What is USMCA a.k.a. ‘New NAFTA’?


After more than a year of sever negotiations, the United States, Canada and Mexico agree to upgrade the North Free American Trade Agreement, a.k.a NAFTA. The original agreement was signed in 1994 and governed more than $1.2 trillion worth of trade on the North American continent. The new deal has gotten the new branding and will be known as the United States-Mexico-Canada Agreement, or simply put USMCA (can we play a YMCA video somewhere here?).

Not just a face lift

But the new deal doesn’t only imply a simple rebranding. It is actually much more than that. Here is a simply put list of what will change and how it will affect the three economies:

  1. First of all, it will highly impact car industry in North America. Starting in 2020, a car or a truck will have to have at least 75% of its part produced in North America. More specifically, those will have to be produced in the US, Canada or Mexico. Otherwise it will not be able to qualify for zero tariffs. This is a huge change compared to the current 62.5% under the old agreement.
    Another new rule, that will potentially change the car production landscape is the labour one. Again, starting in 2020 at least 30% of the work on the vehicle will have to be done by workers earning $16/hour or more. This is a straight shot at Mexican car building industry, given that’s around three times more than an average Mexican worker makes in the industry.
    While this might be a huge boost for North American car industry workers, it will significantly increase car prices. Effects on car exports are also quite unpredicted, given it will be harder for American car producers to compete on international markets.
  2. Secondly, Canada will finally open up its milk market to the US. A huge victory for Trump. Surprised he hasn’t tweeted about it yet. POTUS has mentioned multiple times that Canadian tariffs on the US dairy products are unreasonably high. It is important to understand though that Canadian milk and dairy system is extremely complexed. Canada still gets to keep it, but will give a larger market share to the US products. Trudeau will also have to eliminate the Class 7 dairy products pricing scheme. To cut a long story short, the US producers will be able to send a lot more protein concentrate, skim milk powder and infant formula to its Northern neighbor.
  3. Thirdly, there is a new chapter that imposes stricter intellectual property protections for the three countries. It is an extremely important  update, given that the last agreement on the matter was negotiated around 25 years ago.
  4. Chapter 19 stays. This chapter allows the three countries challenge one another’s anti-dumping and countervailing duties in front of a panel of USMCA representatives, rather than address the trade practices, in, let’s say, a US court.
  5. On the other hard, Chapter 11 is almost eliminated. That means that investors will no longer be able to challenge government decisions in NAFTA (or USMCA) most of the times.
  6. The countries have finally agreed to improve labour and environmental rights. This will especially affect Mexico, especially in its trade with the US. Mexican workers will be able to form unions easier, and Mexican trucks crossing the US border will have to meet tougher environmental standards.

There are, obviously, some other changes to the agreement, but these are the most important ones to understand. How will this affect the economies? We will see soon, meanwhile, you are welcome to comment on these.



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