After months of negotiations, fiery rhetoric, and a bitter war of words between Prime Minister Justin Trudeau and President Donald Trump, all clouding the fate of $1.3 trillion worth of global trade, investors and politicos were put at ease with the announcement of the United States-Mexico-Canada Agreement (USMCA).
Trump put the new agreement on display in a Rose Garden celebration and further honored the trade deal with two of his infamous tweets: “It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world.”
The deal, deemed NAFTA 2.0 by the media and political observers as the structure of NAFTA is essentially kept in place, fulfills a campaign pledge. Candidate Trump promised to rewrite or rip up the original NAFTA deal, which was signed by President Bill Clinton in 1993. While many of the provisions in NAFTA are kept intact, there are three major changes the countries agreed to.
First, 75 percent of a car’s components must be made in either of the 3 member countries, in order to be exempt from tariffs. This is up from the 62.5 percent requirement under the previous deal. Automobile companies will also have to pay their workers a minimum of $16 an hour, and the employees must partake in 40 to 45 percent of the manufacturing process. This requirement will come into effect in the year 2023.
Secondly, U.S. dairy farmers will gain greater access to the $15.2 billion Canadian dairy market, with tariff-free access now capped at 3.6 percent, up 3.25 from percent under the Trans-Pacific-Partnership (TPP). The Canadian government, for quite some time, have held firm on limiting American dairy imports. The agreement of this provision was a long-term trade goal for the U.S. and will give American farmers access to a greater market of consumers. In exchange for this concession, the duty-free import limit on American dairy products was raised from $20 to $150, giving Canadian consumers greater access to the U.S.’s massive dairy market.
Finally, the Canadians agreed to pass a more robust intellectual property law, which resembles TPP regulations already ratified. It included the extension of the copyright length in Canada to the author’s life plus an additional 70 years. Regulations for sound recordings are life plus 75 years.
Though the deal is essentially an updated version of NAFTA and introduces no new provisions that weren’t already in the original deal, it is something that should be looked at in a positive light. The original NAFTA agreement eliminated barriers to investment and trade between the North American countries, particularly between the U.S. and Mexico. Nearly half of their exports to the U.S. were wiped of tariffs, while a third of U.S. exports had the previous tariffs lifted. It was an overwhelming victory for President Clinton and was a symbolic unification of the three countries that also produced substantive change.
USMCA new deal neither takes out nor adds any major provisions. It just reaffirms what was already in place, only updating intellectual property limits and incentivizing domestic car production.
The only provision that was somewhat substantive was giving American farmers greater access to the Canadian market, however, most of what Canada did was remove the tariffs they put on in retaliation for President Trump’s unjustified steel and aluminum tariffs. Adding the provision served as a clean up the trade mess Trump had created. All in all, it is not the massive renegotiation Trump had promised during the campaign.
Dairy farmers, while still facing high tariffs on imports to China amid the trade war, will be put at ease due to the rise of the duty-free limit. Canadian consumers will gain more access to the U.S. dairy market, which will benefit dairy farmers.
Good news will also come to the 1.2 million people working in car manufacturing in the three countries, who will likely get a pay raise from the deal, through the minimum wage provision. This will especially benefit workers in Mexico who manufacture cars that will be sold in either Canada or the U.S., as their salaries will be nearly four times higher than the national minimum wage. However, the rising salaries and strict manufacturing requirements may harm consumers, as car prices will likely rise. Even though this may be a nuisance to car buyers in the short term, it should not impact the market in the coming years.
While the content of the deal is sound, the process to finalize it was nowhere near perfect. Trump, with no provocation whatsoever, imposed steel and aluminum tariffs on both Canada and Mexico, justifying them as an act of “national security.” This, amid the already shaky NAFTA negotiations, nearly derailed the talks altogether.
Canada then imposed retaliatory tariffs, targeting the American dairy industry. This hurt the already struggling dairy farmers, who have been enduring a trade war with China. Spectators were again put on edge, when Trump escalated his war of words with Trudeau, labeling him as “dishonest and weak,” after the G7 meeting in June. He didn’t speak to Mexico and Canada as if they were allies, and although may have forced concessions on certain issues, this tough talk has damaged relations with each country. This is just another example of a diplomatic breakdown between America and its supposed allies, and will further deteriorate the institutions that have been under relentless attack during the Trump Presidency.
Credit should be given to both Trudeau and President Enrique Peña Nieto, who continued to pursue a deal in the midst of Trump’s various outbursts directed at both of them. They were given every reason to abandon these talks, but pushed on and managed to keep a free trade agreement between the three countries, even if meant changing a few letters.
USMCA should not be seen as a new trade agreement, rather a rebranding of NAFTA. The content of the deal is good, but, like a lot of things Trump does, it was an extremely frightening process to watch.