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Explainer: What you should know about the United States-Mexico-Canada Agreement

Dec 13, 2019

What just happened?

On Tuesday, President Trump and Congressional Democrats came to an agreement on trade with America’s nearest northern and southern neighbors. The House of Representatives agreed to Trump’s plan to amend and replace the North American Free Trade Agreement (NAFTA) with a new trilateral trade agreement between the U.S., Canada, and Mexico called the United States-Mexico-Canada Agreement (USMCA).

The Senate is expected to vote to pass the agreement next month.

What is NAFTA?

NAFTA is an initialism for the North American Free Trade Agreement, an agreement signed by Canada, Mexico, and the United States that reduced or eliminated trade barriers in North America. (Since the U.S. and Canada already had a free trade agreement (signed in 1988), NAFTA merely brought Mexico into the trade bloc.) The agreement went into effect on Jan. 1, 1994.

A year earlier, the European Union (EU) created a “single market”—one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. This allowed every country and business in the EU to have access to more than 500 million consumers.

NAFTA was designed to have a similar effect, providing a way to allow the exchange of goods and services to flow more freely across national borders without the artificial restrictions. NAFTA provided for progressive elimination of all tariffs (through 2008) on any goods qualifying as North American. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through corollary agreements, implement labor and environmental safeguards.

The new agreement has sometimes been referred to as “NAFTA 2.0,” though USMCA is not itself a free trade agreement.

Who benefits from the USMCA?

The primary beneficiaries of the agreement are labor unions, U.S. dairy and wheat farmers, and companies that provide automation for manufacturers (e.g., robot makers).

The agreement will require at least 30% of cars (rising to 40% by 2023) to be made by workers earning $16 an hour. This will force more cars to be produced in the U.S. and Canada since the typical manufacturing wage in Mexico is only about $5 per hour. The agreement also requires Mexico to make it easier for workers to form unions, which will make them less competitive against more productive unionized workers in the U.S. and Canada.

U.S. dairy farmers will also gain greater access to the Canadian market. Because of new restrictions on how much dairy Canada can export, there is the potential for U.S. dairy to gain a greater market share in foreign countries. Canada has also agreed to grade imports from U.S. wheat farmers in a manner no less favorable than it accords Canadian farmers, and to not require a country of origin statement on its quality grade or inspection certificate.

Because the agreement makes human labor in the three countries somewhat more costly, economists predict that companies that create robots and other automation will likely be the long-term beneficiaries.

Who are the biggest losers from the USMCA?

Consumers in all three nations are likely to see prices rise on certain goods.

As the Washington Post notes, economists and auto experts think USMCA is going to cause car prices in the U.S. to “rise and the selection to go down, especially on small cars that used to be produced in Mexico but may not be able to be brought across the border duty-free anymore.”

Because the restrictions on Canadian steel and aluminum also remain in place, businesses that use those materials in manufacturing will pay higher-than-market prices, and their products will be less competitive on the global market.

Workers in Mexico will also lose a competitive advantage because Mexican manufacturers will be required to pay higher wages. 

What will be the effect of USMCA on the economy?

The net overall effect of NAFTA on the U.S. economy, while positive, appears to have been relatively modest, concludes the Congressional Research Service. NAFTA accounts for an annual increase in GDP of about 0.1 to 0.5 percent. The primary reason the effect is so negligible is that trade with Canada and Mexico accounts for a small percentage of U.S. GDP.

Because the USMCA carries over many of the same provisions of NAFTA, it is expected to have a similar—though slightly smaller—effect. The U.S. International Trade Commission estimates the USMCA will raise U.S. GDP by 0.35% and U.S. employment by 0.12%.

How long does the agreement last?

Unlike NAFTA, which had an indefinite time frame, the USMCA will expire in 16 years (and reviewed after 6 years). The agreement can also be renewed after expiration for another 16 years.