USMCA poised for approval - will it be more than just NAFTA 2.0?

Origin Calculation | 24 April 2019

The USMCA could come into force soon, so how is it different from its predecessor?


Last year, the US, Canada and Mexico signed a trade deal that would see the decades-old NAFTA replaced by something more fit for the 21st century: the United States-Mexico-Canada Agreement, or USMCA.

Soon, lawmakers in all three nations will have the opportunity to ratify this deal and bring it fully into being. Supporters of the USMCA are hopeful that it will become a useful tool for international trade that reflects the changes to the global economy since NAFTA was signed in 1991.

This is especially the case in the US, where its International Trade Commission recently found the USMCA could add $68.2 billion to the US economy and create 176,000 new jobs.

It forecast that manufacturing would see the biggest gains in output, exports, wages, and employment, while services would also benefit.

So, what is different in the USMCA and how is it more than simply NAFTA 2.0?

New additions in the USMCA

This new deal aims to maintain the most successful provisions NAFTA brought about, but also to add critical improvements. There have been notable changes for the automobile industry, labour standards, intellectual property protection and digital trade provisions, with the latter barely existing when NAFTA was drawn up.

For example, new country of origin rules state cars must have 75 per cent of their components manufactured in Mexico, the US or Canada to qualify for zero tariffs, significantly more than the 62.5 per cent under NAFTA.

Furthermore, 40 to 45 per cent of automobile parts must be made by workers who earn at least $16 an hour by 2023. 

While NAFTA currently allows Canada to export around two million cars to the US tariff-free, USMCA will raise this by more than 30 per cent.

There is an entire chapter of new provisions for small and medium-sized businesses, including cutting down on paperwork for express shipments below a certain value and eliminating particular duties and tariffs, all of which should result in easier trade with fewer administrative hassles.

Under the USMCA, digital products such as software, music and ebooks are also to be exempt from custom duties, which will mean businesses have fewer barriers when it comes to exporting their products across borders.

Interestingly, the USMCA has a 'sunset clause', which will mean the terms of the agreement expire after 16 years and are also subject to a review every six years.

What next for the USMCA?

As detailed above, US president Donald Trump, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto all signed the deal last year, but it must still be ratified by all three governments.

The US Congress has not taken up the USMCA yet, despite Mr Trump urging it to do so during his 2019 State of the Union address in a bid to "deliver for American workers like they have not had delivered to for a long time".

However, the deal seems to have hit something of a hurdle, since the Democrats in America's Congress currently object to parts concerning labour.

Some of them recently wrote to US trade representative Robert Lighthizer to warn him that "previous versions of the [Mexican reform] bill failed to ensure" worker rights and reiterated that they would oppose the USMCA unless more far-reaching changes are passed.

For its part, Mexico made clear that it would not accept a Democratic proposal requiring Mexico to conduct inspections of factories accused of poor working conditions unless the US was asked to do the same.

"In a trade agreement, there is reciprocity - as easy as that. If they want to have a team of labour inspectors going to Mexico, perfect. We will send labour inspectors to the US," said Mexican Ambassador to the US Martha Barcena.

In recent days, though, there have been indications that the Mexican Senate is poised to pass a package of legislative reforms that would see it fulfil its USMCA requirements.

If this is the case (and both the US Congress and Canada's government also agree on the terms required for ratification) then it could be that the USMCA is approved before the current Mexican legislative session ends on April 30th 2019 - and the world has a new trade deal.

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