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Analysis: NAFTA replacement USMCA is finally a done deal after Democrats sign off. Here’s what is in it.
Heather Long, the Washington Post
Dec. 10, 2019 4:45 pm
President Donald Trump notched his first major win on trade Tuesday after Democrats signed off on a new trade deal with Canada and Mexico.
So what exactly does the U.S.-Mexico-Canada Agreement (a.k.a. USMCA) change?
In short, this is 'NAFTA 2.0.” The agreement updates the North American Free Trade Agreement, the 1994 pact that governs more than $1.2 trillion worth of trade among the three nations, for the 21st century. There are a lot more rules in USMCA on intellectual property and data as well as labor and environmental protections.
The White House has yet to release a final copy of USMCA, so not all details are known. This deal was first announced in September 2018, but Democrats demanded several changes since then. The latest full version of the text was released publicly in Ma y, which does not include numerous changes negotiated in recent days. One of the biggest question marks is what date the new provisions will take effect on.
Here's a rundown of what's we know is in the 'new NAFTA” so far.
- New name. Goodbye NAFTA. The new deal will be known as USMCA. Trump, who cares deeply about branding, wanted a new name since he campaigned on ripping up NAFTA. He suggested 'USMC,” in honor of the U.S. Marine Corps, but in the end, USMCA won out.
- Big changes for cars. The goal of the new deal is to have more cars and truck parts made in North America. Soon, to qualify for zero tariffs, a car or truck must have 75 percent of its components manufactured in Canada, Mexico or the United States, a substantial boost from the current 62.5 percent requirement.
There's also a new rule that a significant percentage of the work done on the car must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker makes. Starting soon, cars and trucks must have at least 30 percent of the work on the vehicle done by workers earning $16 an hour. That gradually moves up to 40 percent for cars by 2023.
While many economists think these new rules will help some North American workers, they also warn that car prices might rise and some small cars may end up being produced in Asia, not North America, because they would be too expensive under USMCA.
- Big changes for workers, especially in Mexico. USMCA requires Mexico to change its laws to make it easier for workers to unionize. The Trump Administration pushed hard for this because it should cause wages to rise in Mexico, making it less attractive for companies to move factories south of the U.S. border. USMCA also stipulates that Mexican trucks that cross the U.S. border must meet higher safety regulations.
Democrats and U.S. labor unions insisted on tougher enforcement to ensure Mexico follows through on its commitments. There will be a formal committee to monitor Mexico on labor issues (as well as 'labor attachés” based in Mexico), according to a fact sheet from Rep. Richard E. Neal (D-Mass.), chair of the House Ways and Means Committee. And there are clear benchmarks Mexico has to hit in the coming years - or face penalties. (We await details on what those punitive measures are).
- Trump's victory: Canada opens up its milk market to U.S. farmers. Trump tweeted often about how unfair he thought it was that Canada charged such high tariffs on U.S. dairy products. Canada has a complex milk and dairy system. To ensure Canadian dairy farmers don't go bankrupt, the Canadian government restricts how much dairy can be produced in the country and how much foreign dairy can enter to keep milk prices high.
Under USMCA, Canada is keeping most of its complex system in place, but U.S. farmers will be able to sell more 'Class 7” dairy products to Canada, which is everything from milk powder to ice cream. USMCA also allows more sales of U.S. eggs and turkeys to Canada.
- Canada's victory: Chapter 19, allowing for a special dispute process, stays intact. Canadian Prime Minister Justin Trudeau said repeatedly that he wanted to keep NAFTA Chapter 19 in place, and that's exactly what happened. The U.S. side pushed hard to eliminate this chapter, but in the end, it stayed.
Chapter 19 allows Canada, Mexico and the United States to challenge one another's anti-dumping and countervailing duties in front of a panel of representatives from each country. This is generally a much easier process than trying to challenge a trade practice in a U.S. court. Over the years, Canada has successfully used Chapter 19 to challenge the United States on its softwood lumber restrictions.
- Democrats cut sweeteners for pharma: The original USMCA text called for biologics drugs to get 10 year of intellectual property protection (the current protection for most drugs traded across the border is 8 years). Democrats say that is gone now. Similarly, the original USMCA granted any pharma company three additional years of IP protection if they find a new use for an older drug.
- Increased IP protections. The new IP chapter is over 60 pages and contains more-stringent protections for patents and trademarks, including for biotech, financial services and even domain names. Many business leaders and legal experts believed these updates were necessary given that the original agreement was negotiated 25 years ago.
- Increased environmental protections. The latest iteration of the environmental chapter is 30 pages long and makes a number of advancements, especially around protecting whales, fish and other marine wildlife from pollution and overfishing. In particular, Mexico agrees to enhance monitoring to stop illegal fishing and all three countries agree to no longer subsidize fishing of overfished species. There's also a enhanced customers verification to ensure only legally harvested goods are coming from Mexico.
- Enhanced protections against currency manipulation. This is a big one for the Trump administration. The president tweets often about how other countries are devaluing their currencies so they can sell their goods cheaply on the global market (and undercut American products). USMCA spells out that Canada and Mexico agree to 'market-determined exchange rates” and that all three countries will get regular updates (typically monthly) on any government intervention in the currency markets. Canada and Mexico have generally been good about this already, but this is a clear signal to the Chinese of what Trump wants in other deals.
Mexico and Canada get assurance Trump won't pound them with auto tariffs. Trump has repeatedly threatened to slap hefty tariffs on car and vehicle parts coming from overseas into the United States. Along with the new trade deal, his administration signed 'side letters” allowing the two nations to mostly dodge Trump's auto tariffs.
The side letters say Canada and Mexico can continue sending about the same vehicles and parts across the border free of charge, regardless of whether auto tariffs go into effect down the road. Only parts above that quota could face tariffs.
- Deal must be reviewed after 6 years. The USMCA stipulates that the three nations will review the agreement after six years. If all parties agree it's still good, then the deal will continue for the full 16 year period (with the ability to renew after that for another 16 years).
Chapter 11, giving investors a special way to fight government decisions, is (mostly) gone. Chapter 11 is eliminated entirely for Canada and mostly for Mexico, except for some key industries such as energy and telecommunications. Chapter 11 gave companies and investors a special process to resolve disputes with one of the governments in NAFTA. The idea was that if investors put a lot of money into a project and then the government changed the rules, there was a clear dispute process - outside the court system - where investors could get their problem resolved.
Critics argue that Chapter 11 was mainly used as a way for big corporations to get taxpayer money, but businesses say it was necessary to ensure they weren't harmed by sudden changes when new governments came into power. In the end, Chapter 11 is mostly gone, except for a few key industries, such as oil, that lobbied hard to be able to challenge the Mexican government if it changes the rules and tries to nationalize its energy sector again. It does not appear that Democrats made changes here.