cause some car manufacturers to move their plants to more lenient host nations, giving Asian countries the opportunity to capture a larger portion of the industry.
The Canadian government was able to control the amount of dairy produced in the country versus the amount of foreign dairy that could enter, keeping milk prices high.
Canada must loosen its restrictions on foreign dairy imports, allowing U.S. dairy farmers to send more Class 7 dairy products to Canada.
This is clearly a significant victory for the U.S., as it gives U.S. dairy farmers greater market access. Canada must now work to protect its domestic market and compensate affected Canadian farmers.
U.S. drug companies were not able to sell pharmaceuticals in Canada without facing generic competition in their destination.
U.S. pharmaceutical companies are now able to sell pharmaceuticals in Canada for 10 years before facing generic competition.
This is a victory for U.S. companies, which will now be better positioned for better market access.
Special Dispute Process (Chapter 19)
Chapter 19 allows the three nations to challenge anti-dumping and countervailing duties outside of the U.S. court system.
Canada was successful in maintaining this process in the new agreement, and Chapter 19 stays intact.
There is no change in the process of dispute resolution. The panel is made of representatives from all three nations.
Labor and Environmental Rights
The original NAFTA was very flexible and lenient on both labor and environmental regulations.
USMCA requires trucks that enter the U.S. from Mexico to meet stringent safety regulations. Mexican workers must have more ability to organize and form unions.
This provision has earned praise from U.S. labor unions as well as many members of the Democratic Party who were originally opposed to the renegotiation of the agreement. However, the new rules might be difficult to enforce.
As this agreement was made in 1994, there was very little in the way of Intellectual Property regulations.
Now, USMCA contains 63 pages dedicated to Intellectual Property including protections for patents and trademarks.
This was an important reason for revisions to the agreement, as many companies claimed existing laws were inhibiting growth and development.
No short-term revision period.
The three nations must review the agreement every six years. If approved, it will remain for the full term of 16 years with the ability to renew for another 16 years.
Trump’s insistence on a five-year revision period was highly controversial. This six-year length ensures there will be a new government in office before the agreement is up for discussion again.
Investors vs. Government
Chapter 11 allowed companies and investors to resolve disputes with a NAFTA government through a specific process.
Chapter 11 has been completely eradicated for Canada and only exists for Mexico in key industries like oil, energy, and telecommunications.
Many argued that Chapter 11 gave big corporations too much power over the government and unfair access to taxpayer money. It remains to be seen whether the elimination of Chapter 11 will change this dynamic.
A new Secretariat will oversee dispute settlement panels and assist committees.
The creation of a Secretariat is important institutional progress that will hopefully facilitate and centralize leadership in a less political and more technical manner.
What we’ve learned
Beyond the final text and details of the agreement, the arduous renegotiation process has shed light on the fact that the new USMCA is only the first step of a “re-visioning trend” of trade agreements between the U.S. and other global economies. It seems possible that, in the future, politicians might decide to revise previous agreements to fulfill campaign promises and undermine the achievements of their predecessors. This is a risky process for the global economy and will only result in more uncertainty. To modernize agreements is one thing—this, to some extent, was the main outcome of the USMCA; but to promote renegotiation for the sole reason of being “re-foundational” is a different beast altogether. Latin America knows this story very well. With that flawed spirit of re-foundation, we ended up with many abandoned (or semi-abandoned) regional initiatives (e.g. ALBA, UNASUR, among others).
A few days ago, President Trump signed a revised version of a six-year-old trade agreement with South Korea and reached an agreement with Japanese Prime Minister Shinzo Abe to open trade talks between the two countries to revise their bilateral trade relations. Again, if this “reopening negotiations” trend was only intended to modernize such agreements, it would not be a problem. Indeed, it is necessary for global trade to respond seriously to developments in digital commerce and intellectual property. However, the risk is that under the excuse of “modernization,” officials could actually be altering the very institutions that these agreements originally created.
From the NAFTA renegotiation process, we also learned that one of the main goals of this administration is not only changing tariffs and market access, but also revising the way in which agreements are settled, by altering dispute resolution mechanisms (something that didn’t result from these renegotiations) and sunset clauses (which was included in USMCA). This is an entirely new way of thinking about these processes, which is not necessarily wrong if we decide to revise agreements to modernize them. However, taking renegotiations as the new norm could also undermine the certainty that free trade agreements are designed to produce.
There’s a very thin line between institutional modernization and institutional uncertainty. If the re-visioning trend persists in the coming years, the uncertainty caused by this delicate balance will continue to nip at the heels of the global economy. Still, it’s always better to return to the negotiating table—however arduous the process—than to withdraw from international commitments completely.
Nicolás Albertoni (@N_Albertoni) is a doctoral candidate in political science and international relations at the University of Southern California. He is the Trade Policy Project Principal Investigator for the Security and Political Economy Lab at USC.
Sonum Patel, is a student at the University of Southern California majoring in International Relations and the Global Economy with minors in Finance and Human Security and Geospatial Intelligence. She is a Research Assistant of Trade Policy Project for the Security and Political Economy Lab at USC.
Madeline Zheng, is a student at the University of Southern California, studying Philosophy and Applied & Computational Mathematics. She is a Research Assistant of Trade Policy Project for the Security and Political Economy Lab at USC.